Sylebra Capital Partners Master Fund v. Ronald O. Perelman ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
SYLEBRA CAPITAL PARTNERS )
MASTER FUND, LIMITED and )
P SYLEBRA LTD., )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0843-JRS
)
RONALD O. PERELMAN, KEVIN M. )
SHEEHAN, M. GAVIN ISAACS, )
RICHARD M. HADDRILL, PETER A. )
COHEN, DAVID L. KENNEDY, PAUL M. )
MEISTER, MICHAEL J. REGAN, )
BARRY F. SCHWARTZ, FRANCES F. )
TOWNSEND, VIET D. DINH, GERALD J. )
FORD, GABRIELLE K. MCDONALD, )
SCIENTIFIC GAMES CORPORATION, )
BALLY GAMING, INC. and )
MACANDREWS & FORBES )
INCORPORATED, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: July 30, 2020
Date Decided: October 9, 2020
Samuel T. Hirzel II, Esquire and Gillian L. Andrews, Esquire of Heyman Enerio
Gattuso & Hirzel LLP, Wilmington, Delaware and Patrick J. Smith, Esquire,
Andrew J. Rodgers, Esquire and Nicholas J. Karasimas, Esquire of Smith Villazor
LLP, New York, New York, Attorneys for Plaintiffs.
William M. Lafferty, Esquire, Susan W. Waesco, Esquire and Alexandra M.
Cumings, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware
and Kevin J. Orsini, Esquire and Rory A. Leraris, Esquire of Cravath, Swaine &
Moore LLP, New York, New York, Attorneys for Defendants.
SLIGHTS, Vice Chancellor
Minority stockholders of a Nevada corporation, Scientific Games Corporation
(“Scientific Games” or the “Company”), have sued the Company’s controlling
stockholder and members of its allegedly “handpicked” board of directors for
breaches of fiduciary duty and violations of the Delaware General Corporation Law
(“DGCL”). The Company’s bylaws contain a provision that requires stockholders
to bring claims for breach of fiduciary duty in the courts of Clark County, Nevada.
And the claims at issue here are implicated by a first-filed action brought by the
Company against the minority stockholders in, of all places, Nevada.
Right out of the gate, this picture ought to provoke questions, even upon a
terse glance. Why are stockholders of a Nevada corporation invoking the DGCL?
Why are these stockholders suing fiduciaries of a Nevada corporation in Delaware?
In doing so, why are they asking a Delaware court to ignore a mandatory forum
selection clause in this Nevada corporation’s by-laws? And why haven’t they
asserted these claims in the first-filed Nevada action?
According to the Delaware plaintiffs, to answer these questions, one must first
take a brief sally down memory lane. Scientific Games has not always been
chartered in Nevada. Before it relocated to Nevada in January 2018, the Company
called Delaware home. The plaintiffs here invested in the Company when it was
organized under Delaware law. And the conduct giving rise to the claims in this
action—which involve an alleged scheme to force plaintiffs to redeem their
1
Scientific Games shares at less than fair value—began when the defendants owed
fiduciary duties to a Delaware corporation and its stockholders at a time when the
Company was subject to the DGCL. Thus, say plaintiffs, the picture is more nuanced
than it first appears and they have properly asserted their claims in Delaware.
Defendants respond that, notwithstanding plaintiffs’ attempt to create abstract
art with creative pleading, the image of a misplaced lawsuit still shines through the
prolix. According to Defendants, plaintiffs would have this Court adjudicate their
claims, even though: (1) plaintiffs seek to invalidate provisions of Delaware
constitutive documents that no longer exist and have not existed for more than two
years; (2) plaintiffs were stockholders at the time Scientific Games left Delaware for
Nevada, yet at no time before now have they challenged that move or sought to
pursue their supposed Delaware claims; (3) plaintiffs’ claims require the Court to
decide whether provisions in the constitutive documents of a Nevada corporation are
enforceable; (4) the Company’s mandatory Nevada forum selection bylaw is broad
and unambiguously covers plaintiffs’ supposed Delaware claims; and (5) there is a
first-filed action pending in Nevada before a court that is fully capable of
adjudicating all claims between these parties.
Defendants have moved to dismiss. For reasons that follow, the motion must
be granted.
2
I. BACKGROUND
I have drawn the facts from the Verified Amended Complaint and documents
incorporated by reference or integral to that pleading.1 For purposes of the motion,
I accept as true the Amended Complaint’s well-pled factual allegations and draw all
reasonable inferences in Plaintiffs’ favor.2
A. The Parties
Plaintiffs, Sylebra Capital Partners Master Fund, Limited (“Sylebra Capital”)
and P Sylebra Ltd. (collectively with Sylebra Capital, “Sylebra”), are a Cayman
Islands-based investment fund and a British Virgin Islands-based advisory client,
respectively.3 Taken together, the Sylebra plaintiffs and another Sylebra-advised
entity were, at all relevant times, Scientific Games’ second largest stockholder.4
Defendant, Scientific Games, “is a publicly traded corporation organized and
existing under the laws of the State of Nevada.”5 The Company was a Delaware
corporation until January 10, 2018, when it “re-domesticated” to Nevada, the state
1
Verified Am. Compl. (“Compl.”) (D.I. 23); Wal-Mart Stores, Inc. v. AIG Life Ins. Co.,
860 A.2d 312, 320 (Del. 2004) (noting that on a Motion to Dismiss, the Court may consider
documents that are “incorporated by reference” or “integral” to the complaint).
2
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
3
Compl. ¶¶ 22–23.
4
Compl. ¶ 3.
5
Compl. ¶¶ 4, 27.
3
where it has maintained its principal place of business since inception.6 Scientific
Games operates in the lottery and gaming industry. Defendant, Bally Gaming, Inc.
(“Bally”), is an indirect wholly-owned operating subsidiary of the Company, also
incorporated in Nevada.7
Defendant, MacAndrews & Forbes, Inc., is a holding company formed and
wholly owned by Defendant, Ronald Perelman, to “own and operate a diverse array
of businesses.”8 Scientific Games is a MacAndrews & Forbes portfolio company.9
Perelman, through MacAndrews & Forbes, beneficially owned 39% of the
Company’s outstanding common stock and was the Chairman of its board of
directors (the “Board”) throughout the events described in the Complaint.10
Defendants, Kevin M. Sheehan, M. Gavin Isaacs, Richard M. Haddrill,
Peter A. Cohen, David L. Kennedy, Paul M. Meister, Michael J. Regan, Barry F.
Schwartz, Frances F. Townsend, Viet D. Dinh, Gerald J. Ford and Gabrielle K.
McDonald are each current or former officers or directors of the Company.11 Sylebra
6
Id.
7
Compl. ¶ 28.
8
Compl. ¶ 26.
9
Id.
10
Compl. ¶ 29.
11
Compl. ¶¶ 30–41.
4
alleges each of these defendants are beholden to Perelman and facilitated his
breaches of fiduciary duty, as described below.
