Kevin Diep, derivatively on behalf of El Pollo Loco Holdings, Inc. v. Stephen J. Sather ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
KEVIN DIEP, derivatively on behalf of )
EL POLLO LOCO HOLDINGS, INC., )
)
Plaintiff, )
v. ) C.A. No. 12760-CM
)
STEPHEN J. SATHER, LAURANCE )
ROBERTS, EDWARD VALLE, KAY )
BOGEAJIS, DOUGLAS K. )
AMMERMAN, SAMUEL N. )
BORGESE, and TRIMARAN POLLO )
PARTNERS, L.L.C., )
)
Defendants, )
)
and )
)
EL POLLO LOCO HOLDINGS, INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: April 23, 2021
Date Decided: July 30, 2021
Peter B. Andrews, Craig J. Springer, David M. Sborz, ANDREWS & SPRINGER LLC,
Wilmington, Delaware; Hung G. Ta, JooYun Kim, Natalia D. Williams, HUNG G. TA,
ESQ. PLLC, New York, New York; Peter Safirstein, Elizabeth S. Metcalf, SAFIRSTEIN
METCALF LLP, New York, New York; Counsel for Plaintiff.
Kurt M. Heyman, Elizabeth A. DeFelice, Jamie L. Brown, HEYMAN ENERIO
GATTUSO & HIRZEL LLP, Wilmington, Delaware; Adam H. Offenhartz, GIBSON,
DUNN & CRUTCHER LLP, New York, New York; Tyler H. Amass, GIBSON, DUNN
& CRUTCHER LLP, Denver, Colorado; Counsel for the Special Litigation Committee.
McCORMICK, C.
El Pollo Loco Holdings, Inc. (“EPL” or the “Company”) owns and franchises fast-
casual restaurants with a chicken-based menu. The Company raised its menu prices three
times between July 2014 and January 2015 while simultaneously experimenting with new
variations on its menu. Customers were not crazy about the changes. During a May 2015
earnings call, the Company announced lowered guidance for the second quarter but
downplayed factors that may have led to the decline. Company insiders later sold large
amounts of their EPL stock before second-quarter results were announced and the price of
the Company’s stock dropped.
EPL stockholders asserted insider trading claims in this court and in federal court.
After this court denied a motion to dismiss, the Company formed a special litigation
committee to investigate the claims. The committee concluded that the information on
which the insiders allegedly traded was immaterial and that the insiders lacked the scienter
to support the stockholders’ claims. The committee then moved to dismiss the complaint.
Under Zapata Corporation v. Maldonado,1 when resolving a motion to dismiss filed
by a special litigation committee, the court evaluates the independence and good faith of
the committee and the bases supporting its conclusions. The court then applies its own
independent business judgment to determine whether dismissal is in the best interests of
the corporation. This decision finds that the special litigation committee has met its burden
under Zapata and grants the motion to dismiss.
1
430 A.2d 779 (Del. 1981).
I. FACTUAL BACKGROUND
The factual background is drawn from the record submitted by the special litigation
committee and the plaintiff, which includes the special litigation committee report (the
“SLC Report”), the 408 exhibits attached to the report, transcripts of the depositions taken
of two of the committee’s members, and a handful of additional exhibits that speak to the
committee’s investigation and the independence of its members.2
A. El Pollo Loco
The Company is a Delaware corporation headquartered in Costa Mesa, California.3
It describes itself as “a differentiated and growing restaurant concept that . . . offer[s] the
quality of food and dining experience typical of fast casual restaurants while providing the
speed, convenience, and value typical of traditional quick-service restaurants.”4
The Company strives to offer its customers “healthier alternatives to traditional food
on the go” and to appeal to “a wide variety of socio-economic backgrounds.”5 True to its
2
See C.A. No. 12760-CM, Docket (“Dkt.”) 62 Ex. A (“SLC Report”); Dkts. 62–136 (SLC
Report Exhibits); Dkt. 164 (“Brown Decl.”) Exs. A–C (attaching deposition transcripts and
SLC correspondence); Dkt. 168 Exs. A–D (attaching deposition transcript excerpts and
additional exhibits); Dkt. 172 Exs. D–H (same).
3
SLC Report at 3.
4
SLC Report Ex. 323 at 3. The restaurant industry classifies “limited service” restaurants
as either “QSR”—quality service restaurants—or “fast casual.” The Company describes
itself as “QSR+” because it combines “the food and dining experience of a fast casual
restaurant and the speed, value, and convenience of a QSR.” Id.5
Id.2
name, EPL’s menu primarily comprises “chicken meals” and its signature product is a
“citrus-marinated fire-grilled chicken.”6
B. Trimaran Buys EPL.
In November 2005, the private equity firm Trimaran Capital Partners (“Trimaran”)
acquired EPL for approximately $400 million through an acquisition vehicle, defendant
Trimaran Pollo Partners, LLC (“Pollo Partners”).7 Dean Kehler is one of Trimaran’s
founders and sits on the EPL board of directors.8 He is also one of two managing members
of Trimaran Capital, L.L.C., which is the managing member of Pollo Partners.9
Pollo Partners’ membership comprises entities under Trimaran’s umbrella, with one
exception—private equity firm Freeman Spigoli & Co (“Freeman Spigoli”).10 Until
June 30, 2015, four of EPL’s seven directors were affiliates of either Trimaran or Freeman
Spigoli. EPL’s board expanded to eight directors, including Kehler and two others
affiliated with either Trimaran or Freeman Spigoli.11
6
Id.7
SLC Report at 5.
8
Id. at 4, 7.
9
Id. at 5–6.
10
Id. at 6.
11
Id. at 7. The other two are nonparties Michael Maselli and John Roth. Maselli is a
Trimaran managing partner and the chairman of EPL’s board. Id. Roth is Freeman
Spigoli’s CEO and a director on EPL’s board. Id. The fourth affiliated director, Wesley
Barton, was a Trimaran employee and resigned from EPL’s board on June 30, 2015.
Id. at 7 & n.58.
3
C. Trimaran Takes EPL Public.
Pollo Partners completed an initial public offering of EPL in July 2014 (the “IPO”)
and a secondary offering in November 2014 (the “Secondary Offering”).12 In the IPO,
Pollo Partners sold approximately 8.2 million shares of its EPL common stock at $15 per
share.13 In the Secondary Offering, Pollo Partners sold over six million shares of its EPL
common stock at $27 per share.14 After the Secondary Offering, Pollo Partners held just
over 22 million shares—approximately 59.2%—of EPL’s outstanding common stock.15
D. EPL’s Insider Trading Policy
To promote compliance with the federal securities laws, EPL adopted an insider
trading policy (the “Policy”) prohibiting EPL insiders from selling their stock outside of
pre-established “Trading Windows.” The Policy applied to EPL’s “directors, officers,
employees and service providers” and to “corporations or other business entities controlled
or managed by” those fiduciaries.16
Under the Policy, covered persons and entities “may only purchase or sell Company
securities if the following three requirements are satisfied: (1) [they] are not aware of
material non-public information . . . ; (2) the purchase or sale falls within the Trading
12
Id. at 6.
13
Id. at 202.
14
Id.
15
Id. at 6, 202.
16
SLC Report Ex. 88 at 2.
4
Window . . . ; and (3) the trade was pre-cleared under the Company’s mandatory pre-
clearance policy . . . .”17
The Trading Window “begins two . . . full trading days after the Company’s public
announcement of its annual or quarterly earnings and ends twenty-one . . . calendar days
prior to the end of the then current quarter.”18 During the Trading Windows, covered
persons must “first obtain pre-clearance of the purchase or sale” of EPL stock from the
Company’s Chief Legal Officer.19 Requests for clearance to trade must be submitted “at
least two . . . business days in advance of the proposed purchase or sale, unless the Chief
Legal Officer agrees to a shorter period.”20 At all relevant times, EPL’s Chief Legal Officer
was Edith Austin, who served as the Vice President of Legal and as the Corporate
Secretary.”21
As private equity investors, Pollo Partners’ members “had always intended to sell
down [Pollo Partners’] ownership of ELP stock over time.”22 Due to the Policy, however,
17
Id. at 8.
18
Id.
19
Id. at 9.
20
Id.
21
SLC Report at ix. Neither Ms. Austin, nor any other member of EPL’s legal department
are lawyers. See id. at 281 n.1970.
22
Id. at 201.
5
the first Trading Window after the IPO did not open until May 19, 2015, and only lasted
through June 10, 2015.23
On April 23, 2015, Austin emailed EPL insiders alerting them of the upcoming
Trading Window, attaching the Policy, and reminding them of the need to request pre-
clearance and obtain written approval before executing any transactions in EPL stock.24
E. Events Leading Up to the First Trading Window
EPL increased the prices of its menu items twice in 2014 and once in 2015. First,
it increased the prices of seventeen of its menu items by 0.5% “in response to a minimum
wage hike” 25 on July 3, 2014.26 Second, EPL increased the prices of forty-three of its
menu items by approximately 1% as a “brand decision” to “cover costs to drive top line
sales” and as one of many Company actions to “combat labor inflation”27 on October 16,
2014.28 Then, on January 29, 2015, EPL increased the prices of thirty-two menu items by
approximately 1%, primarily targeting products whose price had not increased in prior
years.29 Combined with the two 2014 price increases, the 2015 price increase produced an
23
Id. at 203.
24
SLC Report Ex. 88.
25
SLC Report at 112, 114.
26
Id. at 112.
27
Id. at 116–18.
28
Id. at 115–16.
29
Id. at 122–23.
6
overall “3.0% pricing increase across the menu, which . . . had never been done over the
course of one year.”30
EPL’s marketing, finance, and operations teams routinely analyzed the Company’s
performance to generate reports assessing the Company’s success and forecast future
results.31 Ryan Hawley had served as the Company’s Vice President of Marketing
Planning & Analysis since 2012 and was responsible for “develop[ing] and refin[ing] the
Company’s pricing strategy and . . . developing pricing recommendations.”32
Hawley’s role involved generating both daily and weekly reports analyzing EPL’s
business and forecasting sales for the Company, which he would use to make pricing
recommendations to EPL’s executive management team.33 His responsibilities included
analyzing consumer responses to EPL’s price increases. He did so, in part, by tracking the
Company’s value metrics, which comprise two categories of value: first, “the combination
of the brand, food, service, environment divided by the price;” and second, “the specific
price competitiveness and ‘value for money’ questions used” in consumer surveys. 34 Put
30
Id. at 114–15.
