IBEW Local Union 481 Defined Contribution Plan and Trust v. Winborne ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IBEW LOCAL UNION 481 DEFINED )
CONTRIBUTION PLAN AND TRUST, )
Derivatively on Behalf of GODADDY, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0497-JTL
)
RAYMOND E. WINBORNE, et al., )
)
Defendants, )
)
and )
)
GODADDY, INC., )
)
Nominal Defendant. )
OPINION DENYING MOTION TO DISMISS
Date Submitted: May 24, 2023
Date Decided: August 24, 2023
Joel Friedlander, Jeffrey M. Gorris, Christopher M. Foulds, FRIEDLANDER & GORRIS,
P.A., Wilmington, Delaware; Randall J. Baron, Benny C. Goodman III, ROBBINS
GELLER RUDMAN & DOWD LLP, San Diego, California; Gladriel Shobe, Jarrod Shobe,
SHOBE & SHOBE LLP, Provo, Utah; Counsel for Plaintiff.
S. Mark Hurd, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Wilmington, Delaware; Jordan Eth, Philip T. Besirof, David J. Wiener, MORRISON &
FOERSTER LLP, San Francisco, California; Counsel for Defendants and Nominal
Defendant.
LASTER, V.C.
The defendants paid $850 million to settle a liability that the company
contemporaneously valued on its audited financial statements at $175.3 million. The
plaintiff contends that the directors breached their fiduciary duties by approving the
payment in bad faith. They contend that the company’s chief financial officer provided the
directors with manufactured financial information to support their decision. They also say
that the payment constituted waste.
Those claims are derivative, and the defendants moved to dismiss the complaint
under Rule 23.1. That motion is denied. A majority of the directors who would consider
the demand are defendants on the merits, and the complaint alleges particularized facts that
collectively support a pleading-stage inference that the directors approved the payment in
bad faith. That inference both rebuts the business judgment rule and renders exculpation
unavailable, resulting in those directors facing a substantial risk of liability and rendering
demand futile.
The defendant directors also moved to dismiss the claims under Rule 12(b)(6). The
standard for pleading a claim that gives rise to a substantial threat of liability is higher than
the standard for pleading a reasonably conceivable claim, so the former analysis dictates
the outcome of the latter motion.
I. FACTUAL BACKGROUND
The facts are drawn from the operative complaint, the documents it incorporates by
reference, and public documents that are subject to judicial notice.1 At this stage of the
proceedings, the complaint’s allegations are assumed to be true, and the plaintiff receives
the benefit of all reasonable inferences.
A. The Up-C IPO And The Tax Agreements
GoDaddy Inc. (“GoDaddy” or the “Company”) is a Delaware corporation
headquartered in Tempe, Arizona. It provides web hosting, Internet domain registration,
and other cloud-based services.
Robert Parsons founded GoDaddy’s predecessor in 1997. In 2011, Parsons sold a
majority of his equity stake, representing a controlling interest in GoDaddy, to Kohlberg
Kravis Roberts & Co. L.P. (“KKR”), Silver Lake Partners (“Silver Lake”), and Technology
Crossover Ventures (“TCV”).
In 2015, GoDaddy completed an Up-C IPO. That chimeric structure layers a parent-
level corporation on top of a limited liability company that is treated as a partnership for
tax purposes. The member interest in the LLC is divided into a number of units. The
1
The operative complaint is the plaintiff’s amended complaint, filed on November
4, 2022. Dkt. 16. Citations in the form “Compl. ¶ —” refer to the paragraphs of the
complaint. The complaint did not attach any exhibits, but it incorporated by reference
documents that the plaintiff obtained using Section 220 of the General Corporation Law.
The parties submitted those documents by affidavit. Citations in the form “DX [number]
at —” refer to exhibits that the defendants submitted. See Dkts. 22, 28. Citations in the
form “PX [number] at —” refer to exhibits that the plaintiff submitted. See Dkt. 24.
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corporation owns some, but not all, of the units. The insiders taking the company public
own the remaining units.
The parent-level corporation issues two classes of stock. Class A stock is straight
common stock, and each share carries voting rights and reflects a proportionate economic
ownership interest in the corporation. Class B stock is special stock. It only carries voting
rights. The Class B stock does not reflect any economic ownership in the corporation.
In the Up-C IPO, public investors receive Class A shares. Insiders receive Class B
shares. The number of units in the LLC is adjusted to match the number of outstanding
shares.
The result is a hybrid entity in which public stockholders participate in governance
and economically through their Class A shares. The insiders participate in governance
through their Class B shares and economically through their LLC units. The combination
allows insiders to take a company public while retaining the benefit of pass-through tax
treatment. They also get the benefit of liquidity, because the transaction documents
authorize an insider to convert one Class B share plus one LLC unit into one Class A share,
which can then be sold.
In the Company’s version of the Up-C structure, GoDaddy was the holding
company. An entity named Desert Newco, LLC was the LLC. GoDaddy’s public
stockholders received Class A shares. Parsons, the private equity investors, and various
pre-IPO senior officers and stockholders (together, the “Founding Investors”) received
Class B shares and Desert Newco units. Consistent with the Up-C structure, the Founding
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Investors could convert one Class B share plus one Desert Newco unit into one Class A
share.
Immediately before the IPO, GoDaddy and the Founding Investors entered into tax
revenue agreements (the “Tax Agreements” or “TRAs”). They provide that if GoDaddy
reduces its taxable income by using a tax asset generated by a Founding Investor, then
GoDaddy must pay the Founding Investor 85% of the savings. GoDaddy has no obligation
to make any payment to a Founding Investor unless and until GoDaddy uses the tax asset
to generate savings.
The principal tax asset that a Founding Investor might create would result if a
Founding Investor exercised its conversion right and sold the resulting Class A share for
more than the IPO price. That sale would result in a proportionate step up in the tax basis
of GoDaddy’s assets, and GoDaddy could claim depreciation on the increased value to
reduce its taxable income. If GoDaddy lacked sufficient taxable income to use the tax asset
in a given year, it could carry the asset forward to a later year, creating a deferred tax asset
(sometimes abbreviated “DTA”) that GoDaddy could use once it had taxable income.
B. The Founding Investors Sell Their Equity Stakes.
By February 2019, Parsons and the three private equity investors had fully exited
from their equity positions, generating tax assets with a total value of $2.2 billion (the “Tax
Asset”). GoDaddy’s commitment to pay 85% of that benefit to the Founding Investors
resulted in a nominal liability of approximately $1.8 billion (the “Nominal Liability”).
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Despite the size of the Nominal Liability, GoDaddy had not made any payments
under the Tax Agreements because GoDaddy did not generate taxable income. GoDaddy
also had little prospect of generating taxable income. Its business model relied heavily on
mergers and acquisitions, which create tax benefits of their own. In the four years since its
IPO, GoDaddy completed acquisitions valued at over $2 billion. GoDaddy had every
intention of continuing that business strategy.
GoDaddy’s strategy of growth by acquisition reduced the likelihood that GoDaddy
would be able to use the Tax Asset and have to make payments to the Founding Investors.
Since the IPO, GoDaddy had repeatedly pushed out the date when it expected to begin
making payments under the Tax Agreements. In 2016, the start date was expected to be
2017. At the beginning of 2019, the start date was 2021. During 2019, it was pushed back
to 2022. And once the payments began, they would be spread out over fifteen years.
For the private equity investors, the right to receive a stream of future payments
beginning at some indefinite point in the future and extending over a decade and a half was
not an attractive asset. The private equity firms invested in GoDaddy through funds formed
in 2006 and 2007. By 2019, those funds had grown stale. It is reasonable to infer that the
private equity investors wanted to convert their rights under the Tax Agreements from a
speculative long-term revenue stream into cash so that they could liquidate their aging
funds and return capital to their investors.
Although the private equity investors had sold off their shares in the Company,
Silver Lake and KKR still had influence on the nine-member board of directors (the
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“Board”). Silver Lake had two designees: Lee Wittlinger, a managing director of Silver
Lake, and Gregory Mondre, Silver Lake’s co-CEO. KKR had one designee—Herbert
Chen—who had worked for KKR from 1995 to 1997 and again from 2007 to 2019. Chen
was personally entitled to payments from the Tax Agreements.
The other six members of the Board were Amanpal Bhutani, Charles Robel, Brian
Sharples, Mark Garrett, Caroline Donahue, and Ryan Roslansky. Robel served as Board
Chair, and Bhutani served as the Company’s Chief Executive Officer.
C. The December 2019 Meeting
During a meeting of the Board in December 2019, GoDaddy’s Chief Financial
Officer Raymond Winborne gave a standard presentation about the Company’s financial
performance. The thirty-sixth page of the presentation was titled “Capital structure |
Capacity and Liquidity.” DX 2 at ’254. The first comment on that page stated: “Cash and
short-term investments at $1.8B+ by end of 2020 brings net leverage ratio under 1X.
Excess liquidity growing to $3B+ at year end 2020 (4x leverage cap).” Id. The next
comment stated: “M&A/share repurchases remain capital allocation priorities” and that
“TRA payments (~$1.8B gross) start in ~2022 at <$100M; expected to be in the $225M
range in 2023+.” Id.
The presentation did not refer to using capital to acquire the Founding Investors’
rights to payments under the Tax Agreements (a “TRA Buyout”). Nor do the minutes
reflect any discussion of a TRA Buyout. See PX 3.
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D. The Formation Of The Special Committee
After the start of the New Year, Nima Kelly, GoDaddy’s General Counsel,
circulated an email asking the directors to execute a unanimous written consent that would
establish a special committee to consider and negotiate the terms of a possible TRA Buyout
(the “Special Committee”). DX 3 at ’454–55. Kelly was a Founding Investor who would
benefit personally from a TRA Buyout.
The Board approved the written consent in the form circulated by Kelly. The record
does not reflect any prior discussion about a TRA Buyout, the concept of the Special
Committee, or who would serve as its members.
A recital in the written consent asserted that the Board “has discussed the possibility
of [a TRA Buyout]” during its meeting on December 4, 2019. Id. To reiterate, the minutes
of the December meeting do not reflect that.