B. Suitability Requirements, Article Tenth and the Redemption Standard
Sylebra first acquired stock in Scientific Games in early 2015.12 By February
2017, Sylebra owned 8,619,044 shares (or 9.84%) of the Company’s Class A
Common Stock.13
As gaming companies, both Scientific Games and Bally are subject to
numerous “licensure [requirements] and regulations” “across multiple
jurisdictions.”14 These regulations include so-called “suitability” requirements that
apply to the Company’s investors.15 Since this was Sylebra’s first foray as an
investor in the gaming industry, it was particularly sensitive to the “suitability”
requirements and worked diligently with the Company to ensure that it complied
with the regulations in all jurisdictions where the Company operated.16 At first, the
12
Compl. ¶ 63.
13
Id.
14
Compl. ¶ 64.
15
“Suitability” regulations generally require companies in the gaming industry to ensure
that their investors are not engaged in or associated with illegal or illicit activity.
Compl. ¶ 4. If a company violates suitability regulations, the company risks losing its
gaming licenses. Compl. ¶ 78.
16
Compl. ¶ 65.
5
Company was ready and willing to assist.17 Happy to receive Sylebra’s investment,
the Company gave Sylebra no reason to be concerned that its structure, investment
base or investment portfolio would run afoul of any suitability requirement.18
In April 2017, at Perelman’s bidding, the Company began to question
Sylebra’s investment in a company called Qiwi plc (“Qiwi”).19 The questions
followed a 2015 New York Times article, where it was reported that pro-Russian
groups were illegally utilizing payment terminals owned by Qiwi to fund the war in
eastern Ukraine.20 While the Company expressed alarm that Sylebra would invest
in a company like Qiwi, government authorities apparently did not share that alarm
as none took any action against Qiwi in response to the 2015 article.21 Thus, from
Sylebra’s perspective, the Company’s questions were pretext for Perelman’s effort
to drive out an investor that posed “a threat to [Perelman’s] total command over
Scientific Games.”22
17
Id.
18
Id.
19
Compl. ¶¶ 66–70.
20
Compl. ¶ 68.
21
Id.
22
Compl. ¶ 66.
6
On April 27, 2017, unbeknownst to Sylebra, the Company ratcheted its
questions into action when it alerted numerous gaming regulators of Sylebra’s
investment in Qiwi.23 According to Sylebra, the Company took this step so it could
invoke “Article Tenth” of its then-operative Amended and Restated Articles of
Incorporation (the “Delaware Charter”).24 Article Tenth, in relevant part, provided
that, “all Securities of the [Company] shall be held subject to the suitability
standards . . . of the [g]aming [a]uthorities.”25 It then laid out criteria by which the
Company could deem that a stockholder was a “Disqualified Holder”:
any holder of the [Company’s] Securities (1) who is requested or
required . . . to . . . submit to the jurisdiction of, or provide information
to, any [g]aming [a]uthority and either refuses to do so or otherwise
fails to comply with such request or requirement within a reasonable
period of time, (2) who is determined or shall have been determined by
any [g]aming [a]uthority not to be suitable . . . or (3) whose holding of
Securities may result, in the judgment of the Board of Directors, in the
failure of the [Company] or any Affiliate to obtain, maintain, renew or
qualify for a license, contract, franchise or other regulatory approval
with respect to the operation or conduct of the business of the
[Company] . . . or any of its Affiliates from a [g]aming [a]uthority
which conditions approval upon holders of the [Company’s] Securities
possessing prescribed qualifications.26
23
Compl. ¶¶ 70, 79–80.
24
Compl. ¶ 71; Transmittal Aff. of Riley T. Svikhart to the Opening Br. in Supp. of the
Defs.’ Mot. to Dismiss Pls.’ Verified Compl. (“Svikhart Aff.”), Ex. 8 (“Delaware
Charter”).
25
Compl. ¶ 72; Delaware Charter, at 3.
26
Compl. ¶ 73. Delaware Charter, at 4.
7
If the Board deemed any stockholder to be a Disqualified Holder, then the
Company could require the Disqualified Holder either to divest its interest within
sixty days or, more relevant here, allow the Company to redeem the Disqualified
Holder’s stock at a specified “Redemption Price.”27 The Redemption Price was
defined as:
a price equal to the lesser of (1) the average closing sale price of such
Securities as reported for composite transactions in securities listed on
the principal trading market on which such Securities are then listed or
admitted for trading during the 30 trading days preceding the Notice
Date or, if such Securities are not so listed or traded, at the fair value of
the Securities determined in good faith by the Board of Directors and
(2) the holder’s original Purchase Price.28
Numerous regulators took the bait set by the Company and contacted Sylebra
to inquire about its relationship with Qiwi.29 Most notably, the Office of
Enforcement Counsel of the Pennsylvania Gaming Control Board
(the “Pennsylvania Regulator”) and the U.S. Virgin Islands Casino Control
Commission (“Virgin Islands Regulator”) both initiated investigations of Sylebra’s
suitability.30
27
Compl. ¶¶ 76–77; Delaware Charter, at 4.
28
Compl. ¶ 77; Delaware Charter, at 4.
29
Compl. ¶ 8.
30
Compl. ¶ 81.
8
C. The Pennsylvania and Virgin Islands Investigations
On April 27, 2017, the Pennsylvania Regulator informed the Company that it
had “determined that Sylebra . . . need[ed] to file a Principal Entity License . . . in
order that a determination [could] be made as to Sylebra’s suitability to maintain its
association with Slot Machine Manufacturer Licensee Bally Gaming, Inc. and its
affiliate Scientific Games.”31 Prior to this date, Sylebra was granted “institutional
investor status” by the Pennsylvania Regulator, allowing it to bypass the Principal
Entity Licensing requirements.32 Pending completion of its investigation, the
Pennsylvania Regulator restricted Sylebra’s ability to divest its Scientific Games
shares without permission.33
The following day, on April 28, the Company instructed Goldman Sachs to
freeze Sylebra’s investment to prevent divestment.34 A few days later, on May 1,
the Company sent a letter to Sylebra informing it of the Pennsylvania Regulator’s
demands regarding licensing and divestment.35 The Company made similar
31
Compl. ¶ 84. Although not entirely clear from the Complaint, it appears the process of
obtaining a Principal Entity License includes an investigation into the applicant’s fitness
for licensure. Compl. ¶¶ 88, 90.
32
Compl. ¶ 85.
33
Compl. ¶ 86.
34
Compl. ¶ 87.
35
Compl. ¶ 88.
9
demands in its own right, and requested that Sylebra identify “all record holders of
shares under Sylebra’s management.”36 Sylebra responded by informing the
Company that it was in discussions with the Pennsylvania Regulator and had no
intention of divesting its Scientific Games stock.37
On May 15, 2017, the Pennsylvania Regulator confirmed that Sylebra had
divested a majority of its shares in Qiwi, but also confirmed that the investigation
was still open pending Sylebra’s final divestiture of all Qiwi stock and its
satisfactory explanation of the fund’s structure.38 On June 21, 2017, the
Pennsylvania Regulator lifted its restrictions on Sylebra’s ability to divest its stock
in the Company.39 Unfortunately, Sylebra’s regulatory woes did not end there.