31
See id. at 68–76 (describing the functions and responsibilities of the various teams in
connection with the Company’s management).
32
Id. at 69.
33
Id.
34
Id. at 120.
7
simply, while “pricing is a function of the value that a consumer perceives from a brand,”
it is not derived solely from quantifiable metrics like menu prices.35
Hawley also analyzed consumer responses to EPL’s price increases by tracking one
of the Company’s “key performance metrics” of Same Store Sales (“SSS”).36 SSS is “the
percentage change in comparable same-store sales on a year-over-year basis,”37 and
Hawley is “the sole employee responsible for forecasting SSS at EPL.”38 The SSS metric
focused on total sales, representing a combination of both the number of transactions and
the size of each transaction, or check. For example, after the second price increase in 2014,
December 2014 transactions growth was 2.2% from the prior year, the average check
amount grew 3.2% from the prior year, and SSS had increased 5.5% from the prior year.39
When considering changes to EPL’s pricing, Hawley evaluated the impact it could
have on the Company’s value metrics and sales results.40 Given the “many ups and downs”
in the Company’s value-tracking metrics, the Company’s “bigger concern” focused on “the
general trend over time, not any specific drop.”41 Beginning just after the third price
35
Id.
36
Id. at 96.
37
Id. at 51 n.339.
38
Id. at 99.
39
Id. at 122. Similarly, November 2014 SSS growth was 7.4%, while transaction growth
was 2.6% and average check growth was 4.7%. Id.
40
See id. at 125–26.
41
Id. at 125.
8
increase, the Company began to experience volatility in its sales, which were lower than
EPL had projected.42
By mid-April, Hawley began preparing materials for the EPL board’s upcoming
meeting.43 The meeting, scheduled for May 11 and 12, 2015, involved two days of board
presentations regarding financial updates, as well as a four-hour Management Team
Presentation that covered topics ranging from marketing and supply chain management to
development, operations, information technology, and franchising.44
From April 15 to May 6, 2015, members of EPL’s various teams coordinated in
preparing and reviewing the May 11 presentation (the “Board Presentation”) and the May
12 presentation (the “Management Presentation” and, with the Board Presentation, the
“Presentations”).45 Relevant players included then-Chief Marketing Officer Edward Valle,
Director of Financial Planning & Analysis Edward Shih, then-Director, President, and
Chief Executive Officer Stephen Sather, and Chairman of EPL’s board and Managing
Director of Trimaran Michael Maselli,.46 The “Executive Management Team,” comprising
Sather, Valle, EPL’s Chief Financial Officer Laurance Roberts, and then-Chief Operating
42
See id. at 126–27.
43
See id. at 127.
44
See id. at 132, 141.
45
Id. at 127–31.
46
See id.; see also id. at ix–xi (identifying relevant individuals).
9
Officer Kay Bogeajis, also “reviewed the presentations and provided feedback before
circulating them to the Board.”47
On May 5, 2015, after the May 11 presentation had undergone several revisions,
Sather sent Maselli the results of a customer survey that revealed a decline in EPL’s value
score from 59.6% in April to 58.1% in early May.48 Sather asked Maselli to “keep this
between us at this point,” which Maselli understood to refer to the preliminary nature of
the data—the sample size was “less than 15.5% of the likely total responses for the
month.”49
EPL’s directors and officers received copies of the Presentations on May 6, 2015,
though Hawley’s daily-updated numbers continued to change between then and the May 11
and 12 board meetings.50
1. May 11 Board Meeting
The entire EPL board and Executive Management Team, as well as several
Company executives and representatives of Freeman Spigoli, attended the May 11
meeting.51 In addition to remarks by Sather and certain other administrative matters, the
47
Id. at 127; see also id. at ix–xi (identifying relevant individuals).
48
Id. at 129 & n.954.
49
Id. at 129.
50
See id. at 130–31.
51
Id. at 132.
10
financial updates in the Board Presentation—given by Roberts—made up the “bulk” of the
meeting.52
At a high level, Roberts informed the board that “Company SSS”53 for the first
quarter of 2015 was 3.5%, a decline from the Company’s forecast.54 He explained that
despite falling short of EPL’s plan, “Company SSS of 3.5% was still a ‘decent number,’”
because “EPL had been ‘running high’ at the time.”55 The directors were generally
unconcerned by this number and felt that “the first quarter is often harder to predict because
it follows the holidays” and that “the Company’s performance and prospects had been very
positive.”56
The financial presentation also included updates to the Company’s projected SSS
for the second quarter of 2015. Specifically, EPL lowered its projected Company SSS for
the second quarter from 4.7% down to 2.6% based on first quarter sales and actual second
quarter results as of May 4, 2015.57 As usual, the new projection “was generated in large
part by Mr. Hawley.”58
52
Id.
53
“Company SSS” refers to the SSS for only Company-owned restaurants, as opposed to
franchised restaurants.
54
SLC Report at 132–33.
55
Id. at 133.
56
Id.
57
SLC Report at 133–34.
58
Id. at 135.
11
The Board Presentation provided the updated figures without exploring the reasons
behind the depressed SSS numbers.59 Neither the EPL board nor the Executive
Management Team voiced any serious concerns with the new projected Company SSS for
the second quarter.60 In fact, management still felt confident in the Company’s System-
Wide SSS61 projections for the year “because it believed that Q3 and Q4 could make up
for lackluster performance in the first half of the year.”62 The board cited optimism
regarding a promising “pipeline” of menu additions that “had previously been successful,”
which would begin on May 21, 2015.63
2. May 12 Board Meeting
The entire EPL board except for one director, Samuel Borgese, as well as certain
Company executives and representatives of Freeman Spigoli, attended the May 12
59
See id. at 132–139.
60
See id. at 135–36.
61
“System-Wide SSS” refers to the SSS for both Company-owned and franchised
restaurants.
62
SLC Report at 136.
63
Id. at 136–37; see id. App. A at A-5. One such addition, the Hand-Carved Salads module,
proved unsuccessful, though the board’s optimism was genuine. See id. at 139, 196 n.1388
(“EPL management was optimistic about the upcoming introduction of Hand-Carved
Salads . . . [as] a significant basis for the expectation that the Company could hit the
System-Wide SSS forecast of 3.0–5.0% for the year, as well as the 2.5% Company SSS for
Q2.”).
12
Management Presentation.64 Hawley took the lead in preparing and giving the bulk of the
Management Presentation.65
Unlike the Board Presentation, the Management Presentation had been updated after
May 6.66 Also unlike the Board Presentation, the Management Presentation explored
possible explanations for the dip in SSS.67 For example, Hawley attributed slow first-
quarter growth to “New Year’s Holiday Timing,” noting that “transactions growth
improved throughout the remainder of Q1 2015.”68
During his presentation, Hawley discussed the pricing increases that the Company
had recently implemented. He noted that growth in the amount-per-transaction had slowed
since the end of 2014 and that sales of the individual menu items subject to the 2015 pricing
increase had declined.69 He concluded that the “2015 pricing action had ‘led to lower total
sales.’”70
Hawley also discussed the recent decline in EPL’s value scores. He noted that in
2014, 71% of consumers answered “yes” when asked whether EPL “provides good value
64
Id. at 141.
65
Id. at 142.
66
Id. at 140–41.
67
See id. at 142–65.
68
Id. at 143.
69
Id. at 144–45.
70
Id. at 145.
13
for the money,” but that in the first quarter of 2015 only 54% of consumers responded
affirmatively.71
Various members of the board and the Executive Management Team discounted
Hawley’s conclusion on the basis that Hawley’s data “failed to tell the entire story.”72 For
example, Valle felt that the decline in sales resulted from the erroneous prioritization of
steak and shrimp items over the Under 500 Menu, which he believed “could shape EPL as
a health-conscious brand.”73
Despite the timing of the decline in value scores in connection with the early-2015
price increase, “both the Executive Management Team and Directors . . . gave relatively
little weight to the . . . value scores.”74 The results were based on insufficient sample sizes
and erroneous comparisons, and had come from a new market research firm that EPL had
not yet grown to trust—the Management Presentation contained “the first complete set of
data that the vendor had collected for EPL.”75
Hawley acknowledged that the firm was untested, the data unreliable, and the results
not indicative of an actual decline in value scores.76
71
Id. at 147 (cleaned up).
72
Id. at 145.
73
Id. at 146.
74
Id. at 147.
75
Id. at 148.
76
See id. at 151–56.
14
Hawley’s SSS forecast declined based on sales during the week between the May 6
completion of the Management Presentation and the presentation itself.77 Attendees of
Hawley’s Management Presentation understood that his forecasted 2.5% Company SSS
growth did not incorporate his most recent weekly forecast.78 They further understood that
“one particular week does not represent an entire quarter,” and typically focus on the
forecast Hawley “provided at the beginning of the quarter or period . . . not the forecast in
[Hawley’s] Daily Sales Updates.”79 Hawley also explained that “the simultaneous
promotion of both” shrimp and beef—two higher-priced proteins—on the menu “was
potentially impacting the Company’s sales” resulting in the lower sales numbers.80
3. May 14 Earnings Call
On May 14, 2015, EPL publicly reported the results from its first quarter in a
Form 10-Q.81 In its Form 10-Q, EPL reported an increase in Company SSS of 3.4% over
77
Id. at 131.
78
See id. at 160.
79
Id. at 161 (“Mr. Hawley explained that, although weak SSS for a few days ‘knocks [the]
number down a little bit,’ the Company still targets his initial forecasts ‘because there’s
organizational alignment around hitting a forecasted number.’” (alteration in original)
(quoting SLC Report Ex. 348)).
80
Id. at 162.
81
Id. at 96; SLC Report Ex. 203.
15
the prior year.82 EPL had previously forecasted a 4.3% increase in Company SSS for the
first quarter of 2015, so the 3.4% figure demonstrated a failure to meet forecasted results.83
That evening, the Company held an earnings call with investors to discuss its first
quarter results (the “Earnings Call”).84 The Earnings Call included a scripted and pre-
recorded presentation followed by a live Q&A session with investors.85 Preparing for the
Earnings Call involved exchanging several internal drafts of both the call script and the
talking points for the Q&A session.86
Prior to the Earnings Call, “it had not been EPL’s practice to comment on quarters
in progress while reporting the prior quarter’s results.”87 Because “the SSS forecasts and
projections indicated that the Company was likely to miss the quarterly earnings per share”
forecast, Roberts raised the possibility of reporting some second-quarter guidance in the
Earnings Call, which otherwise would have focused only on reporting results from the first
quarter.88 Preparation for the Earnings Call thus included discussions regarding how much
82
SLC Report at 96.