A second recital to the written consent stated that the Special Committee was being
created because “certain members of the Board and of management of the Company are
affiliated with the holders of the TRAs or are party to the TRAs” and the Special Committee
would “mitigate and address conflicts of interest in connection with the foregoing process
and any transaction resulting therefrom.” Id. at ’455
The empowering resolution delegated to the Special Committee “the exclusive
power and authority” to take a list of actions “in its sole and absolute discretion.” Id. The
list of actions included:
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• “To consider and evaluate the TRA Buyout and any potential alternatives to the
TRA Buyout”;
• “To review, evaluate, investigate, pursue and negotiate the terms and conditions of
the TRA Buyout or any potential alternatives to the TRA Buyout”;
• “To determine whether the TRA Buyout or any potential alternatives …. are
advisable and fair to, and in the best interests of, the Company and its stockholders”;
and
• “To authorize and approve, or in the discretion of the Special Committee to make a
recommendation to the Board regarding the authorization and approval of the TRA
Buyout or any potential alternatives to the TRA Buyout.”
Id. The resolution provided that the Board would not authorize, approve, or effectuate a
TRA Buyout without an affirmative recommendation from the Special Committee. Id. at
’455–56.
There were five directors who were neither affiliated with Founding Investors nor a
member of management: Robel, Sharples, Garrett, Donahue, and Roslansky. Two of those
directors—Donahue and Roslansky—had no apparent ties whatsoever to the Founding
Investors. But the written consent did not name either as a member of the Special
Committee.
The written consent designated Robel, Sharples, and Garrett as the members of the
Special Committee. Of the five candidates, they were the three with the closest ties to the
Founding Investors.
Robel had served on the Board since before the Up-C IPO. He was thus a Founding
Investor himself and would benefit from the TRA Buyout. So that he could serve on the
Special Committee, he renounced his rights under the Tax Agreements.
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Contemporaneously, Robel was approached by Richard Kimball, a former GoDaddy
director and the founder and general partner of TCV, about coinvesting with TCV in
Sportradar AG, a multinational company that provides data collection and analytical
services to sports betting organizations, and serving on its board. Robel committed to invest
$400,000 in Sportradar and believed he could earn “a return on his investment that,
depending on the company’s performance, could be material to his individual net wealth.”
DX 7 at ’007.
Sharples joined the Board in 2016, after the Up-C IPO. Over the years, Sharples
enjoyed a profitable relationship with TCV. He co-founded HomeAway, Inc., a vacation
rental marketplace, in 2004. In 2008, TCV invested $250 million in HomeAway and placed
two of its representatives on the board. Sharples described the transaction as joining forces
with TCV, and TCV began referring to HomeAway as one of its portfolio companies. In a
prospectus for a SPAC that Sharples filed in March 2021, he touted his relationship with
TCV and other private equity funds.
Garrett joined the Board in 2018, after the Up-C IPO. He also had some overlapping
connections with Silver Lake and KKR. None of his ties appear significant, but unlike
Donahue and Roslansky, he had them.
E. The Special Committee’s First Meeting
The Special Committee met for the first time on January 24, 2020. Winborne
attended, as did a representative of the Company’s in-house legal department and a lawyer
9
from the Company’s outside counsel. Representatives of Potter Anderson & Corroon and
KPMG LLP joined the meeting.
The purpose of the meeting was to consider retaining Potter Anderson and KPMG.
Potter Anderson would serve as legal counsel. KPMG would “provide a valuation report
that would set forth the range of values within which KPMG believed a settlement of the
TRAs would be expected to fall.” DX 4 at ’002.
The minutes do not reflect the Special Committee considering any other firms. At
this stage, it is reasonable to infer Potter Anderson and KPMG where the only legal and
financial advisors that the Special Committee considered. It seems as if someone had
already lined them up for the Special Committee to use.
Both Potter Anderson and KPMG had concurrent representations of KKR. Potter
Anderson disclosed its conflict. KPMG did not. See Compl. ¶ 124.
The Special Committee approved the retention of both advisors and instructed them
to start analyzing a potential TRA Buyout.
F. The Special Committee’s Second Meeting
On February 7, 2020, the Special Committee held its second meeting. Winborne
was there, along with other members of management, an in-house attorney, and two
attorneys from the Company’s outside counsel. A team from Potter Anderson and KPMG
also attended. DX 7.
Winborne started the meeting by providing “an overview of the rational for” the
TRA Buyout, which management called “Project Exodus.” Id. at ’003 & ’010. He cited
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“certain business and investor concerns related to the TRAs’ impact on the Company’s pro
forma business and market trading price.” Id. at ’003. He noted that the Company had “a
number of strategic initiatives” that it could pursue but asserted that “there was
considerable value for the Company in exploring a buyout of the TRAs at this time.” Id.
Winborne walked thorough a presentation that included a base case financial model.
Id. at ’004. One of the Committee members asked if the projections included growth
initiatives, which inferably would include future acquisitions. Winborne said they did not.
Id.; see id. at ’014. That was a key omission, because the Company’s M&A-based business
model generated tax attributes that limited its ability to use the Tax Asset.
Winborne’s model assumed that GoDaddy would begin to use the Tax Asset and
make payments under the Tax Agreements in 2022, with utilization jumping in 2023. Id.
at ’031. He projected that the Company would pay over half of the Nominal Liability by
fiscal year 2027. Id. at ’006, ’031.
To value the TRA Buyout from the Company’s perspective, Winborne modeled the
transaction as a purchase of tax assets owned by the Founding Investors. See id. at ’021.
That perspective allowed him to start with Tax Asset’s gross value of approximately $1.8
billion, treat the purchase of 85% of the Tax Asset as “[l]iability avoidance” in the amount
of $1.3 billion, then add the deductible portion of the buyout price for another $158 million
in value, resulting in a total benefit to the Company of $1.472 million. Id. He then
discounted that figure back to present value using a discount rate of 7.8%, which reflected
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his calculation of GoDaddy’s weighted average cost of capital (“WACC”). Winborne
calculated a net present value for the payments of $904 million. Id. at ’023.
Winborne suggested that the private equity investors would use higher discount
rates of 15% to 20%. Discounting the Nominal Liability at those rates resulted in a present
value of approximately $700 million. See id. at ’012. Winborne thought that the $200
million difference created “space for a mutually agreeable range for settlement.” Id. He
suggested a deal that “splits the difference” and paid the Founding Investors approximately
$800 million. Id. at ’012, ’034. He argued that paying the Founding Investors compared
favorably to share repurchases or M&A of the same magnitude. Id. at ’029.
The minutes recite that after Winborne’s presentation, “[a] discussion ensued
regarding the anticipated timing for the first payments by the Company under the TRAs,
as well as the total amounts to be paid under the TRAs, assuming all TRA attributes were
utilized by the Company.” Id. at ’004 (emphasis added). That assumption put the rabbit in
the hat because a key driver of whether the Company would need to make any payments
under the TRAs was whether and when the Company utilized the Tax Asset.
After discussing the accounting treatment for a TRA Buyout, KPMG left the
meeting. Potter Anderson then made clear that KPMG would not be providing a fairness
opinion, only a valuation report containing financial analysis. DX 7 at ’006. The Special
Committee decided it would be “comfortable relying on KPMG’s valuation report and
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Management’s financial analysis” and would not retain a financial advisor to render a
fairness opinion. Id.
At this point in the meeting, Robel disclosed TCV’s offer to serve on the board of
Sportsradar and co-invest in the company. He explained that he planned to invest $400,000
and that the anticipated upside “could be material to his individual net worth.” Id. at ’007.
Robel left the meeting. Garrett and Sharples discussed the conflict. The minutes redact the
conclusions they drew, but it seems evident from Robel’s continued attendance and
participation at Special Committee meetings that they decided Robel should continue to
serve. See id.
Robel was serving as Chair of the Special Committee. As a result of TCV’s offer,
he also had the most obvious tie to a Founding Investor. TCV would receive 11% of the
proceeds from a TRA Buyout.
G. The Board Gets A New Member.
On February 10, 2020, only three days after Robel disclosed his coinvestment with
TCV, the Company announced that Mondre, Silver Lake’s co-CEO, had resigned from the
Board. He was replaced by Leah Sweet, an outsider with no apparent connections to the
Founding Investors.
The pleading-stage record does not reveal why Mondre left. Regardless of the
reason, replacing him with Sweet opened the door to a legal argument that the nine-member
Board had a majority of independent directors. Even without Robel and Sharples (and
13
counting out Wittlinger and Chen), there remained five other directors: Garrett, Donahue,
Roslansky, Sweet, and Bhutani.
H. The Special Committee’s Third Meeting
On February 14, 2020, the Special Committee met for a third time. The same basic
group attended. The principal purpose of the meeting was to review KPMG’s preliminary
valuation analysis. DX 8 at ’044.
KPMG valued the amounts due under the Tax Agreements from GoDaddy’s
perspective as having a net present value of $869.7 million to $1.1994 billion. PX 7 at ’059.
KPMG derived these amounts by starting with the full value of the Nominal Liability. To
derive a discount rate, KPMG analogized the Founding Investors rights to payments under
the Tax Agreements to a subordinated, illiquid debt instrument, then calculated a range of
discount rates by looking to the implied yield of GoDaddy’s 2027 Notes. Id. at ’063.
KPMG’s alternative methodology derived a discount rate for the TRA Liability of 9.5% by
starting with GoDaddy’s calculated WACC of 8.5% then adding an illiquidity premium of
1%. Id. at ’064.
KPMG’s analysis identified five precedent settlements of TRA liabilities. PX 7 at
’068. KPMG reported that settlements ranged in value from 39.4% to 60.6% of the gross
value of the tax asset. Id. KPMG cautioned that each settlement involved fact-specific
considerations.
The Special Committee and management discussed strategy for negotiating with the
private equity firms. Management—inferably Winborne—noted that there was already
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“alignment with KKR.” DX 8 at ’055. Winborne suggested that he meet with KKR and
Silver Lake the following week to begin negotiations. The Special Committee directed
Winborne to tell Silver Lake and KKR that the Company would not agree to a discount
rate below GoDaddy’s WACC. DX 8 at ’045–46.
I. The 2019 10-K
While the Special Committee was meeting, GoDaddy was finalizing its Form 10-K
for the year ended December 31, 2019. Under generally accepted accounting principles
(“GAAP”), GoDaddy was required to record a liability for the probable amount of the
future payments that GoDaddy actually would have to make under the Tax Agreements
(the “TRA Liability”). The magnitude of the TRA Liability was thus not the same as the
gross value of the Tax Asset or the Nominal Liability. The TRA Liability had to take into
account whether it was probable that GoDaddy would be able to use the Tax Asset, which
was the trigger for making a payment under the TRA Agreements. Neither the Tax Asset
nor the Nominal Liability reflected that critical consideration.