One day after the Pennsylvania Regulator lifted its trading restriction, the
Virgin Islands Regulator issued a directive restricting Sylebra’s ability to divest its
shares in the Company pending a suitability investigation of its own.40 This directive
was issued by the Chairman of the Virgin Islands Regulator, Violet Anne Golden
(“Chair Golden”), citing to both a letter from the Company in which it detailed the
36
Id.
37
Compl. ¶ 90.
38
Compl. ¶ 91.
39
Compl. ¶ 92.
40
Compl. ¶ 103.
10
Board’s concerns, dated June 2, 2017, and Sylebra’s investment in Qiwi, as the bases
for the directive.41
In a strange twist, Chair Golden directed “Sylebra to tender $75,000 to the
Virgin Islands Regulator” to conduct a suitability investigation.42 Sylebra
reluctantly complied. It later discovered that only a small portion of its $75,000 was
used to pay for the suitability investigation.43 Not coincidentally, Chair Golden was
later indicted on federal charges of embezzlement, conspiracy, wire fraud and
obtaining money under false pretenses.44
On January 13, 2020, the Virgin Islands Regulator “lifted the trading
restriction directive with immediate effect” after it reviewed the circumstances
giving rise to the directive “following Chair Golden’s admission of guilt.” 45 Bally
immediately filed a motion for reconsideration, seeking a hearing and maintenance
of the divestiture restriction.46 This regulatory investigation remains in limbo.
41
Compl. ¶ 106.
42
Compl. ¶ 108.
43
Compl. ¶ 111.
44
Id.
45
Compl. ¶ 114.
46
Id.
11
D. Scientific Games Performs Its Own Suitability Investigation of Sylebra
In the midst of the Pennsylvania Regulator’s investigation, in May 2017, the
Company sent a letter requesting that Sylebra provide the Company with the same
information it was providing to the Pennsylvania Regulator. 47 The requested
information included a list of Sylebra’s limited partner investors, a list of companies
affiliated with Sylebra, a list of jurisdictions in which Sylebra is regulated and a list
of companies in which Sylebra is invested.48 The Company explained that it sought
this and other information about Sylebra in order to “ensure compliance with the
Bank Secrecy Act and anti-money laundering requirements within the gaming
industry.”49
Sylebra responded to the Company’s requests by providing both detail
regarding “how Sylebra’s fund administrator applied industry-standard KYC and
AML processes” to manage the fund and a breakdown of the world regions in which
its investments originate.50 Sylebra explained that confidentiality restrictions
prevented it from providing more details regarding its investors but proposed that it
could provide that information to the Pennsylvania Regulator without violating its
47
Compl. ¶ 116.
48
Id.
49
Compl. ¶ 118.
50
Compl. ¶ 121.
12
agreements with investors.51 The Company initially agreed that this course of action
would satisfy its concerns, but later “reneged on the agreement” without
explanation.52
E. Scientific Games Amends Its Delaware Bylaws
Amidst growing tensions between the Company and Sylebra, the Board
amended its Delaware Amended and Restated Bylaws (the “Delaware Bylaws”) on
June 9, 2017, to include two new provisions: Section 8.05 and Section 8.06.53
Section 8.05 allowed the Company to invalidate the shares of any stockholder that
had received a redemption notice following a determination that the stockholder was
a Disqualified Holder.54 Section 8.06 required the Company to conduct a suitability
analysis of each “Significant Stockholder,” defined as any stockholder that
beneficially owned 5% or more of any class of stock.55 In conducting such analyses,
this Section authorized the Company to request “all relevant information pertaining
to suitability and/or qualification.”56
51
Compl. ¶ 122.
52
Compl. ¶¶ 122–24.
53
Compl. ¶¶ 127, 131.
54
Compl. ¶ 127.
55
Compl. ¶ 131.
56
Compl. ¶ 137.
13
According to Sylebra, Section 8.05 exceeded the authority provided to the
Company in Article Tenth since that Delaware Charter provision “said nothing about
the Company’s ability to render securities held by a Disqualified Holder invalid such
that it could void any transfer made by a stockholder that receives a redemption
notice.”57 As for Section 8.06, Sylebra contends this Section also conflicts with
Article Tenth, since that Charter provision did not “sanction[] the investigation of
stockholders who otherwise satisfied the prescribed regulations of gaming
authorities.”58 Of course, Sylebra did nothing to challenge these new bylaws at the
time they were adopted.
Citing its new Delaware Bylaws, the Company sent Sylebra a letter on
June 17, 2017, requesting further confidential information to facilitate the
Company’s “continuing qualification and suitability analysis with respect to
Sylebra.”59 As the Company’s suitability investigation escalated, so did tensions
between the parties.
57
Compl. ¶ 128.
58
Compl. ¶ 133.
59
Compl. ¶ 140.
14
F. Scientific Games Reincorporates in Nevada
On September 18, 2017, the Company announced its plans to enter into a
merger for the purposes of reincorporating the Company in Nevada
(the “Reincorporation Merger” or “Reincorporation”).60 The Company
disseminated its proxy materials relating to the Reincorporation Merger
(the “Proxy”) on October 20, 2017.61
According to Sylebra, the Proxy was materially false and misleading in
several respects, including that it: (i) misrepresented the Company’s reasons for
reincorporating in Nevada by failing to explain that the real reason for the move was
to “further Perelman’s campaign to harm the Sylebra Plaintiffs’ investment and
consolidate his power”; (ii) falsely disclosed that “the rights of stockholders under
the New Charter and New Bylaws are substantially the same as under the Company’s
[Delaware] Charter and Bylaws”; (iii) did not discuss the Board’s amendments to
the Delaware Bylaws in June 2017; (iv) did not disclose that the change in the
definition of Disqualified Holder was part of the Company’s campaign to prompt
government regulators to make adverse findings against Sylebra; and (v) masked the
change in Disqualified Holder, which now allowed the Company to deem
60
Compl. ¶ 144.
61
Compl. ¶ 145.
.
15
disqualified any stockholder that might “cause . . . the imposition of any materially
burdensome or unacceptable terms or conditions on any Gaming License.”62
Sylebra also maintains the Proxy failed to highlight three important
distinctions between the Delaware Charter and the to-be-enacted Nevada Amended
and Restated Articles of Incorporation (the “Nevada Charter”): (i) Article Tenth
(now Article VIII of the Nevada Charter) was changed to grant the Company power
to look beyond the record holder to any beneficial owners when reviewing
suitability; (ii) the Nevada Charter’s new Article VIII also gave the Board the
discretion “to take such other action, to the extent not prohibited by law, as it deems
necessary or advisable to protect the Company or any of its Affiliates from the denial
or loss or threatened denial or loss of any Gaming license”; and (iii) the Nevada
Charter added a provision that the Company is not required to redeem or repurchase
shares owned or controlled by a Disqualified Holder, even though delivering a
redemption notice to a Disqualified Holder constituted a binding agreement on
behalf of the Company to redeem.63 In addition, the Proxy did not accurately
disclose why the new Nevada Amended and Restated Bylaws (the “Nevada
Bylaws”) would contain a forum selection bylaw designating the courts of Clark
62
Compl. ¶¶ 146–56.