83
See id. at 96–97.
84
Id. at 190.
85
Id. at 170.
86
Id. at 170–71.
87
Id. at 172.
88
Id. at 171–75 (“Mr. Roberts stated that he was the first person to raise the issue of
additional messaging regarding Q2 2015’s recent sales and that he did not recall any
pushback or resistance.”).
16
second-quarter forecasting to disclose to adequately “manage the market’s expectations”
without creating an expectation that the market would continue to receive such detailed
forward-looking information “forever.”89
A May 12, 2015 draft of the Earnings Call script revised by Roberts noted that the
Company expected its “comparable restaurant sales to be at the lower end of the range
during the second quarter.”90 Maselli removed the “lower end of the range” language,
replacing it with “language stating that EPL did not expect its comparable restaurant sales
to be linear on a quarterly basis” and that “[s]econd quarter SSS will be effected [sic] by
the strong quarter last year as well as the extended testing of alternative proteins.”91
The Earnings Call was the Company’s third since the IPO, making the drafting
process “relatively new” and prompting extensive “back-and-forth” drafting.92 Given the
novelty of including forecasted results for the second quarter, EPL sent the draft script to
outside counsel “to make sure [its] Q2 disclosure is sufficient from an insider-trading
standpoint.”93 And, because of the upcoming Trading Window—the first since the
89
Id. at 193.
90
Id. at 175; SLC Report Ex. 164A at 14.
91
SLC Report at 175–76; SLC Report Ex. 174A at 14.
92
SLC Report at 176.
93
Id. at 177 (quoting SLC Report Ex. 181).
17
Company’s IPO—Roberts “wanted to ensure that the disclosures made on the Q1 2015
Earnings Call were very thoroughly vetted.”94
The final version of the script, which Roberts read at the Earnings Call, included the
following language regarding second quarter forecasts:
[W]e continue to expect full-year system-wide comparable
restaurant sales growth of 3% to 5%. That said, we do not
expect our comparable restaurant sales increases to be evenly
split among the remaining three quarters of 2015. During the
second quarter, we will be lapping a record high average unit
volume quarter as a result of two of our most successful
promotions, while simultaneously conducting extended tests of
alternative proteins. As a result, we will expect our second
quarter comparable sales to be closer to the low end of the
range.95
The process of drafting the Q&A responses was similar to that of the Earnings Call
Script, though the Q&A responses included input from Hawley “regarding the relationship
between pricing and EPL’s recent performance,” as well as “franchise versus company
performance, Q1 comps, Houston restaurants,” and the impact of price increases on the
Company’s value scores.96 Hawley included in his revisions a projected second-quarter
Company SSS range of 1.0–2.5% instead of the 2.5% number he included in the
Management Presentation.97 The lowered range “reflected an unlikely scenario in which
94
Id. at 178.
95
SLC Report Ex. 197 at 5.
96
SLC Report at 183.
97
Id. at 184–85.
18
the rain, which had been unusually strong in the Los Angeles region . . . had not been the
primary cause of the slower sales” and that “the slower sales were due to changing
underlying sales trends,” though Hawley “ultimately dismissed” that theory.98
Roberts removed reference to SSS ranges in the draft, instead noting a “softening
of . . . momentum” in second-quarter sales due to a “tough quarter lap given . . . record
sales last year” and “the impact of having three proteins on our menu.”99 Roberts further
addressed the impact of price increases on value scores by pointing to errors in the
Company’s marketing as driving value considerations: “Focus on alternative proteins at
higher price points looks to be driving softer transactions, not unexpectedly. This is a key
learning [sic] for us and we’re now adjusting balance of year marketing plan to better
balance value with higher price point items.”100
Hawley responded on May 12, 2015, reinserting SSS ranges for the second quarter
and including his revised 1.0–2.5% Company SSS range.101 He also noted “some potential
pushback from consumers on prices” as a response to questions about pricing and value
scores.102
98
Id. at 185.
99
Id. at 186; SLC Report Ex. 165A at 1.
100
SLC Report Ex. 165A at 2.
101
SLC Report Ex. 168A at 1.
102
Id. at 2.
19
The final draft of the talking points for the Q&A session included the language
Roberts added but did not include SSS ranges.103 Although Hawley generated the updated
SSS ranges based on “his good faith estimate” of the accurate forecast, he did so “for Mr.
Roberts and others so that they could, in their judgment, make disclosures that they
considered appropriate,” as Hawley “was not responsible for disclosing the appropriate
financial data to the public.”104
The call began with Sather reading the scripted presentation on the first quarter SSS
results, the menu items featured, and the development of new restaurants during that
quarter.105 Roberts then read his scripted presentation on first quarter revenue and some of
the factors contributing to the decline in Company SSS, including a reduction in same-
store transactions and sales due to the timing of the New Year’s holiday.106
Valle joined the call for the live Q&A session with the investor participants.
Attendees included analysts from Robert W. Baird & Company, Morgan Stanley, Jefferies
LLC, and William Blair & Company.107 As predicted, the participants asked questions
103
See SLC Report Ex. 193A; SLC Report at 189.
104
SLC Report at 189.
105
Id. at 190–91.
106
Id.
107
Id. at 190.
20
regarding second quarter SSS forecasting and consumer responses to the recent price
increases.108
Responding to a question about the sales slowdown going into the second quarter,
Roberts explained the impact of testing additional proteins on the menu and its effect on
consumer perception of EPL’s value.109 Responding to a question about value scores, Valle
explained that the decline resulted from a decreased “visibility of value . . . on our menu”
given the higher-priced non-chicken proteins, and not from “price resistance in the higher
price points.”110 Sather added that “[v]alue scores remain still one of our best attributes,”111
relying on value scores as reported by the Company’s former market research consultant
and not the numbers provided by EPL’s new and untested market research firm.112
F. May 19 Block Trade
EPL’s stock price closed at $29.06 per share on May 14, 2015, the date of the
Earnings Call.113 It opened the following morning at $24.96 per share and continued to
108
Id. at 191–97.
109
SLC Report Ex. 197A at 7.
110
Id. at 8.
111
Id.
112
See SLC Report at 196 (“Mr. Sather noted that Market Force was the most accurate
value tracker at the time, and scores in that period continued to be strong.”).
113
Id. App. C at 2. The Earnings Call occurred in the evening, after the market had closed.
See SLC Report Ex. 197.
21
decline over the next few days.114 The stock price opened at $24.07 per share on May 19,
2019, the first day of the first Trading Window since the IPO and the expiration of the lock-
up agreements.115
Though Pollo Partners had considered selling a portion of its EPL stock in the
months preceding the Trading Window,116 it did not formally bring the notion to the EPL
board or the Executive Management Team until May 3, 2015, when Maselli emailed Sather
regarding a potential sale.117 Shortly before the May 11 Board Meeting, Maselli met with
Sather, Valle, Roberts, and Bogeajis to inform them of Pollo Partners’ desire to sell stock
in the upcoming Trading Window.118
Wesley Barton, who at the time was both a Vice President of Trimaran and a director
on EPL’s board, informed Austin of Pollo Partners’ desire to sell some of its EPL stock on
May 18, 2015.119 He further informed her that some of EPL’s executives would likely also
participate in the sale.120 The potential underwriters had requested the individual
114
SLC Report App. C at 2.
115
Id.
116
See SLC Report at 204–08 (describing outreach from financial institutions beginning in
March 2015 regarding a potential block sale of Pollo Partners’ EPL holdings).
117
See id. at 208; SLC Report Ex. 110.
118
SLC Report at 208.
119
SLC Report Ex. 208.
120
Id.
22
executives’ involvement to avoid a subsequent additional block sale and to streamline the
administration of the trade, reducing the officers’ transaction costs.121
Three of EPL’s officers sought to participate in Pollo Partners’ block sale: Sather,
Valle, and Bogeajis.122 All three requested and obtained pre-clearance from Austin
pursuant to the Policy.123 Pollo Partners did not.124
On May 19, 2015, Pollo Partners, Sather Valle, and Bogeajis sold a total of
5,962,500 shares of EPL stock to Jefferies LLC for a total of $130,280,625, or $21.85 per
share (the “Block Trade”).125 The breakdown of shares sold and proceeds obtained is as
follows:
• Sather sold 360,000 shares for $7,866,000.
• Valle sold 175,000 shares for $3,823,750.
• Bogeajis sold 25,000 shares for $546,250.
• Pollo Partners sold 5,402,500 shares for $118,044,625.
Distributed among Pollo Partners’ members, Trimaran
received $68,122,313, Freeman Spigoli received $39,010,728,
and “[o]ther” members received $10,911,584.126
121
See SLC Report at 207.
122
Id. at 209.
123
Id.
124
Id.
125
Id. at 224–25.
126
Id. at 225.
23
Trimaran, as Pollo Partners’ managing member, negotiated the terms of the Block
Trade with Jefferies.127 Trimaran’s managing members, Kehler and Jay Bloom, authorized
the trade on behalf of Trimaran and Pollo Partners.128 After the Block Trade, Pollo Partners
held 16,746,544 shares of EPL stock.129
Two directors on EPL’s board, Douglas Ammerman and Samuel Borgese, also sold
EPL stock on May 19, though not as part of the Block Trade.130 That day, Ammerman
“exercised options to purchase 8,795 shares at $12.72 per share and 21,409 shares at $2.62
per share” and then immediately sold those shares and an additional 15,618 shares all at
$23.507 per share, for a total of nearly $1.1 million.131 Similarly, Borgese “exercised his
options and purchased 54,094 shares of EPL stock” and then “immediately sold 11,645
shares of EPL common stock at $24.06 per share” for a total of just over $280,000.132
Borgese then sold his remaining 42,449 shares on May 29 and June 2, 2015, for $20.92
and $21 per share, respectively.133 Combining his three sales, Borgese netted
approximately $890,650 for his EPL stock.134
127
Id. at 220.
128
Id.
129
Id. at 224.
130
Id. at 226–35.
131
Id. at 229. Ammerman netted $909,173.77 from the sale. Id.
132
Id. at 232.
133
Id. at 234.
134
Id. at 233–34.