Winborne led the team that calculated the TRA Liability. Ernst & Young LLP,
GoDaddy’s auditors, reviewed and signed off on the calculation. GoDaddy’s Audit and
Finance Committee (the “Audit Committee”) met quarterly with Winborne and Ernst &
Young to review and approve the Company’s financial statements, including the TRA
Liability.
Throughout 2019, management, Ernst & Young, and the Audit Committee had
examined the TRA Liability. In April 2019, Ernst & Young told the Audit Committee that
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the TRA Liability was one of its “Areas of Emphasis.” PX 2 at ’852. In November 2019,
Ernst & Young identified the TRA Liability as one of two “Critical Audit Matters.” PX 1
at ’167. That meant that the TRA Liability would be “an area of focus in our audit as well
as a focus by our audit executives.” Id.
In November 2019, management valued the TRA Liability at “~175 million.” PX 1
at ’151. Management provided the following explanation for the Audit Committee:
We have determined it is more-likely-than-not we will be unable to utilize
all of the DTAs subject to the TRAs; therefore, we have not recorded a
liability related to the tax savings we may realize from the utilization of NOL
carryforwards and the amortization related to basis adjustments created by
exchanges of units. If utilization of these DTAs becomes more likely-than-
not in the future, at such time, we will record TRA liabilities of up to an
additional ~$1.15B as a result of basis adjustments under the Internal
Revenue Code and up to an additional ~436M related to the utilization of
NOL and credit carryforwards, which will be recorded through charges to
our statements of operations.
Id. In other words, the Nominal Liability may have been approximately $1.8 billion, but
the TRA Liability was much less.
On February 20, 2020, GoDaddy filed its 2019 10-K, which included its audited
financial statements. Every director signed the filing, as did Winborne as CFO.
The audited financial statements recorded a value of $175.3 million for the TRA
Liability as of December 31, 2019. DX 5 at 49. The disclosure regarding the magnitude of
the TRA Liability stated:
As of December 31, 2019, we have recorded a liability under the TRAs of
$175.3 million payable to certain pre-IPO owners. This is the amount of
liability we currently deem probable and estimable, which takes into account
limitations on our use of the favorable tax attributes due to limitations of
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taxable income…. We have determined it is more-likely-than-not we will be
unable to utilize all of our DTAs subject to the TRAs[.]
Id.
The audited financial statements acknowledged the magnitude of the Nominal
Liability, but nevertheless valued the TRA Liability at $175.3 million. GoDaddy’s audited
financial statements did not project any payments to the Founding Investors in 2020, 2021,
or 2022. The audited financial statements projected a payment of only $36.3 million in
2023 and only $139 million in total payments after that.
The representations that Winborne made to the Audit Committee and Ernst &
Young and which appeared in the 2019 10-K were quite different from what Winborne told
the Special Committee. When presenting to the Special Committee, Winborne claimed that
the Company would begin making payments under the Tax Agreements in 2022, that the
payments would ramp up in 2023, that the Company would pay over half of the Nominal
Liability to the Founding Investors by fiscal year 2027, and that over the ensuing years the
Company would generate so much taxable income that it would use the enter Tax Asset
and be forced to pay the Nominal Liability in full. DX 7 at ’006, ’031.
Robel, Garrett, and Donahue served on the Audit Committee. Two of the three
members of the Audit Committee (Robel and Garrett) thus also served on the Special
17
Committee and could bring information they learned as Audit Committee members to bear
on the Special Committee’s assignment.
J. The Special Committee’s Fourth Meeting
The Special Committee met again on February 24, 2020. The same basic group
attended. The meeting took place just four days after all three members of the Special
Committee signed the 2019 10-K containing the valuation of $175.3 million for the TRA
Liability.
Winborne started the meeting by reporting on his discussions with Silver Lake and
KKR. DX 9 at ’130. According to the minutes, he said Silver Lake and KKR had proposed
a discount rate using the Company’s cost of debt, but he had “firmly pushed back” on that
request. Id. at ’131.
K. The Special Committee’s Fifth Meeting
The Special Committee met again on March 2, 2020. Sharples could not attend.
Otherwise, the same basic group attended.
Winborne started the meeting by reporting on his discussions with Silver Lake and
KKR, including a discussion of discount rates. DX 10 at ’132. He reported that both sides
had completed their due diligence and that he had a meeting scheduled for the next day
with Silver Lake and KKR to continue discussions.
Winborne asked for formal authority to begin price negotiations with Silver Lake
and KKR with an initial offer of $750 million. The Special Committee granted that request
and authorized Winborne to negotiate up to $850 million. Winborne reported that
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management hoped to announce an agreement before GoDaddy’s investor day on April 2,
2020. Id. at ’134.
L. Winborne’s Pitch To The Private Equity Firms
On March 9, 2020, Winborne met with the private equity firms and made an opening
offer of $750 million. He framed the transaction as an acquisition of tax assets that they
owned. PX 4 at ’143.
In his presentation, Winborne told the private equity firms that the “timing [of
payments] is relatively well-known as the result of GoDaddy’s scaling income and caps on
utilization.” Id. at ’144. Despite that “relatively well-known” timing, Winborne was saying
different things to different people. For purposes of the Company’s audited financial
statements, he had told Ernst & Young and the Audit Committee that it was more likely
than not that GoDaddy would not use all of the Tax Asset. For purposes of the Special
Committee, he said that GoDaddy would use all of the Tax Asset. For purposes of his
discussions with the private equity firms, he stated that “GoDaddy’s TRA liabilities will
create $1.8B of payments over 15+ years.” Id.
M. The Board Update
During a meeting of the Board on March 5, 2020, Winborne gave a detailed
presentation that largely reiterated what he had been saying to the Special Committee. In
his presentation, Winborne acknowledged that while “[t]he current undiscounted value of
the liability is ~$1.8B,” the “key variable is when (or if) you actually pay it out.” DX 11 at
’480. He noted that the present value of the liability depended on (i) “Trajectory/timing of
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projected operating earnings,” (ii) “Federal tax law (statutory rate, deductibility,
limitations, etc.),” and (iii) “Discount rate.” Id. Winborne then projected that GoDaddy
would begin to use the Tax Asset in 2022, resulting in significant payments that began in
that year, continued through 2030, then declining through 2036. Id. at ’481. That was
contrary to what was in the 2019 10-K that Winborne and the directors signed and filed
two weeks before.
Winborne represented that based on the Company’s “bottoms-up long-term
financial model,” there was a “high probability of using” the Tax Asset. Id. at ’479. He
reported that “our financial advisors have estimated the present value of the TRA to
GoDaddy shareholders is within a range of ~$870 to $1,200M (v. $1.8bn undiscounted),
reflecting a range of discount rates and probability weighting changes to future income tax
rates.” Id. He stated “[u]sing current tax rates and a discount rate of 7.8% (between debt
and [] WACC) results in an NPV of ~$900M.” Id. Winborne explained his view that the
private equity firms would use higher discount rates, resulting in a likely difference of
“~$200M in perceived fair value, creating space for a mutually agreeable range for
settlement.” Id.
N. The Covid-19 Pandemic
In mid-March 2020, the Covid-19 pandemic put the buyout talks on hold. Internet
companies proved resilient, and by June 2020, GoDaddy’s performance had rebounded. A
presentation given to the Board during a meeting on June 3, 2020 noted that “Q2 results
20
will significantly beat consensus expectations for bookings (+4%) and uFCF (+12%) while
revenue will meet consensus.” DX 12 at ’535.
During the June meeting, management noted that by the end of the third quarter,
GoDaddy will have deployed “$415M for announced M&A.” Id. at ’543. Winborne’s
presentations on the TRA Buyout had again not included the effects of future M&A.
O. Winborne Agrees In Principal To The TRA Buyout.
In June 2020, negotiation over the TRA Buyout resumed. On June 19, 2020,
Winborne reported to the Special Committee that Silver Lake had countered at $850
million. That was at the top end of his authority, so from Winborne’s perspective, they had
a deal.
Winborne told the Special Committee that they needed “to move quickly” to lock
in that price. DX 13 at ’185. Winborne elaborated: “We are very likely at peak interest for
liquidity w/r/t/ [the private equity investors] and the outcome of the presidential election
also likely plays against us, so getting to an agreement quickly is to our benefit….” Id. at
’189. That the private equity investors would be eager was understandable—they wanted
to close out their funds. Winborne did not envision using the private equity investors’
eagerness to GoDaddy’s advantage. He wanted GoDaddy to operate on their schedule.
21
The Special Committee did as Winborne asked. They met formally on June 26,
2020, one week after his email. The usual crowd was there.
Winborne gave a presentation on what was now called “Project Leviticus.”
Throughout his analysis, Winborne treated the transaction as the purchase of an asset rather
than a compromise of a liability. E.g., DX 13 at ’198, ’202.
Winborne represented that the valuation of $850 million compared variably to
management’s valuation of $890 million. Id. at ’189. He reported that the management
intended to finance the TRA Buyout using $250 million of cash on hand plus another $600
million from new debt financing. Id. at ’189, ’202. Winborne thus was proposing to fund
over two-thirds of the settlement of a contingent debt obligation that did not bear interest
with interest-bearing debt.
The Special Committee discussed ,the Company’s ability to…engage in the [TRA
Buyout] and meet its ongoing financial obligations.” Id. at ’179. As part of that discussion,
the Special Committee and management—inferably Winborne—discussed whether the
Company “had sufficient funds to engage in certain additional strategic transactions over
the next few years….” Id. at ’180. The projections that Winborne had prepared to support
the TRA Buyout, however, did not incorporate any additional strategic transactions.
22
Omitting those transactions made it appear more likely that GoDaddy would use the Tax
Asset.
During the meeting, KPMG provided a draft of its valuation report. That report
“estimate[d] the range of fair market values of the TRA as of the Valuation Date to be
$951.2 to $1,147.8 million.” Ex. 14 at ’147.
P. The Special Committee Balks.
The Board had created the Special Committee to make a decision about the TRA
Buyout and empowered the Special Committee with its full power and authority for that
purpose. To be sure, the empowering resolution authorized the Special Committee to refer
the matter back to the Board with a recommendation from the Special Committee as to how
to proceed, but the whole purpose of forming the Special Committee in the first place was
to avoid conflicts of interest at the Board level.
At its final meeting on July 14, 2020, the Special Committee balked. Rather than
making the decision itself, the Special Committee lateraled it back to the full Board.