63
Compl. ¶¶ 157–62 (emphasis added); Svikhart Aff., Ex. 3 (“Nevada Charter”) at 5.
16
County, Nevada as the sole and exclusive forum to litigate stockholder disputes
(the “Forum Selection Bylaw”).64
According to the Proxy, the move to Nevada was justified because “Delaware
law does not afford the same substantive rights and protections under Nevada law,”
specifically noting that “reincorporation will result in the elimination of any liability
of an officer or director for a breach of the duty of loyalty unless arising from
intentional misconduct, fraud, or a knowing violation of law.”65 Importantly, the
Proxy also explained that “[p]rimarily, the reincorporation merger will allow us to
better align our legal domicile with our global corporate headquarters and our
primary US manufacturing operations.”66
In unanimously approving the Reincorporation Merger and recommending it
to stockholders, the Board determined that the transaction “[was] advisable, fair to
and in the best interests of [the] stockholders.”67 On November 27, 2017, a majority
of Scientific Games’ stockholders approved the Reincorporation Merger. According
64
Compl. ¶ 164; Svikhart Aff., Ex. 2 (“Nevada Bylaws”) at 17.
65
Compl. ¶ 165; Svikhart Aff., Ex. 1 (“Proxy”) at 5. Along these lines, the Proxy indicates
that incorporating in Nevada “may help us attract and retain qualified management by
reducing the risk of lawsuits being filed against the Company and its directors and
officers.” Proxy, at 4.
66
Proxy, at 4.
67
Compl. ¶ 168.
17
to Sylebra, the vote was a sham because the stockholders were misled by the Proxy
and, therefore, did not understand that the Reincorporation was the latest salvo in
Perelman’s campaign to drive Sylebra out of the Company.68 Sylebra also observes
that the Reincorporation Merger would not have been approved had Perelman not
voted his controlling block in favor of the transaction.69
G. Scientific Games Files Suit Against Sylebra in Nevada
The Reincorporation Merger was executed on January 10, 2018.70 In the
months that followed, the Company ramped up its suitability investigation of Sylebra
by peppering it with requests for confidential information while declining to explain
the reasons for its requests.71 When Sylebra’s offers to explore “an amicable
solution” were summarily rejected,72 it began to question why the Company was not
investigating other stockholders given that Sylebra was “in the same position as
every investor that holds 5% or more of [the Company].” 73 On June 14, 2019, the
day after Sylebra sent its most direct rejoinder to the Company, the Company and
68
Compl. ¶¶ 169–70.
69
Compl. ¶¶ 169–70.
70
Compl. ¶ 171.
71
Compl. ¶¶ 174–75.
72
Compl. ¶¶ 176–77.
73
Compl. ¶ 179.
18
Bally filed suit against Sylebra in Nevada state court to compel Sylebra’s compliance
with the suitability investigation under the Company’s Nevada Bylaws (the “Nevada
Action”).74 After its attempt to remove the Nevada Action to federal court failed,
Sylebra filed this Delaware action on October 23, 2019.75
H. Procedural History
In its eleven count Complaint, Sylebra primarily seeks to have this Court
declare as invalid and unenforceable: (1) Sections 8.05, 8.06 and 10.01 of the
Delaware Bylaws, (2) amendments to Article VIII of the Nevada Charter, and (3) the
Forum Selection Bylaw.76 Sylebra also seeks an order enjoining Defendants from
depriving Sylebra of its rightful holdings in Scientific Games in breach of their
fiduciary duties, which, as explained below, I interpret as effectively asking this
Court to declare a number of provisions in the Nevada Charter, particularly
Article VIII, unenforceable as against Sylebra.77
Following full briefing and oral argument on Defendants’ Motion to Dismiss,
Sylebra filed a Motion for Leave to File a Second Amended Complaint on July 17,
74
Compl. ¶ 180.
75
Id.
76
Compl., Prayer for Relief (b).
77
Compl., Prayer for Relief (a).
19
2020. Defendants oppose that motion as untimely, prejudicial and prohibited by
Chancery Rule 15(aaa).
II. ANALYSIS
The Defendants move to dismiss under both Chancery Rule 12(b)(3) for
improper venue and Chancery Rule 12(b)(6) for failure to state viable claims.
Because I am satisfied dismissal is mandated under Rule 12(b)(3), I will not address
the merits of the claims under Rule 12(b)(6).78 Before addressing the grounds for
dismissal, I take up Plaintiffs’ motion to amend.
A. The Motion to Amend
Rule 15(a) makes clear that leave to amend pleadings “shall be freely given.”79
“Notwithstanding Rule 15(a),” however, this Court will deny leave to amend when
a plaintiff fully engages on a motion to dismiss under Rule 12(b)(6) without first
seeking leave to amend so that it can address the pleading deficiencies exposed in
the motion.80 In such instances, where the plaintiff elects to oppose dismissal rather
than amend, the Court will consider the motion to dismiss on the merits of the
78
In my view, it is best for a court dismissing on venue grounds to avoid addressing the
merits of claims, lest that gratuitous analysis confound the analysis of the court where
venue properly lies.
79
Ct. Ch. R. 15(a).
80
Rule 15(aaa) provides that “a party . . . must file an amended complaint, or motion to
amend . . . no later than the time such party’s answering brief . . . is due to be filed” or face
dismissal with prejudice. Ct. Ch. R. 15(aaa).
20
pleading as addressed in the motion, and will dismiss with prejudice where
warranted.81
Here, for reasons unclear, Sylebra filed its Motion to Amend two weeks after
the hearing on Defendants’ fully briefed Motion to Dismiss. The Motion to Amend
comes too late and Sylebra offers no bases upon which the Court can or should
excuse it from the operation of Rule 15(aaa).
Sylebra’s attempt to invoke Rule 41(a) as a means to avoid dismissal with
prejudice is also unpersuasive. “In order to give Rule 15(aaa) its intended scope,
once the time for amendment has passed under that rule, a party-plaintiff will not be
permitted to resort to Rules 41(a), 23 or 23.1 to file a ‘without prejudice’ dismissal
of its action.”82 The Motion to Amend is denied.
B. Sylebra’s Requests for Declarations Regarding the Delaware Charter
Are Moot
To the extent Sylebra implicitly or explicitly would have the Court declare
that provisions within the Company’s Delaware Charter or Delaware Bylaws are
invalid or unenforceable, any such request faces an immediate and insoluble
81
As our Supreme Court has explained, “[t]he purpose of Rule 15(aaa) [is] to curtail the
number of times that the Court of Chancery [is] required to adjudicate multiple motions to
dismiss the same action.” Braddock v. Zimmerman, 906 A.2d 776, 783 (Del. 2006).
“The rule is intended to conserve litigants’ and judicial resources by discouraging a party
from briefing a dispositive motion before filing an amended complaint.” E. Sussex Assocs.,
LLC v. W. Sussex Assocs., LLC, 2013 WL 2389868, at *1 (Del. Ch. June 3, 2013).