24
G. Second Quarter 2015 Results
The second quarter of 2015 ended on July 1, 2015, and EPL announced the results
of that quarter in an August 13, 2015 press release.135 The press release highlighted that
“System-wide [SSS] grew 1.3%,” noting that Company SSS “in the second quarter
decreased 0.5%, driven by a 3.9% decrease in traffic, partially offset by a 3.4% increase in
average check.”136 It also adjusted its 2015 System-wide SSS projection from 3–5% down
to “approximately 3.0%” for the year.137
The market did not react positively to EPL’s second quarter results. EPL’s stock
opened at $18.04 per share on August 13, 2015, just before the Company announced its
results.138 It closed at $14.56 per share the following day.139 By the end of 2015, EPL had
suffered a 37% decline in its stock price, which opened at $20 per share on January 2, 2015,
and closed at $12.63 per share on December 31, 2015.140
H. Litigation Ensues.
On August 24, 2015, Daniel Turocy, on behalf of a class of EPL stockholders who
bought or sold stock between May 15 and August 13, 2015, sued EPL, Sather, Roberts,
135
See SLC Report Ex. 272; SLC Report at 240.
136
SLC Report Ex. 272 at 1.
137
Id. at 2.
138
SLC Report App. C at C-4.
139
Id.
140
Id. App. C at C-1, C-5; SLC Report at 246.
25
Valle, Pollo Partners, Trimaran, and Freeman Spigoli in the United States District Court
for the Central District of California, alleging violations of federal securities laws in
connection with the Block Trade (the “Federal Action”).141
On November 5, 2015, Armen Galustyan, an EPL stockholder, sued Sather, Roberts,
Valle, Bogeajis, Maselli, Kehler, Barton, Roth, Ammerman, Borgese, and Pollo Partners
in this court alleging breach of fiduciary duty and unjust enrichment in connection with the
Block Trade (the “Galustyan Action”).142 On July 13, 2016, the parties to the Galustyan
Action stipulated to a stay of that suit pending the outcome of the Federal Action.143 On
October 2, 2020, Galustyan voluntarily dismissed his suit with prejudice pursuant to Court
of Chancery Rules 23.1 and 41(a)(1)(ii), which the court granted on October 7, 2020.144
Kevin Diep (the “Plaintiff”), an EPL stockholder, filed the complaint in this action
on September 20, 2016 (the “Complaint”), after obtaining documents through a
Section 220 action in this court.145 The Complaint names Sather, Roberts, Valle, Bogeajis,
141
SLC Report at 44; see also id. at viii (identifying the defendants in the Federal Action
as the “Turocy Defendants”); Daniel Turocy v. El Pollo Loco Hldgs., Inc., No. 8:15-cv-
01343 (C.D. Cal.) (“Federal Action”).
See SLC Report Ex. 290; C.A. No. 11676-VCL (“Galustyan Action”), Dkt. 1; see also
142
SLC Report at vi (identifying the defendants in the Galustyan Action as the “Galustyan
Defendants”).
143
Galustyan Action, Dkt. 15.
144
See id. Dkts. 23–24.
145
See Dkt. 1 (“Compl.”) ¶ 11.
26
Ammerman, Borgese, and Pollo Partners as defendants (the “Defendants”).146 It asserts
two counts: Count I for breach of fiduciary duty in connection with the Block Trade,
asserted against all of the Defendants except Roberts; and Count II for breach of fiduciary
duty in connection with the public disclosures made prior to the Block Trade in the
Earnings Call, asserted against Sather, Roberts, and Valle.147
Defendants moved to stay this suit in favor of the Federal Action, to dismiss this
suit pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim on which relief
can be granted, and to dismiss this suit pursuant to Court of Chancery Rule 23.1 for failure
to make demand or show that demand would have been futile.148 The court stayed
Count II—the disclosure claim—in favor of the Federal Action but denied all three motions
as to Count I—the insider trading claim.149
I. The Company Forms the SLC.
On October 6, 2017, the Company formed a Special Litigation Committee (the
“SLC”) to investigate and evaluate the allegations and issues raised in this suit, the Federal
Action, and the Galustyan Action.150 The Company further tasked the SLC with
146
See id.
147
Id. ¶¶ 119–34.
148
See Dkt. 32 at 87:20–88:2 (The Court).
149
See id. at 88:3–9 (The Court).
150
SLC Report at 18.
27
investigating and evaluating the allegations and requests for action contained in demands
submitted by two other EPL stockholders.151
The Company appointed three of its newer directors to the SLC: Douglas Babb,
William Floyd, and Carol Lynton.152
1. Douglas Babb
Babb, who holds a J.D. from the University of South Carolina School of Law, is
licensed to practice law in Texas, South Carolina, and Minnesota, and has served in various
executive capacities throughout his career.153 He joined the EPL board on January 3, 2018,
and joined the SLC on January 11, 2018.154
Prior to joining the board, Babb knew only one other director, William Floyd, who
also sits on the SLC.155 Floyd recruited Babb to EPL’s board to fill EPL’s need for “another
independent board member.”156 Also prior to joining the board, Babb “conducted a
preliminary review of all of EPL’s then-pending litigations” but “was not asked to, and did
not, reach any conclusions regarding the claims alleged prior to joining the SLC.”157
151
Id.
152
Id. at 19.
153
Id. at 20–21.
154
Id. at 19.
155
Id. at 21.
156
Id.
157
Id.
28
2. William Floyd
Floyd, who holds an MBA from the Wharton School of Business at the University
of Pennsylvania, has served on a variety of corporate and non-profit boards and in
executive capacities at several companies in the food and beverage industry, including
Taco Bell, PepsiCo, and Kentucky Fried Chicken.158 He joined the EPL board on April 1,
2016, and joined the SLC on October 6, 2017.159
Prior to joining the board, Floyd knew only one other director, Kehler.160 Kehler
recruited Floyd to EPL’s board “because the Company was seeking independent board
members to meet federal and agency requirements for public companies.” 161 In the
process, Floyd and Kehler “briefly discussed the litigations at issue” but Floyd “was not
asked to, and did not, reach any conclusions regarding the claims alleged prior to joining
the SLC.”162
158
Id. at 22.
159
Id.
160
SLC Report at 23; see Brown Decl. Ex. A (“Floyd Dep. Tr.”) at 235:5–250:3.
161
SLC Report at 23; see Floyd Dep. Tr. at 14:14–16.
162
SLC Report at 23; see Floyd Dep. Tr. at 10:11–14:13.
29
Floyd met Kehler through their service on the Board of Overseers of the University
of Pennsylvania School of Nursing.163 It meets three to four times per year and has thirty
members. Kehler served as its Chair during part of Floyd’s tenure on the Board.164
In the spring of 2016, while Kehler chaired the Board of Overseers and before Floyd
joined the EPL board, Floyd received a “Dean’s Medal” in recognition of his service to the
Board of Overseers.165 Despite the similarity in the name of the award and Kehler’s first
name, the award refers to the “Dean” of the school, not to Dean Kehler.166
During his time as an executive at Taco Bell over twenty years ago, Floyd
“overlapped” with Sather and Bogeajis, who also worked in executive capacities there.167
Despite this overlap, they “were acquaintances but did not work together or have a personal
relationship” and “had very limited contact with each other while at Taco Bell.”168
3. Carol Lynton
Lynton, who holds an MBA from the Harvard Business School, has worked in the
financial and restaurant industries and has served in executive capacities in both the private
163
SLC Report at 24; Floyd Dep. Tr. at 235:5–13.
164
SLC Report at 24; Floyd Dep. Tr. at 236:12–17.
165
Floyd Dep. Tr. at 238:13–239:8.
166
Id. at 241:17–21 (testifying that the Dean’s medal refers to “the dean of the school,” and
“not Dean Kehler”); Dkt. 181 (“Oral Arg. Tr.”) at 13:20–14:8 (SLC’s Counsel).
167
SLC Report at 24.
168
Id.; Floyd Dep. Tr. at 245:20–247:5.
30
and non-profit sectors.169 She joined the EPL board on April 1, 2016, and joined the SLC
on October 6, 2017.170
Prior to joining the board, Lynton knew only one other director, Kehler.171 Kehler
recruited Lynton to EPL’s board “because the Company was seeking independent board
members to meet federal and agency requirements for public companies.” 172 In the
process, Lynton and Kehler “briefly discussed the litigations at issue” but Lynton “was not
asked to, and did not, reach any conclusions regarding the claims alleged prior to joining
the SLC.”173
Kehler’s wife and Lynton attended Harvard College at the same time, where they
met approximately two to three times.174 Lynton, Kehler, and Kehler’s wife all
simultaneously worked for Lehman Brothers during a two-year period from 1983 to 1985:
Lynton and Mrs. Kehler as junior analysts, and Kehler as a senior associate and Vice
President.175 During that time, Lynton “worked on a pitch with Mr. Kehler” once, and only
169
SLC Report at 24–25.
170
Id. at 24; Brown Decl. Ex. B (“Lynton Dep. Tr.”) at 69:12–73:25.
171
See SLC Report at 25; Lynton Dep. Tr. at 28:3–29:16, 97:11–14.
172
SLC Report at 25; Lynton Dep. Tr. at 96:7–21.
173
SLC Report at 25; Lynton Dep. Tr. at 115:25–116:23.
174
SLC Report at 26; Lynton Dep. Tr. at 117:14–118:11.
175
SLC Report at 26; Lynton Dep. Tr. at 112:9–24, 118:12–120:14.
31
for “a single two-week period.”176 Her other interactions with Kehler during that time
resulted from a year-long deal Lynton worked on with Kehler’s officemate.177
Since their time at Lehman Brothers, Lynton “sought business advice from
Mr. Kehler on a single occasion, roughly 10 years ago, regarding fees for a private equity
firm looking to invest in her business.”178 Lynton asked two other people for similar
advice.179
Lynton’s eldest daughter attended the same high school as the Kehlers’ eldest son,
though they only overlapped for “maybe a year or two.”180 In the past 35 years, Lynton
has dined with the Kehlers approximately 20 times.181 Though at one time Lynton and the
Kehlers’ children would visit each other’s homes—and even Lynton’s mother’s home once
when the kids were young—Lynton has dined with Kehler’s wife only twice since Lynton’s
April 2016 appointment to the EPL board.182 As Lynton describes it, her socializing with
the Kehlers revolved around their children, all of whom are now adults.183
176
SLC Report at 26; Lynton Dep. Tr. at 119:4–25.
177
SLC Report at 26.
178
Id.
179
Id.
180
Lynton Dep. Tr. at 123:4–16.