On July 28, 2020, KPMG submitted its final valuation report. Based on its analysis,
KPMG “estimate[d] the range of fair market values of the TRA as of the Valuation Date
to be $1,070.7 to $1,373.1 million.” DX 15 at ‘223.
Q. The Board Approves The TRA Buyout.
On July 30, 2020, the Board met to consider the TRA Buyout. The two remaining
directors affiliated with the Founding Investors—Wittlinger and Chen—did not attend.
Winborne discussed the terms and benefits of the TRA Buyout and presented
23
management’s valuation.
KPMG was not present. Winborne summarized KPMG’s report.
Robel provided an overview of the Special Committee’s work. He recommended
that the Board approve the TRA Buyout.
Robel, Sharples, Garrett, Sweet, Bhutani, Donahue, and Roslansky approved the
TRA Buyout (the “Voting Directors”). The meeting took a total of thirty minutes.
Four days later, on August 3, 2020, the Audit Committee held its quarterly meeting.
The materials showed that GoDaddy’s audited projections for payments under the Tax
Agreements in coming years had dropped significantly. DX 17 at ’783.
On August 13, 2020, less than two weeks after she voted to approve the TRA
Buyout, Sweet joined the board of directors of BMC Software, a KKR portfolio company
where Chen served as Chairman. The pleading-stage record does not reveal whether that
appointment was in the works before the vote, but it is reasonable to draw that inference at
the pleading stage.
R. This Litigation
The plaintiff is a stockholder who sued to challenge the TRA Buyout. The complaint
contains three counts.
24
Count I asserts that Winborne breached his fiduciary duties as CFO by “providing
materially false, misleading and incomplete information to the Board, the Special
Committee, and KPMG.” Compl. ¶ 246.
Count II asserts that the members of the Board breached their fiduciary duties by
approving the TRA Buyout and “knowingly causing GoDaddy to make a substantial
overpayment to the Founding Investors in exchange for their interests in the TRAs for self-
interested reasons and/or in bad faith.” Id. ¶ 251.
Count III asserts that the TRA Buyout constituted waste. Id.
II. LEGAL ANALYSIS
The defendants have moved to dismiss the complaint under Court of Chancery Rule
23.1 for failure to plead demand futility. In its entirety, Rule 23.1(a) states:
In a derivative action brought by one or more shareholders or members to
enforce a right of a corporation or of an unincorporated association, the
corporation or association having failed to enforce a right which may
properly be asserted by it, the complaint shall allege that the plaintiff was a
shareholder or member at the time of the transaction of which the plaintiff
complains or that the plaintiff’s share or membership thereafter devolved on
the plaintiff by operation of law. The complaint shall also allege with
particularity the efforts, if any, made by the plaintiff to obtain the action the
plaintiff desires from the directors or comparable authority and the reasons
for the plaintiff’s failure to obtain the action or for not making the effort.
The innocuous language of the second sentence supports the edifice of Rule 23.1
jurisprudence. See Lebanon Cnty. Empls’ Ret. Fund v. Collis, 2022 WL 17841215, at *13
(Del. Ch. Dec. 22, 2022).
25
Rule 23.1’s second sentence is the “procedural embodiment” of substantive
principles of Delaware law. Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). When a
corporation suffers harm, the board of directors is the institutional actor legally empowered
to determine what, if any, remedial action the corporation should take, including pursuing
litigation against the individuals involved. See 8 Del. C. § 141(a). “A cardinal precept of
the General Corporation Law of the State of Delaware is that directors, rather than
shareholders, manage the business and affairs of the corporation.” Aronson v. Lewis, 473
A.2d 805, 811 (Del. 1984).2 “Directors of Delaware corporations derive their managerial
2
In Brehm v. Eisner, 746 A.2d 244, 253–54 (Del. 2000), the Delaware Supreme
Court overruled seven precedents, including Aronson to the extent that they reviewed a
Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or
otherwise suggested deferential appellate review. Brehm, 746 A.2d at 253 n.13 (overruling
in part on this issue Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 72–73 (Del. 1997);
Grimes v. Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp.,
611 A.2d 950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow
v. Perot, 539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624–25 (Del.
1984); and Aronson, 473 A.2d at 814). The Brehm Court held that going forward, appellate
review of a Rule 23.1 determination would be de novo and plenary. Brehm, 746 A.2d at
254. The seven partially overruled precedents otherwise remain good law. This decision
does not rely on any of them for the standard of appellate review. Having described
Brehm’s relationship to these cases, this decision omits their cumbersome subsequent
history.
More recently, the Delaware Supreme Court overruled Aronson and Rales, to the
extent that they set out alternative tests for demand futility. United Food & Com. Workers
Union & Participating Food Indus. Empls. Tri-State Pension Fund v. Zuckerberg
(Zuckerberg II), 262 A.3d 1034, 1059 (Del. 2021). The high court adopted a single, unified
test for demand futility. Although the Zuckerberg II test displaced the prior tests, cases
properly applying Aronson and Rales remain good law. Id. This decision therefore does
not identify any precedents, including Aronson and Rales, as having been overruled by
Zuckerberg II.
26
decision making power, which encompasses decisions whether to initiate, or refrain from
entering, litigation, from 8 Del. C. § 141(a).” Zapata Corp. v. Maldonado, 430 A.2d 779,
782 (Del. 1981) (footnote omitted). “The board’s authority to govern corporate affairs
extends to decisions about what remedial actions a corporation should take after being
harmed, including whether the corporation should file a lawsuit against its directors, its
officers, its controller, or an outsider.” Zuckerberg II, 262 A.3d at 1047.
“In a derivative suit, a stockholder seeks to displace the board’s decision-making
authority over a litigation asset and assert the corporation’s claim.” Id. (cleaned up). Unless
the board of directors permits the stockholder to proceed, a stockholder only can pursue a
cause of action belonging to the corporation if (i) the stockholder demanded that the
directors pursue the corporate claim and they wrongfully refused to do so, or (ii) demand
is excused because the directors are incapable of making an impartial decision regarding
the litigation. Id. “Thus, the demand-futility analysis provides an important doctrinal check
that ensures the board is not improperly deprived of its decision-making authority, while
at the same time leaving a path for stockholders to file a derivative action where there is
reason to doubt that the board could bring its impartial business judgment to bear on a
litigation demand.” Id. at 1049.
Rule 23.1 imposes a pleading requirement so that demand principles can be applied
at the outset of a case to determine whether the plaintiff has standing to sue. See id. at 1048.
To satisfy the pleading requirements of Rule 23.1, the plaintiff “must comply with stringent
requirements of factual particularity that differ substantially from . . . permissive notice
27
pleadings . . . .” Brehm, 746 A.2d at 254. Under the heightened pleading requirements of
Rule 23.1, “conclusionary [sic] allegations of fact or law not supported by allegations of
specific fact may not be taken as true.” Grobow, 539 A.2d at 187.
The plaintiff in this case chose not to make a pre-suit demand. The question under
Rule 23.1 is therefore whether demand is excused because there is a reasonable doubt that
the directors could have properly responded to a demand. Zuckerberg II, 262 A.3d at 1049.
The reasonable doubt standard is intended to be “sufficiently flexible and workable
to provide the stockholder with ‘the keys to the courthouse’ in an appropriate case where
the claim is not based on mere suspicions or stated solely in conclusory terms.” Grimes,
673 A.2d at 1217 (footnote omitted). The “reasonable doubt” standard is not intended to
incorporate “a concept normally present in criminal prosecution.” Id. at 1217. “Reasonable
doubt can be said to mean that there is a reason to doubt.” Id. “Stated obversely, the concept
of reasonable doubt is akin to the concept that the stockholder has a ‘reasonable belief’ that
the board lacks independence or that the transaction was not protected by the business
judgment rule. The concept of reasonable belief is an objective test . . . .’” Id. at 1217 n.17.
As noted, a plaintiff must plead particularized facts sufficient to give rise to a
reasonable doubt, but that does not mean that a plaintiff must “plead particularized facts
sufficient to sustain ‘a judicial finding’” that a director would be disabled from considering
a demand. Grobow, 539 A.2d at 183. Rule 23.1 requires that a plaintiff allege specific facts,
but “he need not plead evidence.” Aronson, 473 A.2d at 816; accord Brehm, 746 A.2d at
254 (“[T]he pleader is not required to plead evidence.”). Whether the pled facts could
28
support a “judicial finding” would impose “an excessive criterion” for applying Rule 23.1.
Grobow, 539 A.2d at 183. The operative standard is the “reasonable doubt test.” Id.The particularized pleading standard also does not change the principle that the
plaintiff receives the benefit of favorable inferences on a pleading-stage motion to dismiss.
“When considering a motion to dismiss a complaint for failing to comply with Rule 23.1,
the Court does not weigh the evidence, must accept as true all of the complaint’s
particularized and well-pleaded allegations, and must draw all reasonable inferences in the
plaintiff’s favor.” Zuckerberg II, 262 A.3d at 1048. When determining whether a
reasonable doubt exists, the trial court must “consider all the particularized facts pled by
the plaintiffs . . . in their totality and not in isolation from each other.” Del. Cnty. Empls.
Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015). Evaluating a board’s ability to
consider a demand impartially thus requires a “contextual inquiry.” Beam v. Stewart (Beam
II), 845 A.2d 1040, 1049 (Del. 2004).
When conducting a demand futility analysis, a Delaware court proceeds on a claim-
by-claim and director-by-director basis.3 As to each claim, the court asks for each director,
(i) whether the director received a material personal benefit
from the alleged misconduct that is the subject of the litigation
demand;
3
See, e.g., Khanna v. McMinn, 2006 WL 1388744, at *14 (Del. Ch. May 9, 2006)
(“This analysis is fact-intensive and proceeds director-by-director and transaction-by-
transaction.”); Beam v. Stewart (Beam I), 833 A.2d 961, 977 n.48 (Del. Ch. 2003)
(“Demand futility analysis is conducted on a claim-by-claim basis.”), aff’d, 845 A.2d 1040(Del. 2004).
29
(ii) whether the director faces a substantial likelihood of
liability on any of the claims that would be the subject of the
litigation demand; and
(iii) whether the director lacks independence from someone
who received a material personal benefit from the alleged
misconduct that would be the subject of the litigation demand
or who would face a substantial likelihood of liability on any
of the claims that are the subject of the litigation demand.