82
Stern v. LF Capital P’rs, LLC, 820 A.2d 1143, 1147 (Del. Ch. 2003).
21
problem—the Delaware Charter and Delaware Bylaws no longer exist.83 They
ceased governing Scientific Games the moment the Reincorporation Merger was
effected. Any claim that seeks or depends upon a declaration of ongoing rights under
these documents, or upon a declaration that provisions within them are invalid or
unenforceable, therefore, is moot.84
C. Sylebra’s Complaint Implicates the Internal Affairs of a Nevada
Corporation
Sylebra would also have the Court declare that certain amendments and
provisions of the Company’s Nevada Charter and Nevada Bylaws, including the
Forum Selection Bylaw and the Nevada Charter’s redemption provision, are
unenforceable as to Sylebra. In doing so, Sylebra would have this Court do what
this Court strongly prefers courts in other jurisdictions not do with respect to
83
See Compl. ¶¶ 185, 204–211, 213–220.
84
See Mentor Graphics Corp. v. Shapiro, 818 A.2d 959, 963 (Del. 2003) (“Mootness arises
when controversy between the parties no longer exists such that a court can no longer grant
relief in the matter.”); Supermex Trading Co., Ltd. v. Strategic Sols. Gp., Inc., 1998
WL 229530, at *9 (Del. Ch. May 1, 1998) (“The record reflects . . . those amendments
have all been rescinded. Thus, I . . . will not enter any order with respect to those bylaws
other than to note that they have been rescinded and to dismiss the claims with respect to
them as moot for that reason.”); In re Tri-Star Pictures, Inc. Litig., 1990 WL 82734, at *2
(Del. Ch. June 14, 1990) (“The Court ruled that the Article Sixth claim had been mooted
because the merger had eliminated that Article from Tri-Star’s certificate of
incorporation.”).
22
Delaware corporations—decide matters that impact the internal affairs of a
corporation chartered in another state.85
“The internal affairs doctrine is a long-standing choice of law principle which
recognizes that only one state should have the authority to regulate a corporation’s
internal affairs—the state of incorporation.”86 “By providing certainty and
predictability, the internal affairs doctrine protects the justified expectations of the
parties with interests in the corporation.”87 While the internal affairs doctrine is,
fundamentally, a choice of law doctrine, as explained by the United States Supreme
85
See, e.g., Sternberg v. O’Neil, 550 A.2d 1105, 1124–25 (Del. 1988) (“The Delaware
courts and legislature have long recognized a ‘need for consistency and certainty in the
interpretation and application of Delaware corporation law.’”) (quoting Armstrong v.
Pomerance, 423 A.2d 174, 178 (Del. 1980)) (explaining that allowing important or novel
questions of Delaware law to be resolved by other courts “might create excessive
uncertainty about the meaning of the Delaware law as a result of too many forums
interpreting it since there would be no certiorari process available to the Delaware Supreme
Court to resolve conflicts”); MacAndrews & Forbes Hldgs., Inc. v. Revlon, Inc., 1985
WL 21129, at *2 (Del. Ch. Oct. 9, 1985) (“[N]ovel and substantial issues of Delaware
corporate law . . . are best resolved in a Delaware court.”). Cf. Martinez v. E.I duPont
de Nemours & Co., Inc., 86 A.3d 1102, 1107 (Del. 2014) (observing that our Supreme
Court “has recognized that novel or important issues of Delaware law are best determined
by Delaware courts”).
86
VantagePoint Venture P’rs 1996 v. Examen, Inc., 871 A.2d 1108, 1112 (Del. 2005);
see also In re Topps Co. S’holders Litig., 924 A.2d 951, 953 (Del. Ch. 2007) (noting “it is
well settled that jurisdiction in any case will be declined . . . where a determination of the
rights of the litigants involves regulation and management of the internal affairs of [a]
corporation dependent upon the laws of [a] foreign state”) (quoting Langfelder v. Universal
Labs., 56 N.E.2d 550 (N.Y. Ct. App. 1944)).
87
VantagePoint, 871 A.2d at 1113.
23
Court, there are notions of comity and deference inherent in the doctrine that should
not lightly be ignored:
It has long been settled that a court—state or federal—sitting in one
state will as a general rule, decline to interfere with, or control by
injunction or otherwise, [a] corporation organized under the laws of
another state but will leave controversies as to such matters to the courts
of the state of the domicile.88
It is indisputable that the Nevada Charter and Nevada Bylaw provisions
implicated by Sylebra’s claims fall within the purview of the internal affairs
doctrine. For example, the Company’s Forum Selection Bylaw “plainly focus[es]
on [matters] governed by the internal affairs doctrine and thus the law of the state of
incorporation.”89 The redemption clause likewise directly affects the Company’s
internal affairs. That provision, in Article VIII of the Nevada Charter, allows the
Board to redeem the shares of an investor it deems unsuitable.90 This is plainly a
“matter[] which [is] peculiar to the relationships among or between the corporation
and its current officers, directors and shareholders.”91
88
Rogers v. Guar. Tr. Co. of New York, 288 U.S. 123, 130 (1933); see also In re Topps
Co., 924 A.2d at 958 (“Venerable authority recognizes that a chartering state’s interest in
promoting an efficient and predictable corporation law can be undercut if other states do
not show comity by deferring to the courts of the chartering state when a case is presented
that involves the application of the chartering state’s corporation law.”).
89
See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 962 (Del. Ch.
2013).
90
Nevada Charter, at 5.
91
McDermott Inc. v. Lewis, 531 A.2d 206, 213 (Del. 1987).
24
In its Prayer for Relief, Sylebra asks this Court, among other relief, to
(1) enjoin the Defendants from depriving Sylebra of its rightful holdings in the
Company through the enforcement of the Nevada Charter and Bylaws provisions
that purportedly require redemption; and (2) declare, under Delaware law, that the
amendments to the redemption provisions of the Nevada Charter are invalid and
unenforceable.92 I would no more enter that injunction or make that declaration than
I would declare that a Nevada statute was unenforceable in Nevada as a matter of
Delaware law.
The application of internal affairs and comity principles is all the more
appropriate here given that Sylebra seeks to prevent the Company from invoking its
constitutive documents on a future date, when any resulting injury would occur in
Nevada, not Delaware.93 As Sylebra’s counsel readily acknowledged during oral
argument, “the real threat to [Sylebra] . . . is [Defendants] forc[ing] [Sylebra] to
redeem.”94 That forced redemption has not happened yet, meaning it did not occur
92
Compl., Prayer for Relief (a)–(b); see also Compl. ¶ 186 (asking the Court to declare
that defendants breached their fiduciary duties by “approving the Nevada Charter” and
“enacting the Nevada Bylaws”).
93
In other words, the financial injury to Sylebra will occur, if at all, while the Company is
a Nevada corporation. This means that, at least under Delaware law, if the Company forces
redemption, Sylebra will be injured in the Company’s legal home, Nevada. See Sample v.
Morgan, 935 A.2d 1046, 1057 (Del. Ch. 2007).