181
SLC Report at 26; Lynton Dep. Tr. at 127:13–128:4.
182
Lynton Dep. Tr. at 138:17–20, 172:2–25, 174:6–23.
183
See id. at 137:9–23 (testifying that many dinners with the Kehlers “would have been a
long time ago because the kids would be grown up, 10, 15 years ago”); id. at 168:8–12 (“Q.
So when you had these dinners with the Kehlers over the years, just generally, what did
32
Lynton sits on the board of the East Harlem Tutorial Program, for which she has
raised over $5 million and to which she has personally contributed over $2 million.184
Kehler has contributed approximately $13,000 to the East Harlem Tutorial Program over
the past ten years.185 Kehler sat on the board of CARE USA, a non-profit to which Lynton
had donated approximately $10,000 in the five years before joining the EPL board.186
J. The SLC Investigation and Report
On January 17, 2018, the court stayed this suit pending the results of the SLC’s
investigation.187
The SLC reviewed over 249,000 documents obtained from counsel to this suit and
the Federal Action, including board materials, financial updates and reports, documents
detailing internal Company governance and policies, and documents and emails generated
in connection with the Board Presentation, the Management Presentation, and the Block
Trade.188 The SLC further reviewed fourteen deposition transcripts from the Federal
you talk about? A. It was mostly with the kids and about the kids.”); id. at 171:22–172:25
(testifying as to only one “dinner with all the kids as adult children,” noting that the dinners
had “been kids, mostly at residences”).
184
SLC Report at 26; Lynton Dep. Tr. at 271:11–272:20.
185
SLC Report at 26; see also Lynton Dep. Tr. at 271:17–272:8 (estimating that the Kehlers
have contributed “around $12,000” to the East Harlem Tutorial Program).
186
SLC Report at 26; Lynton Dep. Tr. at 274:1–21.
187
Dkt. 57.
188
See SLC Report at 49–52.
33
Action and conducted additional interviews of twelve witnesses comprising all potential
defendants and “several key EPL employees,” like Hawley and Austin.189
The SLC met with Plaintiff’s counsel and counsel representing each of the various
defendants in this suit and the Federal Action.190 It met formally as a committee sixteen
times between December 2017 and February 2019, and “routinely met” with its counsel,
Gibson Dunn & Crutcher LLP, throughout the course of its investigation. 191 It concluded
its investigation and published its report on February 13, 2019.192
The SLC’s 377-page report attached 408 exhibits and contained nearly 2500
footnotes. The report concluded “that the Company should move to dismiss” this suit and
should “not pursue litigation nor otherwise take any further action against any of the
Defendants.”193 It reached this conclusion in light of the litigation costs to the Company,
the “risk that litigation would distract management from its primary task of operating
EPL’s business, serving EPL’s customers, and delivering profits and value for EPL’s
stockholders,” and the risk that litigation would “inevitably focus a portion of the
189
Id. at 63–67.
190
Id. at 52–63.
191
Id. at 67; see id. at vi (identifying Gibson Dunn as the SLC’s counsel).
192
See SLC Report.
193
Id. at 377.
34
Company’s public relations and management efforts on what the SLC has determined are
meritless claims.”194
As to Count I of the Complaint, the SLC concluded that “neither element of a
Brophy claim” for fiduciary insider trading was met.195 Specifically, the SLC determined
that none of the information contained in Hawley’s projections was material, nonpublic
information.196 The SLC then further concluded that, even if Hawley’s projections were
material, no defendant was motivated to trade by the projections. The SLC observed that
the Block Trade occurred on the first day of the first Trading Window after the IPO, timing
that suggests that the sale was made at the first opportunity for reasons unrelated to
Hawley’s projections. The SLC further found that Defendants’ contemporaneous reactions
to Hawley’s projections did not suggest that they were motivated to trade by the
information.197
194
Id. at 374–76.
195
Id. at 313. To prevail on a Brophy claim, “[t]he plaintiff must show that ‘1) the corporate
fiduciary possessed material, nonpublic company information; and 2) the corporate
fiduciary used that information improperly by making trades because she was motivated,
in whole or in part, by the substance of that information.” Kahn v. Kohlberg Kravis Roberts
& Co., 23 A.3d 831, 838 (Del. 2011) (quoting In re Oracle Corp., 867 A.2d 904 (Del.
Ch. 2004), aff’d 872 A.2d 960 (Del. 2005) (ORDER)).
196
SLC Report at 313–14.
197
See id. at 314–42 (evaluating the motivations for each individual who sold EPL stock
during the relevant period and concluding that none were motivated by any nonpublic
Company information). To establish scienter under Brophy, a plaintiff must show that a
“corporate fiduciary used material, nonpublic information improperly by making trades, at
least in part, because of the substance of that information.” Silverberg v. Gold, 2013 WL
6859282, at *14 (Del. Ch. Dec. 31, 2013) (emphasis added). In other words, the trade must
35
As to Count II of the Complaint, the SLC concluded that neither Sather, Roberts,
nor Valle breached their fiduciary duties of care, candor, or loyalty in connection with their
disclosures in the Earnings Call.198 Specifically, the SLC determined that “the Executive
Management Team was well informed, acted in good faith, and was not grossly negligent
in its decision not to disclose potentially unreliable value score data and highly variable
intra-quarter SSS projections,” that none of their statements in the Earnings Call were
materially misleading misstatements or omissions, and that “the Company does not have a
viable claim for breach of the duty of loyalty against any of the Defendants” due to a “lack
of evidence of bad faith, intent to violate the law, failure to implement internal controls, or
a conscious disregard of their corporate oversight duties.”199
The SLC filed its report and moved to dismiss this suit on February 13, 2019.200
The parties completed briefing the SLC’s motion to dismiss almost two years later, on
January 21, 2021, and the court heard oral argument on April 23, 2021.201
have at least partially resulted from a fiduciary’s conscious exploitation of “the fact that
they possessed material, nonpublic information.” Id. (citing Guttman v. Huang, 823 A.2d
492, 505 (Del. Ch. 2003)).
198
See SLC Report at 342–56.
199
Id.200
Dkt. 62. Count I is the only count against Pollo Partners in the Complaint and the only
cause of action that would survive if the settlement is approved. See infra Section I.K.
201
See Dkt. 163; Dkt 168 (“Pl.’s Answering Br.”); Dkt. 171; Oral Arg. Tr.
36
K. The Settlements
In January 2019, the parties to the Federal Action reached an agreement in principle
to settle that suit.202 The United States District Court for the Central District of California
approved that settlement on August 27, 2019.203 The SLC evaluated the settlement and
concluded that “the [Federal Action] Defendants decided to settle the litigation not because
they believed the allegations had merit, but because of the risks inherent in potentially
proceeding to trial and the significant costs that would be incurred in doing so.”204
On April 22, 2021, the day before oral argument on the SLC’s motion to dismiss,
the parties filed a Stipulation and Agreement of Compromise and Settlement (the
“Stipulation of Settlement”) as to the individual defendants.205 Specifically, Bogeajis,
Roberts, Sather, Valle, Ammerman, and Borgese agreed to collectively pay $625,000 in
exchange for Plaintiff’s agreement to release them of the claims asserted in this action.206
Pollo Partners is not a party to the Stipulation of Settlement.
202
See SLC Report at 46; SLC Report Ex. 397.
203
See Federal Action, Dkts. 218–19.
204
SLC Report at 47 n.319. The terms of the settlement are not mentioned in the SLC
Report. Plaintiff notes in briefing, and Defendants do not dispute, that the Federal Action
settled for a cash payment of $20 million. See Pl.’s Answering Br. at 18–19.
205
See Dkt. 176.
206
Id. ¶ N.
37
II. LEGAL ANALYSIS
In light of the individual defendants’ Stipulation of Settlement, this analysis resolves
the SLC’s motion to dismiss the claims asserted against Pollo Partners only.
Under Zapata, this court evaluates a special litigation committee’s motion to
dismiss under a “procedural standard akin to a summary judgment inquiry.”207 “[T]he
movant has the burden of demonstrating the absence of any material issue of fact, and any
doubt as to the existence of such an issue will be resolved against him.”208
Zapata calls for a two-step analysis. As the first step, the court must “review[] the
independence of SLC members and consider[] whether the SLC conducted a good faith
investigation of reasonable scope that yielded reasonable bases supporting its
conclusions.”209 As the second step, the court applies “its own business judgment to the
facts to determine whether the corporation’s best interests would be served by dismissing
the suit.”210
A. First Step
“The first prong of the Zapata standard analyzes the independence and good faith
of committee members, the quality of [the SLC’s] investigation and the reasonableness of
207
In re Oracle Corp. Derivative Litig., 824 A.2d 917, 928 (Del. Ch. 2003).
208
Lewis v. Fuqua, 502 A.2d 962, 966 (Del. Ch. 1985).
209
London v. Tyrrell, 2010 WL 877528, at *11 (Del. Ch. Mar. 11, 2010).
210
Id.38
its conclusions.”211 For the purposes of a motion subject to Zapata, the SLC is not entitled
to any favorable presumptions.212 Rather, the SLC bears “the burden of proving
independence, good faith and a reasonable investigation.”213
1. The SLC Members Are Independent.
The first matter to be considered at the initial step is whether the SLC was
independent.214 The SLC “bear[s] the burden of proving that there is no material question
of fact about their independence” because “the situation is typically one in which the board
as a whole is incapable of impartially considering the merits of the suit.”215 Still, “the
substantive contours of the independence doctrine” remain unchanged from the pre-suit
demand context.216 “At bottom, the question of independence turns on whether a director
is, for any substantial reason, incapable of making a decision with only the best interests
211
In re WeWork Litig., 250 A.3d 976, 997 (Del. Ch. 2020) (quoting Kahn, 23 A.3d at
836)).
212
Kaplan v. Wyatt, 484 A.2d 501, 507 (Del. Ch. 1984), aff’d 499 A.2d 1184 (Del. 1985).
213
Zapata, 430 A.2d at 788–89.
214
See Lewis, 502 A.2d at 936 (finding that a single-member special litigation committee
did not meet its burden where that member’s “past and present associations raise a question
of fact as to his independence”).
215
London, 2010 WL 877528, at *13.
216
Id. (“[I]t is conceivable that a court might find a director to be independent in the pre-
suit demand context but not independent in the Zapata context . . . . [I]t is primarily a
function of the shift in the burden of proof from the plaintiff to the corporation when the
suit moves from the pre-suit demand zone to the Zapata zone.”).