Zuckerberg II, 262 A.3d at 1059. “If the answer to any of the questions is ‘yes’ for at least
half of the members of the demand board, then demand is excused as futile” for purposes
of that claim. Id. Although the inquiries are framed as if they contemplate affirmative
findings, each must be answered using the pleading-stage standard. See id. at 1049.
The board of directors that would consider a demand (the “Demand Board”)
comprises nine directors: Bhutani, Robel, Sharples, Garrett, Donahue, Roslansky, Sweet
Wittlinger, and Chen. To establish demand futility, the plaintiff must plead facts supporting
a reasonable inference that at least five members of the Demand Board could not act
disinterestedly or independently on a demand.
Two of the directors are readily disqualified. Wittlinger was a dual fiduciary for the
Company and Silver Lake, a party interested in the TRA Buyout, so he is not independent.
Chen is both interested in the TRA Buyout as a recipient of payments under the TRA
Agreements and has sufficiently longstanding and recent ties to KKR, a party interested in
the TRA Buyout, to render him not independent. Framed in the language of the operative
test, there is reason to doubt that either could consider a demand.
30
For the remaining directors, the plaintiff argues that each faces a substantial
likelihood of liability for breaching their fiduciary duties when voting to approve the TRA
Buyout.
Analyzing that contention requires determining the standard of review that would
apply to a challenge to the TRA Buyout. If the business judgment rule would govern the
challenge, then the Voting Directors will not face a substantial risk of liability and the
complaint must be dismissed. If grounds exist to rebut the business judgment rule such that
entire fairness would apply, then the Voting Directors could face a substantial risk of
liability. At that point, the analysis must consider whether the plaintiff has pled facts
sufficient to support an inference that the Voting Directors would not be entitled to
exculpation. If the pled facts do not support such an inference, then the Voting Directors
will not face a substantial threat of liability and the complaint again must be dismissed. But
if it is inferable that the Voting Directors would not be entitled to exculpation then a
substantial threat of liability exists, and the Rule 23.1 motion must be denied.
The plaintiff relies on a single theory to elevate the standard of review and negate
exculpation. The plaintiff argues that the complaint’s allegations support a reasonable
inference that the Voting Directors acted in bad faith. That contention, if correct, rebuts
one of the presumptions of the business judgment rule, causing the standard of review to
31
shift to entire fairness.4 It also renders exculpation unavailable, because Delaware law does
not permit a director to be exculpated for bad faith conduct. See 8 Del. C. § 102(b)(7).
Successfully pleading bad faith thus leads to a pleading-stage inference that a director could
not consider a demand. United Food & Com. Workers Union v. Zuckerberg (Zuckerberg
I), 250 A.3d 862, 890 (Del. Ch. 2020) (“As part of [the demand futility] analysis, this
decision considers whether the complaint pleads particularized facts that support a
reasonable inference that the director’s decision could be attributed to bad faith.”), aff’d,
262 A.3d 1034, (Del. 2021).
A. The Standard For Pleading Bad Faith
Bad faith is a state of mind. Court of Chancery Rule 9(b) states that a person’s
“condition of mind may be averred generally.” Ct. Ch. R. 9(b) (“In all averments of fraud
or mistake, the circumstances constituting fraud or mistake shall be stated with
particularity. Malice, intent, knowledge and other condition of mind of a person may be
averred generally.”). As noted previously, Court of Chancery Rule 23.1 requires that a
plaintiff “allege with particularity the efforts, if any, made by the plaintiff to obtain the
4
In re Walt Disney Co. Deriv. Litig. (Disney II), 906 A.2d 27, 53 (Del. 2006)
(explaining that Delaware law “clearly permits a judicial assessment of director good faith”
and that the business judgment rule can be rebutted by establishing “the directors breached
their fiduciary duty of care or of loyalty or acted in bad faith” such that “[i]f that is shown,
the burden then shifts to the director defendants to demonstrate that the challenged act or
transaction was entirely fair to the corporation and its shareholders.”); accord Brehm, 746
A.2d at 264 n.66; Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995);
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993); eBay Domestic Hldgs.,
Inc. v. Newmark, 16 A.3d 1, 40 (Del. Ch. 2010).
32
action the plaintiff desires from the directors or comparable authority and the reasons for
the plaintiff’s failure to obtain the action or for not making the effort.” Ct. Ch. R. 23.1(a).
Delaware decisions have read those rules together to require that a plaintiff plead
particularized facts that can support a reasonable inference about the directors’ state of
mind.5 In a legal regime that uses demand futility as a screening mechanism for weak
complaints, that approach makes sense, because permitting a plaintiff to rely on general
averments to disqualify a director for demand futility purposes would risk making it too
easy to survive a Rule 23.1 motion.6
5
Zuckerberg I, 250 A.3d at 890 (surveying prior case law and concluding that as
part of the demand futility analysis, a court “considers whether the complaint pleads
particularized facts that support a reasonable inference that the director’s decision could be
attributed to bad faith.”); see Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (requiring
pleading of “particularized facts” to establish “bad faith”); Rich v. Chong, 66 A.3d 963,
966 (Del. Ch. 2013) (“Having found that the Plaintiff has pled particularized facts that raise
a reasonable doubt that the directors acted in good faith in response to the demand, I deny
the Rule 23.1 Motion.”); In re The Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL
4826104, at *12 (Del. Ch. Oct. 12, 2011) (requiring that to establish demand futility, the
plaintiffs had to plead facts “amounting to bad faith”); In re J.P. Morgan Chase & Co.
S’holder Litig., 906 A.2d 808, 824 (Del. Ch. 2005) (requiring “particularized facts
sufficient to raise . . . a reason to doubt that the action as taken honestly and in good faith”),
aff’d, 906 A.2d 766 (Del. 2006); Guttman v. Huang, 823 A.2d 492, 501–02, 507 (Del. Ch.
2003) (same); see also In re Lear Corp. S’holder Litig., 967 A.2d 640, 652 (Del. Ch. 2008)
(holding to establish demand futility, a plaintiff must “plead particularized facts supporting
an inference that the directors committed a breach of the fiduciary duty of loyalty”).
6
See Zuckerberg II, 262 A.3d at 1049; Gagliardi v. TriFoods Int’l, Inc., 683 A.2d
1049, 1054 (Del. Ch. 1996). The screening function is the only coherent explanation for
the demand requirement. As Chancellor McCormick has explained, the notion that
requiring demand encourages intra-corporate dispute resolution conflicts with how demand
law operates. See Solak v. Welch, 2019 WL 5588877, at *7 n.62 (Del. Ch. Oct. 30, 2019)
(“[T]he tacit concession doctrine set forth in Spiegel, coupled with the mutually exclusive
33
An individual’s mental state is not directly observable. “[I]t may be virtually
impossible for a . . . plaintiff to sufficiently and adequately describe the defendant’s state
of mind at the pleadings stage.” Desert Equities, Inc. v. Morgan Stanley Leveraged Equity
Fund, II, L.P., 624 A.2d 1199, 1208 (Del.1993) (citations omitted). “Even after a trial, a
judge may need to make credibility determinations about a defendant’s subjective beliefs
by weighing witness testimony against objective facts.” Allen v. Encore Energy P’rs, L.P.
(Encore I), 72 A.3d 93, 106 (Del. 2013). And even then, the members of the Court of
Chancery “cannot peer into the hearts and souls of directors to determine their subjective
intent with certainty.” Id. (cleaned up). “Without the ability to read minds, a trial judge
only can infer a party’s subjective intent from external indications. Objective facts remain
logically and legally relevant to the extent they permit an inference that a defendant lacked
the necessary subjective belief.” Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167,
178 (Del. Ch. 2014).
One of the objective indicia that a trial court can consider is how extreme the
decision appears to be. As the Delaware Supreme Court has explained, if the pled facts
indicate that that the terms of the transaction were extreme, then those facts are “logically
nature of a stockholder’s options under Rule 23.1, discourages a stockholder from bringing
potential wrongdoing to the corporation’s attention prior to initiating litigation. This
disincentive stands in tension with statements repeated in Delaware case law describing
that Rule 23.1 serves to encourage stockholders to pursue pre-suit intracorporate
remedies.”), aff’d, 228 A.3d 690 (Del. 2020).
34
relevant” to making a subjective determination of bad faith. Encore I, 72 A.3d at 107. The
high court made its position on this issue clear because this court had posited that the
quality of the decision was “not relevant” when determining a party’s good faith. Id. The
Delaware Supreme Court emphasized that such an assertion “overstated the potency of the
subjective good faith standard” and could render transactions “virtually unchallengeable.”7
For a court to consider whether a decision appears extreme when assessing bad faith
accords not only with Encore I, but also with widely accepted scientific learning about the
theory of mind.
While “mind reading” might sound like a mentalist magic trick, for cognitive
scientists it refers to the very pedestrian capacity we all have for figuring out
what another human being is thinking … Other people’s minds are opaque
to us, so we cannot observe them directly. And yet, when someone walks
toward the water fountain on a hot day, we know she wants a drink. When
someone yelps after stubbing her toe, we know she feels pain. When
someone aims an arrow at a target, we know she intends to hit it. We take in
observable data about a person and infer something about her unobservable
mental life.
7
Encore I, 72 A.3d at 106–07. Both Encore I and El Paso interpreted limited
partnership agreements that eliminated fiduciary duties but required that a member of the
board of directors of a corporate general partner make a decision in subjective good faith.
The requirement of good faith that is a condition to compliance with the duty of loyalty
under corporate law also requires subjective good faith. Stone v. Ritter, 911 A.2d 362, 369
(Del. 2006). The subjective requirement is thus identical, even though the object of the
subjective belief can be different. For example, the corporate standard requires that the
fiduciary believe subjectively that the decision will serve the best interests of the
corporation and its residual claimants. See El Paso, 113 A.3d at 179–80. In an alternative
entity agreement, a contractual standard may use a different referent, such as requiring that
the decisionmaker believe subjectively that the decision will serve the best interests of the
partnership, taking into account all of its stakeholders. Id. at 181.
35
Mihailis Diamantis, How To Read a Corporation’s Mind, in The Culpable Corporate Mind
222–23 (Elise Bant ed., 2023) (footnotes omitted). Clairvoyance plays no role. “We gather
two types of observable information—what the person did and the circumstances in which
he did it—and triangulate to a person’s unobservable mental state.” Id. (footnote omitted).
The extent to which a business decision appears extreme under the circumstances is
thus necessarily a factor that a court can consider when assessing mental state. That reality
must not be confused with a seemingly similar proposition: the outcome of the challenged
decision cannot itself be an occasion for director liability. The latter proposition “is the
hard core of the business judgment doctrine.” Gagliardi, 683 A.2d at 1051.