94
Telephonic Oral Arg. on Defs.’ Mot. to Dismiss (D.I. 53) (“Tr.”) at 52.
25
prior to the Reincorporation when Scientific Games still called Delaware home. As
discussed below, Scientific Games has a Forum Selection Bylaw that requires
Sylebra to bring its claims in Nevada. Unless there is good reason not to enforce
that bylaw, Sylebra has no business bringing its claims in this court.95
D. The Nevada Forum-Selection Clause is Enforceable and Requires
Dismissal
“The proper procedural rubric for addressing a motion to dismiss based on a
forum selection clause is found under Rule 12(b)(3), improper venue.”96 “Although
Delaware courts have, in the past, framed a forum selection clause analysis as
jurisdictional in some sense, recent cases have all proceeded under Rule 12(b)(3).”97
And, when addressing a motion under Rule 12(b)(3), “the court is not shackled to
95
To be clear, Sylebra could have brought an action in this court back in 2017, when the
Company was still a Delaware corporation, to enjoin the Reincorporation Merger as the
product of a controlling stockholder’s unlawful self-interest and an inadequate Proxy that
prevented an informed stockholder vote on the transaction. It made no such claims. Now,
almost three years later, with the Company firmly ensconced in Nevada, Sylebra comes to
Delaware asking the Court to declare, in essence, that the Company never should have left
here and, more remarkably, to declare that elements of its Nevada constitutive documents
are unenforceable. If the Court were to entertain such claims, it would not only be
departing from its “lane,” it would be crossing the centerline into Nevada’s lane.
96
In re Bay Hills Emerging P’rs I, L.P., 2018 WL 3217650, at *4 (Del. Ch. July 2, 2018)
(quoting Bonanno v. VTB Hldgs., Inc., 2016 WL 614412, at *5 (Del. Ch. Feb. 8, 2016)).
97
Id. (quoting Troy Corp. v. Schoon, 2007 WL 949441, at *2 (Del. Ch. Mar. 26, 2007)).
26
the plaintiff's complaint and is permitted to consider extrinsic evidence from the
outset.”98
Forum selection bylaws are enforced “in the same way [Delaware] enforces
any other forum selection clause.”99 Such clauses “are presumptively valid and
should be specifically enforced unless the resisting party clearly show[s] that
enforcement would be unreasonable and unjust, or that the clause [is] invalid for
such reasons as fraud and overreaching.”100
The Forum Selection Bylaw provides:
To the fullest extent permitted by law, and unless the Corporation
consents in writing to the selection of an alternative forum, the Eighth
Judicial District Court of Clark County, Nevada, shall be the sole and
exclusive forum for any actions, suits or proceedings, whether civil,
administrative or investigative or that assert any claim or counterclaim
(a) brought in the name or right of the Corporation or on its behalf,
(b) asserting a claim for breach of any fiduciary duty owed by any
director, officer, employee or agent of the Corporation to the
Corporation or the Corporation’s stockholders, (c) arising or asserting
a claim arising pursuant to any provision of NRS Chapters 78 or 92A
or any provision of the Articles of Incorporation or these Bylaws or
(d) asserting a claim governed by the internal affairs doctrine. In the
event that the Eighth Judicial District Court of Clark County, Nevada
does not have jurisdiction over any such action, suit or proceeding, then
any other state district court located in the State of Nevada shall be the
sole and exclusive forum therefor and in the event that no state district
court in the State of Nevada has jurisdiction over any such action, suit
or proceeding, then a federal court located within the State of Nevada
98
Id.
99
Chevron, 73 A.3d at 940.
100
Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1146 (Del. 2010) (internal quotations omitted).
27
shall be the sole and exclusive forum therefor. Any person or entity
purchasing or otherwise acquiring any interest in shares of capital stock
of the Corporation shall be deemed to have notice of and consented to
the provisions of this Section 10.01.
Sylebra has advanced three reasons the Court should decline to enforce this
obviously broad Forum Selection Bylaw: (1) it did not consent to the bylaw, (2) the
bylaw is both unjust and unreasonable and (3) the bylaw was procured by fraud.
I address each in turn.
Sylebra Consented to the Forum Selection Bylaw
Sylebra maintains it did not consent to the Forum Selection Bylaw because,
at the time the Company adopted the bylaw, Sylebra had no ability to sell its
shares.101 This argument rests on a flawed reading of Delaware law. The ability of
a board of directors of a Delaware corporation “to adopt binding bylaws” is “an
essential part of the contract stockholders assent to when they buy stock.”102
101
Sylebra also argues it could not consent because, at the time of Reincorporation, the
Forum Selection Bylaw would have been unlawful under Section 115 of the DGCL.
Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss Pls.’ Compl. (“PAB”) (D.I. 32)
at 49–51; Tr. at 40. This argument is difficult to follow. While it is true Section 115 would
have prevented Scientific Games from prohibiting its stockholders from bringing certain
claims in Delaware while the Company was incorporated in Delaware, the Company was
not incorporated in Delaware when it adopted the Forum Selection Bylaw. That clause
exists in the Nevada Bylaws. Accordingly, Section 115 does not apply here.
102
Chevron, 73 A.3d at 940; City of Providence v. First Citizens BancShares, Inc., 99 A.3d
229, 240 (Del. Ch. 2014), superseded on other grounds by statute, 8 Del. C. § 115; see also
Delaware Charter, at Art. Sixth (“In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal
the Bylaws of the corporation.”).
28
According to Sylebra, even if it implicitly consented to the Board unilaterally
enacting bylaws when it invested in the Company, it did so with the understanding
that it could sell its shares at any time. If that, in fact, was Sylebra’s understanding,
it was mistaken both as a matter of Scientific Games’ governance and as a matter of
law.
First, upon investing in the Company, Sylebra knew that it was subject to
Article Tenth, which, among other things, required securities in the corporation to
“be held subject to the suitability standards, qualifications, and requirements of the
Gaming Authorities.”103 These standards expressly included suitability standards,
which are subject to enforcement by gaming regulators in each of the jurisdictions
where Scientific Games operates.104 And with enforcement comes restrictions,
including restrictions on the sale of Company securities.105
Second, the link Sylebra attempts to draw between the ability of a stockholder
to sell its shares and that stockholder’s consent to the corporation’s bylaws finds no
support in our law. In Strougo v. Hollander, a case Sylebra relies upon, the court
deemed a fee-shifting bylaw inapplicable to the plaintiff because “a former
103
Compl. ¶ 71; Delaware Charter, at Art. Tenth.
104
32 V.I CODE R. § 444-1.10 (“It shall be the continuing duty of all applicants and
licensees to provide full cooperation to the Commission in the conduct of such inquiry or
investigation.”).
105
Compl. ¶ 86.