39
of the corporation in mind,” and the analysis therefore focuses on “impartiality and
objectivity.”217
“To establish independence, the court must be persuaded that the SLC can base its
decision on the merits of the issue rather than being governed by extraneous consideration
or influences.”218 The analysis is thus contextually “tailored”—because the court may
presume that “special litigation committee members are persons of typical professional
sensibilities,” the key inquiry is whether “an unacceptable risk of bias” is present.219
None of the three SLC members sat on EPL’s board at the time of the Block Trade,
and none have any financial interest in the transactions at issue. 220 Thus, the court’s
analysis focuses on whether “the relationships [the SLC members] have with defendants
are of such a nature that they might have caused [the SLC] to consider factors other than
the best interests of the corporation in making their decision to move for dismissal.”221
Plaintiff does not challenge Babb’s independence, and Babb did not have
relationships with any of the Defendants prior to joining the EPL board. The court thus
217
In re Oracle, 824 A.2d at 938 (quoting Parfi Hldg. AB v. Mirror Image Internet, Inc.,
794 A.2d 1211, 1232 (Del. Ch. 2001) rev’d in part on other grounds, 817 A.2d 149 (Del.
2002) (emphasis added)).
218
Sutherland v. Sutherland, 958 A.2d 235, 239 (Del. Ch. 2008) (internal quotation marks
omitted).
219
In re Oracle Corp., 824 A.2d at 941–42, 947.
220
See SLC Report at 28–29, 31.
221
London, 2010 WL 877528, at *13 (“Such a relationship would raise a material question
as to the SLC’s independence.”).
40
finds that the SLC has met its burden to establish Babb’s independence and ability to
consider the allegations impartially and in the best interests of the Company.
Plaintiff challenges the independence of Floyd and Lynton, arguing first that each
lacks independence because they prejudged Plaintiff’s claims by filing a motion to dismiss
this action in 2016, and next that each lacked independence from Kehler.222
In support of the first argument, Plaintiff relies on London v. Tyrell, but that case is
distinguishable.223 There, the court concluded that
if evidence suggests that the SLC members prejudged the
merits of the suit based on . . . prior exposure or familiarity,
and then conducted the investigation with the object of putting
together a report that demonstrates the suit has no merit, this
will create a material question of fact as to the SLC’s
independence.224
The “prior exposure” and “familiarity” present in London is markedly different from the
ostensible acts of “prejudgment” in this case. There, both members of a two-member SLC
also sat on an audit committee that reviewed valuations tied to the alleged wrongdoing.225
They later characterized their consideration of the valuations as an “attack” on the flaws in
222
See Pl.’s Answering Br. at 50–58.
223
Id. at 50–52.
224
London, 2010 WL 877528, at *15.
225
Id.41
those valuations, using language “suggesting that the SLC might have engaged in a
combative assault rather than an investigation.”226
In this case, Plaintiff’s only argument concerning Floyd and Lynton’s involvement
with the motion to dismiss derives from Floyd’s deposition testimony, when he stated that
no one on the Board objected to the filing.227 From this, Plaintiff effectively seeks an
inference that both Floyd and Lynton must therefore have reviewed, analyzed, and
prejudged the merits of this litigation. Plaintiff, however, cannot rely on inferences at this
stage. The applicable standard is “akin to a summary judgment inquiry,”228 where
“unsupported allegations are insufficient to create a genuine dispute as to material facts.”229
226
Id. at *16.
227
See Floyd Dep. Tr. at 66:8–16.
228
In re Oracle, 824 A.2d at 928; see also Kaplan, 484 A.2d at 507 (noting that this motion
“is to be handled procedurally in a manner akin to proceedings on summary judgment” in
that “[e]ach side . . . shall have an opportunity to make a record” and that the moving party
“has the normal burden imposed on a moving party under a Rule 56 motion”).
229
Shuttleworth v. Abramo, 1997 WL 349131, at *1 (Del. Ch. June 13, 1997) (“Although
all facts are to be viewed in favor of the non-moving party on a motion for summary
judgment, unsupported allegations are insufficient to create a genuine dispute as to material
facts.”); see also Ct. Ch. R. 56(e) (“When a motion for summary judgment is made and
supported as provided in this rule, an adverse party may not rest upon the mere allegations
or denials of the adverse party’s pleading, but . . . must set forth specific facts showing that
there is a genuine issue for trial.”); In re Transkaryotic Therapies, Inc., 954 A.2d 346, 356
(Del. Ch. 2008) (holding that “once the moving party has satisfied its initial burden of
demonstrating the absence of a material factual dispute, the burden shifts to the nonmovant
to present some specific, admissible evidence that there is a genuine issue of fact for a trial”
and that the nonmovant “may not rest upon the mere allegations or denials of its pleading”
(cleaned up)).
42
Stripped of the inference, Plaintiff’s argument is that the mere fact that Floyd and
Lynton sat on the board when the motion was filed, standing alone, automatically
disqualifies them. That argument finds no support in Delaware law. Moreover, the tone
of the SLC Report and of each SLC member is even-keeled and unbiased, suggestive of a
fair investigation—not a “combative attack” on Plaintiff’s claims. The prior motion to
dismiss, therefore, does not create a material question of fact as to Floyd’s or Lynton’s
independence.
Plaintiff next argues that Floyd and Lynton lack independence from Pollo Partners
based on their respective relationships with Kehler. This decision assumes for the sake of
analysis that connecting Floyd and Lynton to non-party Kehler would suffice to
demonstrate that Floyd and Lynton lacked independence from Defendant Pollo Partners.
Even so, the SLC has met its burden to demonstrate their independence.
As to Floyd, Plaintiff primarily relies on the fact that he served on the Board of
Overseers for the University of Pennsylvania Nursing School with Kehler for sixteen years.
When Kehler chaired the Board of Overseers, Floyd received the “Dean’s Medal” from the
school.230 This relationship, however, does not create a material question of fact as to
Floyd’s independence. The Board of Overseers has “30 board members” and “meets three
to four times per year,” so co-service on that board is plainly not enough to impugn Floyd’s
230
Pl.’s Answering Br. at 57.
43
independence.231 Kehler was not the Dean of the school, nor is there any evidence to
suggest that he was involved in the decision to select Floyd for the award. 232 Again,
Plaintiff cannot rely on mere inference on this motion and has failed to build a record that
gives rise to a genuine dispute of facts as to Floyd’s independence. Nothing about Floyd’s
and Kehler’s overlapping service on the Board of Overseers impairs Floyd’s ability to
consider the allegations impartially and in the best interests of the Company.
Plaintiff also contends that Kehler’s statements to Floyd while recruiting Floyd to
EPL’s board call Floyd’s independence into question. For this point, Plaintiff relies on the
following passage from Floyd’s deposition:
As I recall, Dean [Kehler] really said three things [about this
litigation]. He said we did nothing illegal, we did nothing
unethical, but he said the optics did not look good with the, you
know, with the trading of the stock.233
There is no basis to conclude that Kehler’s conclusory statements to Floyd would have
caused Floyd to prejudge the merits of the litigation. In light of the extensive additional
testimony provided by Floyd, his recollection of Kehler’s statements in early 2016 are
231
See SLC Report at 24.
See Floyd Dep. Tr. at 250:10–251:15 (confirming that the Dean’s Medal was “in no
232
way, shape or form” connected to Dean Kehler”).
233
Id. at 10:21–11:1.
44
immaterial and insufficient to suggest that Floyd approached the investigation with his
mind already made.234
Neither Floyd’s service on the Board of Overseers with Kehler, nor Floyd’s receipt
of the Dean’s medal, nor Kehler’s statements in early 2016 regarding the litigation, suffice
to establish a genuine dispute of material fact as to Floyd’s independence. The SLC has
therefore met its burden of establishing Floyd’s independence and ability to consider the
allegations impartially and in the best interests of the Company.
The question of Lynton’s independence from Kehler presents a closer call, but the
SLC has likewise met its burden of establishing her independence. Lynton’s relationship
with Kehler was more substantial than Floyd’s. Lynton attended the same college as
Kehler’s wife, where the two met a handful of times. Lynton then worked at the same
company as both Kehler and his wife for a two-year period after college. Over the past
234
See, e.g., id. at 10:14–18 (“We discussed the litigation but . . . very briefly. I mean, the
focus of our discussion was about what I could add to the board and the company and . . .
Dean had brought it up very briefly.”); id. at 14:4–16 (testifying that he understood the
SLC’s purpose being “to investigate, analyze the allegations and determine what steps
would go from there including making a recommendation” and that he was selected for the
SLC because he “was an independent director”); id. at 46:16–47:8 (“And every one of us
approached it in a very independent, impartial way with no preconceived notions
whatsoever about [whether] they were guilty or they were innocent. We looked at this in
a very exhaustive way. . . . I think we maintained a very objective, impartial view
throughout the whole process.”); id. at 50:16–51:1 (“[W]e went into this . . . with our
mission here to evaluate independently and partially [sic] and let the facts, let the data take
us where they would. So I don’t think it’s -- there was no fait accompli about sending a
report to the Delaware Chancery Court with a motion to dismiss.”); id. at 65:16–22
(testifying that he recalled the EPL board moving to dismiss this suit in 2016, “but I don’t
recall any of the details of it”).
45
thirty-five years, Lynton has dined with the Kehlers approximately twenty times, with most
of those meals concentrated around the time when their “now grown up” children “were
little.”235 Lynton once asked Kehler a question regarding private equity fees over ten years
ago, a question that she also asked two other individuals. Both Kehler and Lynton have
made donations over the past ten years to charities where the other served as a board
member, but the specific donations identified by Plaintiff were immaterial compared to
their wealth.236
To meet its burden, the SLC must establish that Lynton’s relationship with the
Kehlers would not have biased Lynton in her investigation of the claims against Pollo
Partners. Two decisions of this court discussing whether similar relationships impugn the
independence of SLC members are instructive.
In Sutherland v. Sutherland, the plaintiff challenged the independence of a one-
member special litigation committee.237 The plaintiff argued that the committee’s sole
member had undisclosed and material financial ties to a defendant director in addition to a
235
Lynton Dep. Tr. at 134:14–136:5.
236
Compare SLC Report at 26 (noting that Lynton has donated over $2 million to the East
Harlem Tutorial Program), and Lynton Dep. Tr. at 181:4–10, 287:6–10 (testifying that her
charitable foundation controls assets worth $8 million and that her net worth is
approximately $40 million), with SLC Report at 26 (noting that Kehler donated $13,000 to
the East Harlem Tutorial Program).