What actually happens down the road is a different issue than whether the decision
appears extreme when made. Inferring bad faith because a decision turned out badly would
impose liability by hindsight. Examining the circumstances surrounding the decision when
made—irrespective of how it actually turns out—is part of how a court assesses mental
state. If it appears that the transaction was “authorized for some purpose other than a
genuine attempt to advance corporate welfare or is known to constitute a violation of
positive law,” then a court can find bad faith.8 The decision may well have turned out
8
Id. at 1051 n.2; see In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del.
Ch. 1996) (“That is, whether a judge or jury considering the matter after the fact, believes
a decision substantively wrong, or degrees of wrong extending through ‘stupid’ to
‘egregious’ or ‘irrational’, provides no ground for director liability, so long as the court
determines that the process employed was either rational or employed in a good faith effort
to advance corporate interests.”).
36
badly—after all, there is a lawsuit—but the analytical lens focuses on the decision, not the
outcome.
Indeed, in situations when there are no other pled facts that could provide any
reasonably conceivable basis to infer that a fiduciary could have acted for an improper
purpose, the court can only evaluate the merits of the decision that the fiduciaries made. In
re J.P. Stevens & Co., Inc. S’holders Litig., 542 A.2d 770, 780–81 (Del. Ch. 1988) (“A
court may, however, review the substance of a business decision made by an apparently
well motivated board for the limited purpose of assessing whether that decision is so far
beyond the bounds of reasonable judgment that it seems essentially inexplicable on any
ground other than bad faith.”) (internal citation omitted)). If the decision is sufficiently
extreme, then the court can still infer bad faith, but the decision must be so extreme that it
could not be rationally explained on another basis. In re Orchard Enters., Inc. S’holder
Litig., 88 A.3d 1, 34 (Del. Ch. 2014).
That means of pleading bad faith matches the standard for a claim for waste, defined
as a decision “so egregious or irrational that it could not have been based on a valid
assessment of the corporation’s best interests.” White v. Panic, 783 A.2d 543, 554 n.36
(Del. 2001). Although waste historically was viewed as a type of ultra vires act that was
beyond a fiduciary’s power to take, contemporary Delaware authorities have integrated the
concept into the business judgment rule as a means of pleading bad faith. See In re
McDonald’s Corp. S’holder Derivative Litig., 291 A.3d 652, 693–94 (Del. Ch. 2023)
(collecting cases).
37
Pleading that a transaction is so extreme as to suggest waste is thus one way to plead
bad faith, but not the only way. Id. “While every act of waste supports an inference of bad
faith, every act committed in bad faith does not necessarily constitute waste.” Frederick
Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *42 (Del. Ch. Apr. 14, 2017).
There are ways to plead bad faith beyond alleging a transaction is so egregious that no
business person of ordinary, sound judgment could approve it unless acting in bad faith.
The Delaware Supreme Court took pains to emphasize that point when reviewing a
decision in which this court had suggested that a plaintiff must always plead facts sufficient
to exclude possibilities other than bad faith. Despite otherwise affirming this court’s
decision, the high court rejected that proposition, stating “to the extent that the Court of
Chancery’s decision might be read as suggesting that a plaintiff in this context must plead
facts that rule out any possibility other than bad faith, rather than just pleading facts that
support a rational inference of bad faith, we disagree with that statement as well.” Kahn v.
Stern, 183 A.3d 715, 2018 WL 1341719, at *1 (Del. 2018) (TABLE).
One other way that a plaintiff can plead bad faith is by alleging facts which support
an inference that the defendant “acted with scienter, meaning they had actual or
constructive knowledge that their conduct was legally improper.” McElrath v. Kalanick,
224 A.3d 982, 991 (Del. 2020) (cleaned up). The necessary mental state can range from an
38
“intentional dereliction of duty,” such as a “conscious disregard for one’s responsibilities”9
to an intent to act “with a purpose other than that of advancing the best interests of the
corporation,”10 to an “actual intent to do harm” to the corporation or its stockholders.11
The most difficult cases in corporate law involve the middle subset of possibilities.
In that subset, the defendants have seemingly taken the steps necessary to comply with
their duties, so an inference of bad faith does not arise from intentional dereliction of duty,
such as a conscious disregard for one’s responsibilities. The defendants also have not acted
with malicious intent to harm the corporation and the stockholders. Nevertheless, in that
subset of cases, there are indications that the directors acted with a purpose other than that
of advancing the best interests of the corporation and its stockholders. In that setting, it is
possible that directors can be found to have acted in bad faith if a purpose other than
pursuing the best interests of the corporation and its stockholders tainted their actions. “It
9
Disney II, 906 A.2d at 66; accord Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 240
(Del. 2009).
10
Disney II, 906 A.2d at 67; accord Stone, 911 A.2d at 369 (“A failure to act in
good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose
other than that of advancing the best interests of the corporation . . . .”); see Gagliardi, 683
A.2d at 1051 n.2 (Allen, C.) (defining a “bad faith” transaction as one “that is authorized
for some purpose other than a genuine attempt to advance corporate welfare or is known
to constitute a violation of applicable positive law”); In re RJR Nabisco, Inc. S’holders
Litig., 1989 WL 7036, at *15 (Del. Ch. Jan. 31, 1989) (Allen, C.) (explaining that the
business judgment rule would not protect “a fiduciary who could be shown to have caused
a transaction to be effectuated (even one in which he had no financial interest) for a reason
unrelated to a pursuit of the corporation’s best interests”).
11
Disney II, 906 A.2d at 64; accord Lyondell, 970 A.2d at 240.
39
makes no difference the reason why the director intentionally fails to pursue the best
interests of the corporation.”12 Bad faith can be the result of “any human emotion [that]
may cause a director to [intentionally] place his own interests, preferences or appetites
before the welfare of the corporation,” including greed, “hatred, lust, envy, revenge, . . .
shame or pride.”13
Because of the need to draw inferences about a defendant’s mental state from the
surrounding circumstances and other indirect sources of evidence, bad faith functions as a
residual catchall. At the pleading stage, the test is whether the complaint alleges a
constellation of particularized facts which, when viewed holistically, support a reasonably
conceivable inference that an improper purpose sufficiently infected a director’s decision
to such a degree that the director could be found to have acted in bad faith. Everything goes
into that mulligan stew. The court must sample the concoction, and if the pleading-stage
flavor is foul, then the complaint survives dismissal, and the case proceeds to discovery.
12
In re Walt Disney Co. Deriv. Litig. (Disney I), 907 A.2d 693, 754 (Del. Ch. 2005),
aff’d, 906 A.2d 27 (Del. 2006); see Nagy v. Bistricer, 770 A.2d 43, 48 n.2 (Del. Ch. 2000)
(“[R]egardless of his motive, a director who consciously disregards his duties to the
corporation and its stockholders may suffer a personal judgment for monetary damages for
any harm he causes,” even if for a reason “other than personal pecuniary interest.”).
13
RJR Nabisco, 1989 WL 7036, at *15; see Guttman, 823 A.2d at 506 n.34 (“The
reason for the disloyalty (the faithlessness) is irrelevant, the underlying motive (be it venal,
familial, collegial, or nihilistic) for conscious action not in the corporation’s best interest
does not make it faithful, as opposed to faithless.”).
40
Through this mechanism, Delaware’s application of the business judgment rule
remains true to that doctrine’s origins as an inquiry into the good faith exercise of delegated
power. In a scholarly and meticulous treatise, Professor David Kershaw has explained that
what we describe today as the “business judgment rule” did not emerge as a concept until
the 1940s and did not achieve prevalence until the 1970s. But the principle of deference to
a good faith judgment made by an individual to whom authority has been delegated dates
back to the eighteenth century. David Kershaw, The Foundations of Anglo-American
Corporate Fiduciary Law 75 (2018). When assessing whether the individual exercised
judgment in good faith, courts have always looked for “for evidentiary inferences or
indicators, such as “circumstantial evidence of irrelevant preferences or conflicts of
interest,” “evidence of extreme indifference to the consequences of action,” and an action
that seems extreme based on some minimal level of “objective testing of the quality of the
reasons” offered for it.” Id. at 30 (citation omitted). See generally id. at 31–47.
When American judges began reviewing decisions by directors, they relied on the
precedents about delegated authority and examined whether the directors had acted in good
faith.14 Decades later, when courts began referring to the “business judgment rule,” the test
14
See id. at 68-70. A trio of decisions that the New Jersey Court of Chancery issued
in the 1890s illustrate this approach. See id. at 70-72 (discussing Elkins v. The Camden &
Atlantic Ry Co., 36 N.J. Eq. 9 (1882); Ellerman v. Chicago Junction Rys, 49 N.J. Eq. 217(1891), and Wildes v. Rural Homestead Co., 53 N.J. Eq. 452 (1895)). The New Jersey
decisions warrant particular attention because when a certain upstart across the Delaware
River sought to challenge New Jersey for the business of chartering corporations, that state
both copied the New Jersey General Corporation Law (while making some provisions less
41
still turned on “‘good faith and the exercise of honest judgment.’” Kershaw, supra, at 75
(quoting Blaustein v. Pan Am. Petroleum, 293 N.Y. 281, 303 (1944)). Early Delaware cases
deployed the following analytical framework:
(i) directors owe obligations to exercise powers honestly and in good faith to
further the corporate interest;
(ii) there is no scope to review business decisions in the absence of
dishonesty or bad faith;
(iii) in the absence of clear evidence of improper intent or clear evidence of
disregard of the corporate interest, good faith is typically testified by the
existence of plausible or rational reasons for actions which need not be
proved to be the actual reasons for actions; and
(iv) the absence of such rational grounds—or even though they are present
where other factors operate as proxies for bad faith such as extreme
informational inadequacy—results in a finding of bad faith.15
restrictive and charging a lower price for incorporations) and treated New Jersey
precedents as persuasive. See, e.g., Martin v. Am. Potash & Chem. Corp., 92 A.2d 295,
300 (Del. 1952) (“Our courts have long recognized that our General Corporation Law of
1899 was modeled after the then existing New Jersey act and decisions of the courts of that
state are persuasive in construing a section of our statute drawn from the New Jersey law.”)
(citation omitted).