29
stockholder is not subject to . . . any bylaw amendments adopted after one’s interest
in the corporation has been eliminated.”106 There, the plaintiff was no longer a
stockholder in the company when the company adopted the bylaw at issue and,
therefore, was not subject to that bylaw. That, of course, is not this case; Sylebra
was (and still is) a stockholder when the Forum Selection Bylaw was adopted.107
Sylebra has not cited any authority, and I am aware of none, supporting the
proposition that when a stockholder is temporarily unable to sell its stock, that
stockholder’s consent to current or newly enacted bylaws, by operation of that
circumstance, is somehow withdrawn. And I can see no reason why that should be
our law.108
The Forum Selection Bylaw Is Not Unreasonable or Unjust
Having determined that Sylebra consented to the Forum Selection Bylaw,
I turn next to whether the bylaw is invalid because its enforcement would be
106
111 A.3d 590, 598 (Del. Ch. 2015) (emphasis in original).
See id. (“[T]he bylaw cannot apply to Plaintiff, who was no longer a stockholder of the
107
Company when the Bylaw was adopted.”).
108
This is especially so here, where the restriction was a feature of Scientific Games’
governance structure when Sylebra invested in the Company, and Sylebra knew, given
MacAndrews & Forbes’ controlling stake, that no organic movement of stockholders was
likely to alter the charter or bylaw provision that implemented the focus on investor
suitability.
30
“unreasonable and unjust.”109 “Courts should assess the reasonableness of a forum
selection clause on a case-by-case basis.”110 To escape the reach of the Forum
Selection Bylaw on grounds that it is unreasonable or unjust, Sylebra “bears a heavy
burden” to demonstrate that enforcement here would “place [it] at an unfair
disadvantage” or “otherwise deny [it its] day in court.”111 Sylebra has not carried
that burden.
Sylebra begins its “unreasonableness” argument by observing that the timing
of the wrongdoing “can be relevant to enforcement of a forum-selection bylaw.”112
In support of this proposition, Sylebra points to non-Delaware authority, Galaviz v.
Berg and In re Facebook, where the courts, purportedly applying Delaware law, held
that a forum selection clause will be deemed unenforceable when it was “adopted by
the directors who are defendants in this action, after the majority of the purported
wrongdoing is alleged to have occurred.”113 If that, in fact, is the holding of these
cases, then they have misstated our law.114 To reiterate, a stockholder in a Delaware
109
Ingres, 8 A.3d at 1146.
110
Id.
111
Capital Gp. Cos., Inc. v. Amour, 2004 WL 2521295, at *6 (Del. Ch. Nov. 3, 2004).
112
PAB at 44.
113
Id.; Galaviz v. Berg, 763 F. Supp. 2d 1170, 1174 (N.D. Cal. 2011); In re Facebook, Inc.
IPO Sec. & Deriv. Litig., 922 F. Supp. 2d 445, 459–63 (S.D.N.Y. 2013).
114
See First Citizens, 99 A.3d at 242 n.54 (“[T]he Galaviz and Triquint decisions, to the
extent they purport to apply Delaware law, are based on a misapprehension of Delaware
31
corporation gives consent to be bound by current and future bylaws when it buys
stock.115 Whether or not the alleged wrongdoing comes before or after the adoption
of a forum selection bylaw is irrelevant in determining the reasonableness or overall
enforceability of the bylaw.116
Sylebra next argues that, “enforcement would be unreasonable where the
Amended Complaint specifically alleges a years-long scheme aimed at the Sylebra
Plaintiffs’ investment, an essential component of which was the forum-selection
bylaw issue.”117 This argument attempts to answer the wrong question. As the
law regarding the facial validity and as-applied analysis of forum selection bylaws.”);
id. at 241 (“[The] contention that the Forum Selection Bylaw cannot be enforced because
it seeks to regulate the forum for asserting claims that arose before it was adopted is
unpersuasive.”); Chevron, 73 A.3d at 956 (“[T]he conclusion reached by the United States
District Court for the Northern District of California in Galaviz v. Berg . . . that board-
adopted bylaws are not like other contracts because they lack the stockholders’ assent—
rests on a failure to appreciate the contractual framework established by the DGCL for
Delaware corporations and their stockholders.”).
115
Id.
116
Id.
117
PAB at 43–44; Compl. ¶¶ 81–170. As a branch of this argument, Sylebra claims that
the Forum Selection Bylaw was adopted via a misleading Proxy and “in furtherance of the
campaign targeting Sylebra and the Sylebra Plaintiffs’ investment,” making the Forum
Selection Bylaw itself unjust and unreasonable. If ever this argument were to carry any
persuasive force, that time would have been before the stockholder vote on the
Reincorporation Merger. Scientific Games has been chartered as a Nevada corporation for
almost three years now operating in accordance with the Nevada Charter and Nevada
Bylaws. The argument that enforcement of one of the Nevada Bylaws is unreasonable
because the stockholders, way back when, were not fully informed when they approved the
transaction that created the bylaw is not persuasive.
32
Defendants properly note, in determining whether a stockholder has met his burden
to demonstrate unreasonableness in Delaware, the fundamental inquiry is whether
the stockholder has alleged “well-pled facts calling into question the integrity” of
the court chosen in the forum selection bylaw, or “explain[ed] how the defendants
have advanced their ‘self-interests’ by having the claims . . . adjudicated in those
courts instead of a Delaware court.”118 Sylebra has not alleged, likely because it
cannot allege, either fact.
The best Sylebra can muster is an allegation that Nevada state courts are
accustomed to “only holding fiduciaries accountable for ‘intentional misconduct,
fraud or a knowing violation of the law.”119 That generalized (and unsupported)
characterization of the Nevada courts’ orientation is a far cry from raising a
legitimate question regarding the integrity or competency of the Nevada courts to
provide Sylebra “its day in court.”120
As noted, the determination of unreasonableness is contextual.121 The
gravamen of Sylebra’s claim is that Company fiduciaries, including a controlling
stockholder and a supine Board, intend to deem Sylebra unqualified to own stock in
118
First Citizens, 99 A.3d at 241.
119
Compl. ¶ 166 (quoting Proxy at 5); PAB at 46.
120
Capital Gp. Cos., Inc., 2004 WL 2521295, at *6.
121
Ingres, 8 A.3d at 1146.
33
Scientific Games and then force it to redeem its Scientific Games shares at an unfair
price.122 That scheme, assuming it is in progress as alleged, has not come to fruition.
When (or if) it does, the fiduciaries involved will owe duties to a Nevada corporation
and its stockholders. And the claims will be subject to a Nevada Forum Selection
Bylaw. Nevada courts are now, and will be, available to Sylebra to adjudicate its
claims, even if those claims, in some measure, implicate Delaware law. Enforcing
the Forum Selection Bylaw will not change that.123
Any attempt to find unreasonableness in the fact that the statute of limitations
in Nevada may have run on some of Sylebra’s claims would also be unavailing.124
Defendants filed the Nevada Action on June 19, 2019, providing Sylebra nearly an
entire year to file counterclaims or a separate action in the jurisdiction prescribed by
122
Compl. ¶ 6.
123
See First Citizens, 99 A.3d at 241 (“The conduct of the FC North Board in approving
the proposed merger will not be absolved from judicial review; that review simply must
occur in a North Carolina court.”); Chevron, 73 A.3d at 960 (“[T]he forum selection bylaws
only regulate where a certain set of claims, relating to the internal affairs of the corporation
and governed by the law of the state of incorporation, may be brought, not what claims.”