237
958 A.2d at 236.
46
disclosed social relationship.238 Specifically, the plaintiff pointed to the committee
member’s compensation as a director, his firm’s compensation for work related to the
investigation, and accounting work he had performed for the director defendant’s wife over
ten years prior.239 The court found the disclosed social relationship immaterial and held
that the alleged financial ties were “de minimus” and did not “raise a material question as
to [the committee member’s] independence.”240 The court concluded that the director acted
with sufficient independence where the director “hired independent counsel to support him
in his investigation” and was “himself, a named partner in a reputable Arkansas accounting
firm,” giving him “a strong incentive to act independently” despite any “de minimis” social
contact with an interested director.241
By contrast, in London v. Tyrell, the court found a material question of fact as to
one SLC member’s independence based on a familial relationship.242 There, an SLC
member was married to a defendant director’s cousin, and although the relationship did
“not seem to be particularly close,” the court could not “say with certainty that [the SLC
238
Id. at 240–41.
239
Id.240
Id.241
Id. at 241. This holding is buttressed by the fact that Delaware law applies greater
scrutiny to the independence of one-member special litigation committees. See id. at 239–
40 (“It should be noted that one-member SLCs are less insulated from the influence of
interested directors, and are closely scrutinized.”).
242
2010 WL 877528, at *15–16.
47
member] would not have considered the potentially awkward situation of showing up to
[the defendant’s] annual party after the family rumor mill had spread the word that [the
SLC member] had recommended that a lawsuit should proceed against the host.”243
Because the extent to which the family association “may have influenced” the objectivity
of the committee member presented a dispute of fact, the court found that the special
litigation committee had not met its burden under Zapata.244
Lynton’s relationship with the Kehlers is more like the relationship described in
Sutherland than the familial or financial obligations present in London. Lynton holds
numerous leadership roles in the restaurant and non-profit sectors separate from her
participation on the EPL board and the SLC—like the committee member in Sutherland,
Lynton has a reputational incentive to act independently.245 And unlike the committee
member in London, the connections between Lynton and the Kehlers—based largely
around their children—are unlikely to result in the type of awkward post-investigation
encounters that would weigh on a director’s decision-making during the course of the
243
Id. at *14.
244
Id. The London court further evaluated a prior business relationship between the second
special litigation committee member and the defendant director. The defendant had
previously served as CFO of the committee member’s company and “made a significant
and valued contribution to the efforts to sell” that company for a good price. Id. at *15.
The court found “a strong possibility” that this committee member would feel “a sense of
obligation” to the defendant for his assistance in the sale, which sufficed to establish “a
material question of fact regarding the SLC’s independence.” Id.
245
See Lynton Dep. Tr. at 69:18–73:18.
48
SLC’s investigation. There is no basis to conclude that a relationship based mainly around
their children gave rise to a “sense of obligation” to Kehler, much less Pollo Partners.
Moreover, the Kehlers’ contributions to charities affiliated with Lynton would not
compromise her independence given the relatively small size of those contributions.246
In sum, neither Lynton’s professional nor personal connections to Kehler suffice to
establish a genuine dispute of material fact as to her independence. The SLC has therefore
met its burden of establishing Lynton’s independence and ability to consider the allegations
impartially and in the best interests of the Company.
2. The SLC Conducted a Reasonable Investigation.
In addition to establishing its own independence, the SLC bears the burden “to prove
also that it conducted a reasonable investigation of the matters alleged in the complaint in
good faith.”247 The court denies an SLC’s motion to dismiss where it arises from a
“selective investigation” that fails to adequately address all of the plaintiff’s claims.248
A reasonable SLC investigation should “thoroughly investigate[] the factual
elements underlying” the plaintiff’s claims and should result in “an in depth inquiry and . . .
[a] well documented report.”249 It should also “investigate all theories of recovery asserted
246
See, e.g., id. at 181:4–10, 287:6–10 (testifying that her charitable foundation controls
assets worth $8 million and that her net worth is approximately $40 million).
247
Kaplan, 484 A.2d at 507.
248
Sutherland, 958 A.2d at 244 (quoting Electra Inv. Tr., PLC v. Crews, 1999 WL 135239,
at *6 (Del. Ch. Feb. 24, 1999)).
249
Kahn, 23 A.3d at 842.
49
in the plaintiffs’ complaint” and “explore all relevant facts and sources of information that
bear on the central allegations in the complaint.”250 Further, “[t]o demonstrate that its
recommendations are supported by reasonable bases, the SLC must show that it correctly
understood the law relevant to the case.”251
Plaintiff argues that the SLC investigation was unreasonable in scope because it did
not thoroughly evaluate the impact of the settlements or of Pollo Partners’ violation of the
Policy.252 Plaintiff also argues that the SLC lacked reasonable bases for the conclusions in
its report because it applied an incorrect standard of materiality,253 erroneously dismissed
Hawley’s conclusions as to the materiality of the Company’s declining value scores and
SSS,254 and erroneously concluded that Pollo Partners lacked the scienter necessary to
establish a claim for insider trading.255
a. Scope of Investigation
Plaintiff identifies two factors that the SLC purportedly failed to consider in
reaching its conclusions: first, the $20 million value of the Federal Action settlement and
the $625,000 value of the individual defendants’ settlement in this suit; second, whether
250
London, 2010 WL 877528, at *17.
251
Id.252
Pl.’s Answering Br. at 21–25.
253
Id. at 38.
254
Id. at 26–42.
255
Id. at 42–48.
50
Pollo Partners’ violation of the Policy provides any independent causes of action against
Pollo Partners or aids in establishing Pollo Partners’ scienter.
“If the SLC fails to investigate facts or sources of information that cut at the heart
of plaintiffs’ complaint this will usually give rise to a material question about the
reasonableness and good faith of the SLC’s investigation.”256 Where the SLC decides “not
to explore specific acts of alleged misconduct,” it must “carefully analyze whether a
summary investigation of those specific acts could shed light on the more serious
allegations,” because a “total failure to explore the less serious allegations in plaintiffs’
complaint may cast doubt on the reasonableness and good faith of an SLC’s
investigation.”257
Plaintiff’s assertion that the SLC failed to consider settlement of the Federal Action
is incorrect. The SLC Report notes that:
In reaching the conclusions discussed herein, the SLC
considered what impact, if any, the fact that the Turocy
Defendants decided to settle the Turocy Class Action, and the
settlement amount, should have on the SLC’s analysis. The
SLC determined that neither the fact, nor amount, of the
settlement alters the SLC’s determinations. The SLC
concludes that the Turocy Defendants decided to settle the
litigation not because they believed the allegations had merit,
but because of the risks inherent in potentially proceeding to
trial and the significant costs that would be incurred in doing
so. The SLC notes that the MOU explicitly states that the
256
London, 2010 WL 877528, at *17 (citing Sutherland, 958 A.2d at 242).
257
Id.51
Turocy Defendants have not, by entering into the agreement,
admitted any liability or wrongdoing.258
The gravamen of Plaintiff’s argument is that the SLC’s dismissal of the settlement was
conclusory. But, as is common in litigation settlements, the settlement does not constitute
an admission of liability. Rather, non-legal business decisions, like those cited in the SLC
Report’s conclusion, may incentivize a party to settle litigation.259
The individual defendants in this action reached a settlement agreement with
Plaintiff for $625,000 on June 23, 2020, over one year after the SLC concluded its
investigation and published its report.260 The settlement agreement did not exist at the time
of the SLC’s investigation and thus could not have been included in the SLC Report. This
court has not yet evaluated or approved the settlement. Plaintiff argues that the SLC should
have later reconsidered its position in light of the settlement agreement,261 but Plaintiff’s
arguments do not demonstrate a genuine dispute of fact material to the scope of SLC’s
investigation.
As this court highlighted in London v. Tyrell, the court’s inquiry into the scope of
an SLC’s investigation is designed to ensure that the SLC “seriously investigated”
Plaintiff’s allegations, including “fundamental theor[ies] of recovery in plaintiffs’
258
SLC Report at 47 n.319.
259
See id. at 374–76.
260
See Dkt. 176 ¶ N.
261
Pl.’s Answering Br. at 22–23.
52
complaint.”262 The SLC did just that, and Plaintiff offers no explanation for why the
settlement agreement itself would alter the factual findings and legal conclusions that the
SLC reached after its investigation.
Plaintiff next argues that the SLC should have considered whether Pollo Partners’
violation of the Policy could have “established a presumption that [Pollo Partners] acted
with scienter, or a presumption that [Pollo Partners] possessed material information,”
whether “violation of the policy should result in all inferences being drawn against [Pollo
Partners] as to the elements of scienter and materiality,” and whether the “violation of the
Insider Trading Policy gave rise to any independent legal claims” against Pollo Partners.263
As noted above, the SLC must “investigate all theories of recovery asserted in the
plaintiffs’ complaint.”264 The court will not fault the SLC for failing to evaluate claims
that were not asserted in the Complaint.
Plaintiff’s argument that the SLC failed to consider the elements of scienter and
materiality in light of the Policy similarly fails to impugn the reasonableness of the scope
of the SLC’s investigation. The SLC considered the technical violation,265 concluding that
“the potential harm in this instance was mitigated by the fact that Ms. Austin was aware of
262
London, 2010 WL 877528, at *22.
263
Pl.’s Answering Br. at 24–25.
264
London, 2010 WL 877528, at *17 (emphasis added).
265
See SLC Report at 208–09.
53
the Block Trade in advance and did not find it objectionable.”266 In any event, the SLC
conducted an independent and thorough evaluation of the materiality of Hawley’s
information and of each Defendants’ scienter based on its interviews and review of an
extensive record, obviating the need for an inference of intent based on the Policy alone.
In sum, the SLC’s investigation and report considered each allegation contained in
the Complaint and evaluated the facts and law relevant to those allegations. It further
considered the Federal Action settlement and the Policy and did not find that either
weighed heavily on its analysis. The SLC has therefore met its burden of establishing that
its investigation was reasonable in scope.
b. Bases for Conclusion
Plaintiff contests the reasonableness of the SLC’s conclusions on three grounds:
first, that the SLC applied an incorrect standard of materiality;267 second, that the SLC
erroneously concluded that Hawley’s value score and SSS data were immaterial; 268 and
third, that the SLC erroneously concluded that the Defendants lacked scienter.269
It bears noting at the outset that the court’s role on this motion is not to second guess
the conclusions that the SLC reached.270 Rather, the court must only determine whether
266
Id. at 280–82.