15
Id. at 88 (formatting added). To support this framework, Professor Kershaw
references Bryan v. Aikin, 82 A. 817 (Del. Ch. 1912) (Curtis, C.), rev’d on other grounds,
86 A. 674 (Del. 1913); Lofland v. Cahall, 118 A. 1 (Del. 1922); Allied Chemical v. Steel
& Tube Co., 122 A. 142 (Del. Ch. 1923) (Wolcott, C.); Robinson v. Pittsburgh Oil Refin.
Corp., 126 A. 46 (Del. Ch. 1924) (Wolcott, C.); Bodell v. General & Electric Corp., 140
A. 264 (Del. 1927) (Wolcott, C.); Davis v. Lousiville, 142 A. 654 (Del. Ch. 1928) (Wolcott,
C.); Allaun v. Consol. Oil Co., 147 A. 257 (Del. Ch. 1929) (Wolcott, C.); Eshelman v.
Keenan, 194 A. 40 (Del. Ch. 1937), aff’d, 2 A.2d 904 (Del. 1938); Gottlieb v. Heyden
Chemical. Corp., 90 A.2d 660 (Del. 1952); Beard v. Elster, 160 A.2d 731 (Del. 1960);
Nadler v. Bethlehem Steel, 154 A.2d 146 (Del. Ch. 1959); Maldonado v. Flynn, 413 A.2d
42Good faith thus was not simply an aspect of the business judgment rule; it was the whole
of the rule. Id. at 97 (“[T]raditionally a rational business purpose was a proxy for
demonstrating good faith, and the good faith requirement was the business judgment rule.)
Chief Justice Strine and his co-authors have likewise located good faith at the center of
Delaware’s fiduciary jurisprudence. Leo E. Strine, et al., Loyalty’s Core Demand: The
Defining Role of Good Faith In Corporation Law, 98 Geo. L. J. 629 (2010).
In Aronson, the Delaware Supreme Court reframed the business judgment rule more
formally as “[a] presumption that in making a business decision the directors the
corporation acted on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the corporation.” 473 A.2d at 812. Unless one of those
presumptions is rebutted, then “[a]bsent an abuse of discretion, that judgment will be
respected by the courts.” Id. As Professor Kershaw explains, that phrasing could be read to
suggest that that “good faith” means something separate and distinct from “act[ing] on an
informed basis,” having an “honest belief that the action taken was in the best interests of
the corporation,” or taking action that was not “an abuse of discretion.” Kershaw, supra, at
97. And because Aronson separately stated that if a board decision is “not approved by a
majority consisting of disinterested directors, then the business judgment rule has no
121 (Del. Ch. 1980), rev’d on other grounds430 A.2d 779 (Del. 1981). See generally
Kershaw, supra, at 77–81.
43
application,” 473 A.2d at 812, Aronson’s framing could be read to imply that
disinterestedness (and its close cousin independence) was yet another distinct inquiry.
If Aronson is approached from this standpoint, then each analytical step seems
exclusive and subtractive. The court first looks to see if the allegations disqualify at least
half of the directors by establishing reason to doubt their disinterestedness or independence.
If so, then the business judgment rule is rebutted and the inquiry ends. If not, then the court
gives no further consideration to allegations pertinent to disinterestedness and
independence and only concerns itself with the allegations that are left.
Next, the court looks to see if the directors acted with due care, focusing exclusively
on the allegations about the process that the directors followed. If those allegations support
an inference of gross negligence, then the business judgment rule is rebutted and the inquiry
ends. If not, then the court gives no further consideration to any allegations that pertinent
to care. The court only examines what is left.
At this point, the court ostensibly considers allegations about whether the directors
acted in good faith, but that inquiry has been denuded of content, both because loyalty and
care already have been covered, and because in the final step under Aronson, after the
presumptions of the business judgment rule have been considered, the court to defer to the
board’s judgment “[a]bsent an abuse of discretion.” 473 A.2d at 812. With the inquiry
limited in this fashion, good faith becomes a mystery. This method of reasoning effectively
predetermines that no grounds will exist to question the defendants’ good faith.
44
Although they do not say so expressly, the defendants approach this case using the
foregoing framework. Their arguments, particularly in their reply brief, tick through a
checklist. The defendants start with loyalty and examine whether the Voting Directors were
interested in the TRA Buyout or independent of the Founding Investors. They need not
consider due care, because the plaintiff does not assert a due care violation. Instead, they
turn to whether the TRA Buyout could be attributed to a rational business purpose. See
Defs.’ Reply Br. 6–8. At that point, their version of the inquiry ends. Nothing is left over
for good faith. It becomes a residual category, devoid of content and with no work to do.
That approach is misguided. Delaware law does not reduce good faith to such an
emaciated role. Nothing about Aronson leads to a subtractive analysis in which good faith
concerns itself only with residual leavings. It makes sense that Aronson would call for a
court to look for and identify early in the analysis situations where business judgment
deference cannot apply, such as where the board lacks a disinterested and independent
majority. That type of upfront triage does not mean that an inquiry into good faith cannot
consider the totality of the circumstances. The good faith inquiry can consider, for example,
indications of interestedness that are not disqualifying in themselves but which
nevertheless color the actions that the board took. By the same token, the fact that
authorities generally call on a court to consider each director individually does not mean
that a court cannot consider the directors’ connections as a whole as part of the
circumstances attendant to the board’s decision. Directors make decisions collectively, so
the collective circumstances are relevant.
45
Properly understood, the good faith inquiry is a holistic one. It requires a collective
assessment of the complaint’s allegations. In this way, good faith operates as a backstop
that prevents the demand futility test from devolving into the type of checklist that the
defendants try to deploy. Instead, good faith provides as a safety valve against an
inappropriate pleading-stage dismissal when the allegations as a whole suggest inequitable
conduct. A court of equity can allow a case to proceed past the pleading stage when the
allegations as a whole support an inference of bad faith, even if the as-plead scenario does
not fit within one of the easily demarcated boxes that Aronson identified for prioritized
review.
B. The Question Of Good Faith In This Case
Viewed holistically, the complaint’s allegations provide reason to doubt that the
Voting Directors acted in good faith. The following constellation of factors leads to that
inference.
1. The Extreme Disparity In Valuation
The first indicative factor is the stark contrast between the valuation of $175.3
million for the TRA Liability in GoDaddy’s audited financial statements and the $850
million payment in the TRA Buyout. The contrast between those figures is so glaring as to
support a claim of waste and hence an inference of bad faith on that basis alone.
In making the determination that $175.3 million was an appropriate valuation for
the TRA Liability, Winborne and his financial team had to assess whether it was
probable—in the sense of more likely than not—that GoDaddy would use the Tax Asset.
46
In a November 2019 presentation to the Audit Committee, management represented that
GoDaddy would not generate sufficient taxable income to use all of the Tax Asset. PX 1
at ’150. Management thus acknowledged that the Nominal Liability based on the Tax Asset
might have been approximately $1.8 billion, but the TRA Liability was only $175.3
million, precisely because GoDaddy would not be able to use all of the Tax Asset. The
2019 10-K said the same thing: “We have determined it is more-likely-than-not we will be
unable to utilize all of our DTAs subject to the TRAs[.]” DX 5 at 49.
The TRA Liability was a real number, prepared by management, audited by Ernst
& Young, and signed off on by the Audit Committee. It received special focus as one of
just two critical audit matters. Yet in the face of that real number, the Voting Directors
approved the Company paying $850 million in the TRA Buyout.
Given the gulf between $175.3 million and $850 million, one might expect the
record to contain documents addressing in detail why the numbers differed so dramatically.
The documents that the complaint incorporates by reference do not contain any explanation
of that sort. They show that when developing valuations for purpose of the TRA Buyout,
Winborne and his team simply projected that GoDaddy would use the entire Tax Asset.
There was no effort to engage with the more-likely-than-not determination or to bridge
from one number to another.
The defendants respond that the 2019 10-K and the Company’s audited financial
statements also refer to the Nominal Liability. That is true: The Nominal Liability provides
the starting point for calculating the TRA Liability. The audited financial statements bridge
47
from the latter to the former by assessing whether it is more likely than not that the
Company will generate sufficient taxable income to utilize the Nominal Liability, which is
the real driver of what the Company will owe to the Founding Investors. The presence of
references to the Nominal Liability does not undermine the calculation of the TRA
Liability. The fact that the 2019 10-K and the Company’s audited financial statements
acknowledge both figures makes it all the more glaring that the analyses for the TRA
Buyout only consider the Nominal Liability and never engage with the TRA Liability.
The defendants’ other response is to wave their hands and say that everyone knows
accounting isn’t valuation. Therefore, they say, management and the directors had the
discretion to ignore the TRA Liability and derive their own valuation using different
analyses. While there are times when an accounting entry diverges from fair value, most
notably when an entry uses cost-based accounting or when an asset has been depreciated
using a schedule that does not reflect real-world wear and tear, acknowledging that fact
does not entitle the defendants to a pleading-stage inference that audited financial
statements are generally unreliable. Nor does it entitle the defendants to a pleading-stage
inference that the TRA Liability can be disregarded.
The pleading-stage record does not suggest that the TRA Liability is some obviously
stilted figure. Winborne and his team prepared it with care, under the auspices of both Ernst
& Young and the Audit Committee. At this stage of the case, the plaintiff is entitled to an
inference that the Voting Directors approved the Company paying $850 million for
something the Voting Directors knew was worth $175.3 million. That valuation disparity
48
is sufficient to suggest bad faith. Indeed, such an exchange “is so one-sided that no
businessperson of ordinary, sound judgment could conclude that the corporation has
received adequate consideration.” Brehm, 746 A.2d at 263.
Plaintiff thus pleads facts sufficient to support a claim of waste. That alone
establishes an inference of bad faith sufficient to render demand futile. But the plaintiff has
plead more, and there are additional factors which bolster the inference that the Voting
Directors acted for an improper purpose.
2. Winborne’s Conflicting Representations
The second indicator of bad faith is the conflict between Winborne’s representations
to the Audit Committee and Ernst & Young and his representations to the Special
Committee and the Voting Directors. When dealing with the Audit Committee and Ernst
& Young for purposes of the TRA Liability, Winborne represented that it was more likely
than not that GoDaddy would not generate enough taxable income to use all of the Tax
Asset. When dealing with the Special Committee and the Voting Directors for purposes of
the TRA Buyout, Winborne represented that GoDaddy would generate so much taxable
income that it would use all of the Tax Asset. As framed, those assertions cannot be
squared. For Winborne to have said one thing to the Audit Committee and Ernst & Young
then said the opposite to the Special Committee and the Voting Directors supports an
inference of bad faith.