(emphasis in original)).
124
Tr. at 69. See Helen Hershkoff & Marcel Kahan, Forum-Selection Provisions in
Corporate “Contracts”, 93 WASH. L. REV. 265, 300 (2018) (“Red flags ought to be raised
if the selected forum has, relative to the state of incorporation, a statute of limitations for
corporate disputes that may bar an asserted claim.”). I note that I make no finding here
regarding whether vel non the statute of limitations bars any of Sylebra’s claims since that
issue may be presented to a Nevada court.
34
the Forum Selection Bylaw.125 Instead, Sylebra chose to double down on its
disregard of the Forum Selection Bylaw, electing to file in Delaware, file nothing in
Nevada (even prophylactically) and then wait for the ruling on Defendants’ motion
to dismiss, where the showcase argument is that Sylebra has filed in the wrong
forum. Under these circumstances, I cannot conclude that enforcement of the Forum
Selection Bylaw would be unreasonable or unjust.
The Forum Selection Bylaw Was Not Procured by Fraud
Sylebra next argues that the Forum Selection Bylaw was procured by fraud
because it “was enacted as part of the scheme to benefit Perelman and shield
Defendants from liability for targeting and destroying the Sylebra Plaintiff’s
investment.”126 The prima facie elements of fraud are well settled:
(1) the defendant falsely represented or omitted facts that the defendant
had a duty to disclose; (2) the defendant knew or believed that the
representation was false or made the representation with a reckless
indifference to the truth; (3) the defendant intended to induce the
plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its
reliance.127
125
Compl. ¶ 180; Tr. at 69 (explaining that the expiration of the statute of limitations for
one of Sylebra’s earliest claims was June 9, 2020).
126
PAB at 45.
127
Abry P’rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
35
According to Court of Chancery Rule 9(b), all averments of fraud “shall be stated
with particularity.”128 To meet the particularity requirement, Rule 9(b) often will
require a plaintiff making a fraud claim to allege: “the time, place, and contents of
the false representation, the identity of the person(s) making the representation, and
what he intended to obtain thereby.”129
As a preliminary matter, I note that Sylebra has not pled a fraud claim, either
with respect to the Forum Selection Bylaw or otherwise. Moreover, even if Sylebra
had attempted to plead that the Reincorporation Merger was procured by fraud, that
would be irrelevant in determining whether the Forum Selection Bylaw itself was
procured by fraud. If the Forum Selection Bylaw is valid and enforceable in its own
right, then whether there was fraud associated with the Reincorporation Merger
(again, not pled here) is a matter for the Nevada court to decide.
As for the Forum Selection Bylaw, the Proxy notes that “Delaware law does
not afford the same substantive rights and protections under Nevada law” such that
128
Ct. Ch. R. 9(b); see also Composite Hldgs. v. Westinghouse Elec. Corp., 992 F. Supp.
367, 369 (S.D.N.Y. 1998) (“Rule 9(b) requires that allegations of fraud with respect to a
forum selection clause—just as any other allegations of fraud—be made with
particularity.”).
129
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 145 (Del. Ch. 2003); see also
Trenwick Am. Litig. Tr. v. Ernst & Young LLP, 906 A.2d 168, 207–08 (Del. Ch.
2006) (Strine, V.C.), aff’d sub nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438
(Del. 2007) (noting that the relevant factors include “the time, place, and contents of the
false representations; the facts misrepresented; the identity of the person(s) making the
misrepresentation; and what that person(s) gained from making the misrepresentation”).
36
the “reincorporation will result in the elimination of any liability of an officer or
director for a breach of the duty of loyalty unless arising under intentional
misconduct, fraud or a knowing violation of the law.”130 The Proxy then makes clear
that the Company intends to adopt the Forum Selection Bylaw once chartered in
Nevada, which would dictate where stockholders could bring claims against
Scientific Games fiduciaries.131 Indeed, the proposed Nevada Bylaws were attached
to the Proxy.132 Sylebra has not pled any basis to infer fraud in the adoption of the
Forum Selection Bylaw from these disclosures or otherwise.133
130
Compl. ¶ 165; Proxy, at 4–5; PAB at 46.
131
Compl. ¶ 167; Proxy, at 9.
132
Proxy, at 6; Proxy, at Annex C.
133
Abry, 891 A.2d at 1050 (holding that fraud requires proof of a “falsely represented or
omitted fact[] that the defendant had a duty to disclose”). Sylebra further argues that the
Forum Selection Bylaw might not apply to MacAndrews & Forbes or Bally. PAB at 51
n.13. Here again, Sylebra misstates our law. A party “closely-related” to a signatory of a
contract containing a forum selection clause can enforce the clause if that enforcement is
foreseeable. Ashall Homes Ltd. v. ROK Entm’t Gp. Inc., 992 A.2d 1239, 1249 (Del. Ch.
2010). As Defendants properly point out, the cases Sylebra cites to question the vitality of
the closely-related test actually apply the test to decide the case. See, e.g., Neurvana Med.,
LLC v. Balt USA, LLC, 2019 WL 4464268, at *1 (Del. Ch. Sept. 18, 2019) (“In the end,
the explication is largely academic, because the plaintiff fails to plead facts sufficient to
satisfy the closely-related test even under its broad formulation of the foreseeability
inquiry.”). Here, MacAndrews & Forbes is the Company’s largest stockholder and Bally
is one of the Company’s wholly-owned subsidiaries; both are inextricably tied to the
Company, making it entirely foreseeable that stockholder claims against both would be
subject to the Forum Selection Bylaw. Compl. ¶¶ 16, 26, 29, 30–39, 95; see also Weygandt
v. Weco, LLC, 2009 WL 1351808, at *5 (Del. Ch. May 14, 2009) (“Several cases suggest
that when a control person agrees to a forum, it is foreseeable that the entities controlled
by that person which are involved in the deal will also be bound to that forum.”). The fact
that Sylebra relegates its “closely-related” argument to a footnote in its brief suggests that
37
* * * * *
Sylebra has failed to carry its “heavy burden” to demonstrate that the Forum
Selection Bylaw is unenforceable. That clause mandates that the parties litigate their
disputes in Nevada. Because I am satisfied that the Forum Selection Bylaw is
controlling, I need not, and elect not to, decide whether this action is subject to
dismissal under the McWane doctrine or for failure to state a claim upon which relief
may be granted.134
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is GRANTED.
Plaintiffs’ claims are subject to Scientific Games’ Forum Selection Bylaw and must
be brought in the Nevada court identified in that bylaw.
IT IS SO ORDERED.
it is not serious in its suggestion that the Court, on this record, should ignore or reject a
well-established aspect of our forum selection jurisprudence. See In re Asbestos Litig.,
2015 WL 5016493, at *4 (Del. Super. Ct. Aug. 31, 2015) (noting that a party’s
“relega[tion]” of an argument to a footnote in its brief suggested more of “an attempt to
preserve it” than to advance it for serious consideration).
134
McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283
(Del. 1970); Ct. Ch. R. 12(b)(6).
38