267
Pl.’s Answering Br. at 38.
268
Id. at 26–42.
269
Id. at 42–48.
270
See Kaplan, 484 A.2d at 519 (holding that “it is the conduct and activity of the Special
Litigation Committee in making its evaluation of the factual allegations and contentions
54
the SLC had “reasonable bases” for reaching its conclusions and whether it reached those
conclusions in good faith.271 In this case, the SLC did.
The standard for materiality under Delaware law is information that “would have
been viewed by the reasonable investor as having significantly altered the ‘total mix’ of
information made available.”272 In arguing that the SLC incorrectly applied a subjective,
rather than an objective, standard for materiality, Plaintiff points to two sentences in the
SLC Report273 and to an excerpt from Lynton’s deposition in which she defines material
as information that “has significant effect on the operations of the company” or “has an
effect on the long-term operations and viability of the company.”274
The SLC, however, identified and applied the correct standard.275 It evaluated the
information provided by Hawley, identified various reasons why Hawley’s data did not
contained in the plaintiff’s complaint which provide the measure for the Committee’s
independence, good faith and investigatory thoroughness” because “it is the Special
Litigation Committee which is under examination at this first-step stage of the proceedings,
and not the merits of the plaintiff’s cause of action”).
271
See London, 2010 WL 877528, at *11.
272
Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009).
273
Pl.’s Answering Br. at 38; see also SLC Report at 286 (“In the SLC’s view, the
Company’s performance and projections fall within the expected level of intra-quarter
variability that companies typically experience. . . .” (emphasis added)); id. at 287 (“The
SLC also found significant the fact that, in the past, EPL has rebounded in the final period
of a quarter after suffering two very poor, and significantly below-plan, periods of
Company SSS.” (emphasis added)).
274
Lynton Dep. Tr. at 51:10–52:12.
275
See SLC Report at 249 (quoting In re Oracle, 867 A.2d at 934); id. at 251 (quoting
Gantler, 955 A.2d at 710).
55
support the conclusion that price increases caused the decline in SSS and Company value
scores, and concluded that “the Company’s intra-quarter information, when viewed with
the Company’s disclosures and cautionary statements about the inability to guarantee a
particular level of performance, would, if disclosed, not have impacted the total mix of
information.”276 It is contextually evident that the language cited by Plaintiff does not refer
to the SLC’s view on materiality, but rather to the SLC’s views on the accuracy of
Hawley’s information—one of many factors in the materiality analysis. And despite
Lynton’s personal definition of materiality differing from the legal standard, there is no
evidence sufficient to establish a dispute of fact as to whether the SLC adopted Lynton’s
standard in its analysis.277
Plaintiff next argues that the SLC incorrectly discounted Hawley’s data when
reaching its conclusions. But the SLC relied on Hawley’s own statements discounting a
correlation between value scores and pricing increases and noting that he “had been, in
effect, providing his own point of view throughout his portion of the [Management
Presentation].”278 Further, as detailed above, the recipients of Hawley’s data all understood
276
Id. at 367.
See Lynton Dep. Tr. at 292:18–293:3 (testifying that she “[r]elied on the definition [of
277
materiality] in the SLC report”).
278
SLC Report at 154; see also id. at 151 (“Mr. Hawley testified that he did not believe
that the data indicated that ‘value scores’ declined simultaneous to EPL’s pricing
actions.”).
56
that his SSS projections did not “‘translate’ into his more formal quarterly forecasts”279 and
that Hawley himself had “ultimately dismissed” the conclusion that “the slower sales were
due to changing underlying sales trends.”280
The SLC’s investigation and report is not rendered unreasonable merely because
Plaintiff disagrees with its conclusions. The SLC did not discount Hawley’s data; it simply
concluded that the EPL board and Executive Management Team correctly reached less-
nefarious conclusions from that data. The challenges raised by Plaintiff regarding the
materiality of Hawley’s data offers an alternative conclusion: that the decline in SSS and
value score was based on pricing increases. This does not create a dispute of fact as to
whether the conclusion the SLC reached was reasonable. Because the SLC had provided
ample reasonable bases for its conclusion that the data presented by Hawley was
immaterial, Plaintiff’s challenge fails.
Plaintiff lastly argues that because Defendants “[a]ffirmatively [c]oncealed” certain
information during the Earnings Call, the SLC should have concluded that Defendants
acted with scienter when participating in the Block Trade.281 Plaintiff points to information
regarding the Company’s declining SSS numbers and value scores in the time leading up
to the Earnings Call. Because Defendants were made aware of this information at the
279
Id. at 161.
280
Id. at 185.
281
Pl.’s Answering Br. at 42–47.
57
May 11 and 12 board meetings, Plaintiff contends that their decision not to share it publicly
in the earnings call evinces their intent to trade on that information.
No Pollo Partners representatives participated in the Earnings Call where
information was purportedly “affirmatively concealed.” In any event, the SLC concluded
that the EPL board and Executive Management Team made the decision not to share that
information in the Earnings Call for other reasons. Specifically, the SLC found that “the
SSS range in the Q1 2015 Earnings Call Q&A may have been Mr. Hawley’s forecast,” but
it “did not reflect an official position by the Company.”282 Hawley confirmed this position,
noting that his data serves as an “estimate for Mr. Roberts and others so that they could, in
their judgment, make disclosures that they considered appropriate.”283
The SLC also noted that the existence of the lock-up agreements and the Policy
resulted in May 19, 2015, being the first available Trading Window since the IPO. The
SLC concluded that the open Trading Window provided a more plausible explanation for
Pollo Partners’ intent than the exploitation of material nonpublic information.284
Plaintiff relies on Silverberg v. Gold to support the premise that “[Pollo Partners’]
sale on the very first day of the trading window supports the finding of scienter.”285 In
282
SLC Report at 188.
283
Id. at 189.
284
See id. at 333.
Pl.’s Answering Br. at 48 (citing Silverberg v. Gold, 2013 WL 6859282, at *14 (Del. Ch.
285
Dec. 31, 2013)).
58
Silverberg, the defendants’ “large-scale disposal of stock immediately following the
FDA’s approval” of their drug was “sufficient to support a reasonable inference” for
“purposes of a motion to dismiss” where the plaintiff alleged that the defendants knew of
“a significant risk of the physician community being reluctant to prescribe [the drug]
because of the cost and reimbursement concerns associated with it.”286 Because the
defendants knew the risk that their drug would not be commercially successful, did not
disclose that risk, and sold their stock immediately after the event that would have revealed
the drug’s failure, the court found scienter reasonably inferable.287
Silverberg is distinguishable from this case, both substantively and procedurally.
Substantively, the SLC concluded that the timing of the trade on the first available Trading
Window since the IPO undercuts a finding of scienter rather than supporting that finding.
This conclusion was based, reasonably, upon the nature of Pollo Partners’ investment and
the lack of available selling opportunities prior to the Trading Window. Procedurally,
Plaintiff is not entitled to the same inference the plaintiff in Silverberg received. Rather,
Plaintiff had the opportunity to develop a record that would cast doubt on the SLC’s
conclusions regarding scienter but failed to do so.
None of Plaintiff’s arguments raise a genuine question of material fact as to the
reasonableness of the scope of the SLC’s investigation or the presence of reasonable bases
286
2013 WL 6859282, at *14.
287
See id. at *15.
59
for the SLC’s conclusions. Rather, the SLC has met its burden and established that its
conclusions were the product of a reasonable, good faith investigation.
B. Second Step
This court has framed the analysis called for in the second step as follows:
[T]he trial court’s task in the second step is to determine
whether the SLC’s recommended result falls within a range of
reasonable outcomes that a disinterested and independent
decision maker for the corporation, not acting under any
compulsion and with the benefit of the information then
available, could reasonably accept.288
Having already dilated extensively on Plaintiff’s challenge to the substance and
scope of the SLC’s investigation, it is not much of a leap to conclude that the recommended
result falls within the range of reasonable outcomes. At bottom, a disinterested and
independent decision-maker for the Company, not acting under any compulsion and with
the benefit of the information available to the SLC, could reasonably accept the SLC’s
recommendation to dismiss Plaintiff’s claims.
288
In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 468 (Del. Ch. 2013); accord Obeid
v. Hogan, 2016 WL 3356851, at *12 n.14 (Del. Ch. June 10, 2016) (collecting cases). The
second step of the Zapata analysis has been described by Delaware courts as “the essential
key,” on the one hand, Zapata, 430 A.2d at 789, and “discretionary” on the other. Kaplan,
484 A.2d at 520; accord WeWork, 250 A.3d at 1013 (noting that the second step “permits
the court in its discretion to use its own independent business judgment in determining
whether the motion to dismiss should be granted” (emphasis added) (internal quotation
marks omitted)); Sutherland, 658 A.2d at 239 (noting that “the court may nonetheless
exercise its own business judgment and deny the motion to dismiss” (emphasis added)).
Given the salutary and “innovative” nature of the second step, this jurist is inclined to view
it as essential. See Obeid, 2016 WL 3356851, at *12.
60
Only the Brophy claim of Count I is asserted against the non-settling defendant,
Pollo Partners. That claim requires a showing of scienter.289 The SLC directly addressed
the facts on which Plaintiff relies to support a finding of scienter and concluded that they
offered little support. Although this decision is focused on Pollo Partners, the SLC
evaluated the information available to each Defendant, as well as each of the Defendants’
respective reasons for participating in the Block Trade, and determined that innocent
explanations for the timing of the trade and the disclosures issued in May 2015 were more
plausible than the insider trading theory set forth in the Complaint.290 Specific to Pollo
Partners, the SLC found no liquidity concerns present and that the private equity model for
Pollo Partners’ investment provided a more credible explanation for the timing of the sale
than did any information to which insiders may have had access.291
Faced with factual circumstances that present compelling explanations for the
timing of the Block Trade, the SLC’s determination that Count I is not worth pursuing was
a reasonable one. In other words, the SLC reasonably concluded that pursuit of the weak
Brophy claim against Pollo Partners is not worth the expense of protracted and uncertain
litigation.
289
See supra note 195.
290
See SLC Report at 313–42.
291
See id. at 333–34.
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III. CONCLUSION
The SLC has met its burden of proof. The SLC’s motion to dismiss is GRANTED.
62