A related consideration is the absence of any objections from Voting Directors who
should have spoken up. Robel, Garrett, and Donahue served on the Audit Committee. CEO
49
Bhutani regularly attended their meetings. When Winborne was pursuing the TRA Buyout,
they were contemporaneously going through a process with Ernst & Young to value the
TRA Liability. That latter process resulted in the value of the TRA Liability being lowered
in June 2020 from $175.3 million to $150 million. Robel, Garrett, and Donahue thus knew
about Winborne’s more-likely-than-not representation that formed the basis for valuating
TRA Liability. Yet as members of the Special Committee, Robel and Garrett accepted
Winborne’s contrary representation and signed off on the TRA Buyout at over five times
that amount. And when acting as a Voting Director, Donahue did the same. Nor are the
remaining Voting Directors off the hook. Each of them signed the 2019 10-K that disclosed
the TRA Liability, and each of them also signed off on the TRA Buyout.
At the pleading stage, the plaintiff is entitled to the inference that Winborne and the
Voting Directors knew about the TRA Liability, believed it was accurate, but wanted to
approve a deal that would make the Founding Investors happy. That plaintiff-friendly
inference contributes to an inference of bad faith.
3. The Failure To Consider M&A
A third indicative factor is that that Winborne’s projections and analysis excluded
any consideration of GoDaddy’s M&A-based business model and its effect on GoDaddy’s
ability to use the Tax Asset. One of the main reasons why GoDaddy had not made any
payments under the Tax Agreements and kept putting off when they would begin was
because the Company engaged in M&A.
50
The pleading-stage record demonstrates that M&A was part of the Company’s
business strategy. GoDaddy had engaged in transactions worth $2 billion during the four
years preceding the TRA Buyout. Management told investors its 2020 investor day that it
intended to “[e]xecute acquisitions to accelerate grown and technology and fill out our
product roadmap.” DX 6 at 80. Management announced a commitment to deploy 80% of
its available capital over the next three years to M&A, representing approximately $4
billion in acquisitions. Id. That business plan would generate millions of dollars of
additional tax assets that would delay GoDaddy’s ability to use the Tax Asset.
As directors, the members of the Board and the Special Committee knew about
GoDaddy’s M&A-based business plan. The Special Committee even discussed it during
their meeting on June 26, 2020, when they considered whether using cash for the TRA
Buyout would interfere with GoDaddy’s business strategy. They asked management on
whether after completing the TRA Buyout, GoDaddy would have “sufficient funds to
engage in certain additional strategic transactions over the next few years….” Id. at ’180.
Winborne said yes. But the projections that Winborne had prepared for the Special
Committee and to support the TRA Buyout did not contemplate acquisitions.
The pleading-stage record supports an inference that the members of the Special
Committee knew that Winborne’s projections rested on unrealistic assumptions. During
the Special Committee’s second meeting on February 7, 2010—its first substantive
meeting—Winborne walked through a presentation that included a base case financial
model that projected the Company’s free cash flow. DX 7 at ’004; id. at ‘014. One of the
51
Committee members asked if the projections included growth initiatives, which inferably
includes future acquisitions. Winborne said that the projections did not include those
initiatives. Id.; see id. at ’014.
Despite inferably knowing that the projections rested on the unrealistic and
counterfactual assumption that GoDaddy would not make any more acquisitions, the
directors went along. That suggests bad faith.
4. The Thirty-Minute Meeting
The next consideration includes factors which, if considered in isolation, would
likely only support a potential breach of the duty of care, but which nevertheless contribute
to an inference of bad faith as part of the holistic analysis. After the Special Committee
declined to approve the TRA Buyout using its delegated authority, the Voting Directors
gave it the thumbs up in a thirty-minute meeting, without a fairness opinion, without the
firm who performed financial analysis of the TRA Buyout being present, and despite
knowing that the valuation of the TRA Liability conflicted on its face with the pricing of
the TRA Buyout.
The record does not contain any explanation as to why the Special Committee
balked at approving the TRA Buyout when the moment finally came. The resolutions that
originally created the Special Committee empowered the Committee to make the decision
itself. To be sure, the resolution contemplated that its members might defer to the full Board
and provide a recommendation, but the purpose of creating the Special Committee was to
neutralize Board-level conflicts.
52
At the pleading-stage, it is reasonable to infer that the Special Committee realized
that two of its members—Robel and Sharples—had ties to the Founding Investors that were
compromising. Robel was co-investing with TCV, and Sharples had a longstanding
relationship with the same firm. But int he meantime, Mondre had left the Board and Sweet
had joined, so the numbers worked better at the Board level. The inferably compromised
Special Committee that was responsible for the TRA Buyout therefore sent the decision
upward.
Once the Special Committee took that step, the Voting Directors needed to dig in.
The Board had created the Special Committee because “certain members of the Board and
of management of the Company are affiliated with the holders of the TRAs or are party to
the TRAs” and the Special Committee would “mitigate and address conflicts of interest in
connection with the foregoing process and any transaction resulting therefrom.” DX 3 at
’455. Now, the Special Committee had tossed the decision back to the Board. If the Voting
Directors were going to cleanse the transaction, they had to perform their role.
The Voting Directors did not dig in, and the Special Committee did not help them.
As Chair of the Special Committee, Robel recommended that the Voting Directors approve
the TRA Buyout. He and Garrett did not discuss the Audit Committee’s contemporaneous
process that resulted in the TRA Liability falling from $175.3 million to $150 million.
None of the Special Committee members explained that the projections did not include
future acquisitions.
53
The Voting Directors had enough knowledge on their own to question the TRA
Buyout. Donahue was a member of the Audit Committee and had participated in the
process of lowering the TRA Liability from $175.3 million to $150 million. The other
Voting Directors had signed the 2019 10-K which valued the Tax Liability at $175.3
million and stated that GoDaddy probably would not use all of the Tax Asset. They
inferably knew that the numbers did not add up.
At a minimum, the Voting Directors should have asked questions. Instead, they went
along. The Voting Directors also should have questioned why the Special Committee had
not obtained a fairness opinion and why KPMG was not at the Board meeting. Management
was proposing to pay $850 million to resolve a liability that the Company had valued at
$175.3 million as of December 31, 2019, and at $150 million the month before.
Management was treating the transaction as the acquisition of an asset, but no one had
obtained a fairness opinion, and the firm that provided a valuation report was nowhere to
be found. The meeting was over in thirty minutes.
Issues like the failure to ask questions, the length of the meeting, or the failure to
have an advisor present typically only would relate to the issue of care. Here, those factors
do not stand alone. They combine with the directors’ knowledge of the disparity between
the value of the TRA Liability and the price to be paid in the TRA Buyout, and they operate
in conjunction with other considerations. They therefore provide another ingredient for the
mulligan stew and contribute to the inference of bad faith.
54
5. The Ties With The Founding Investors
The final consideration is that the TRA Buyout is not a transaction with a third party
lacking any prior ties to the decisionmakers. It is a transaction with counterparties that
management and the directors had reason to favor.
The four Founding Investors who would receive the bulk of the consideration were
Parsons, the Company’s founder, and three major private equity firms. They obviously
carried considerable influence at the Company, at least before they liquidated their shares,
and that influence would not have vanished overnight. The transaction process began only
ten months after those Founding Investors completed their sales, at a point when Mondre,
Wittlinger, and Chen remained on the Board.
The two principal players from management had close ties to the Founding
Investors. Kelly, the General Counsel, started the transaction process by circulating the
written consent that created the Special Committee. She was a Founding Investor in her
own right and would benefit from a TRA Buyout. Winborne then took over. He had been
an executive at KKR portfolio companies for eleven years, including approximately four
years during which he worked for the Company. He created the projections that drove the
analysis. He provided the information on which the directors relied. He negotiated with
Silver Lake and KKR, and those negotiations happened to end up at the upper limit of his
authority. He then pushed the Special Committee to approve the deal quickly. After the
TRA Buyout was approved, both Kelly and Winborne left GoDaddy, with Kelly landing a
55
job at another KKR affiliate. There is a sense that two trusted lieutenants got the result they
were expected to obtain.
Nor was the Special Committee pristine. Sharples has a history of successfully
investing with TCV. Robel was a Founding Investor who only became qualified to serve
on the Special Committee by renouncing his interest in the Tax Agreements. He
contemporaneously received an invitation to co-invest with TCV in a company where the
upside could constitute a material portion of his wealth.
There were other options. When Kelly drafted the resolution for the Committee, she
named Robel as Chair and Sharples and Garrett as members. There were two other directors
with minimal ties to the Founding Investors—Donahue and Roslanky—but Kelly did not
identify either. That suggests that the Special Committee was designed to lean into, rather
than avoid, entanglements with the Founding Investors.
Lateraling the decision to the Board did not cleanse the process. There were four
apparently disinterested and independent directors: Garrett, Donahue, Roslansky, and
Sweet. There were two plainly compromised directors: Wittlinger and Chen. There were
two inferably compromised directors: Robel and Sharples. That turns the CEO—Bhutani—
into the swing director. He came from a TCV backed company. Would he have the fortitude
to stick his neck out on the TRA Buyout, particularly when the Compensation Committee
that approved his pay package consisted of Chen, Sharples, and Sweet? A reasonable mind
can doubt it.
56
This is not a situation where the collective weight of many disinterested and
independent voices can easily outweigh a few directors with conflicts. This is a situation
where smoke filled the boardroom, suggesting that the plaintiff should be permitted to
conduct discovery to determine if there was any fire.
6. The Conclusion Regarding Demand Futility
This is a close case for pleading-stage analysis. The defendants’ strongest argument
relies on compartmentalizing the elements of the business judgment rule in a way that
denudes good faith of substance. That approach conflicts with Delaware Supreme Court
precedents like Encore I and abandons the role that good faith historically played.
Compartmentalizing the analysis in this way would elevate the form of the demand futility
standard over its substance. Courts of equity exist to address substance, as exemplified by
the maxim that “equity regards substance rather than form.” Monroe Park v. Metro. Life
Ins. Co., 457 A.2d 734, 737 (Del. 1983).
When viewed in a compartmentalized way, the complaint’s allegations suggest that
a majority of the Demand Board faces at most a claim for breach of the duty of care, which
does not give rise to a substantial threat of liability due to the availability of exculpation.
When viewed holistically, the complaint’s allegations support an inference of bad faith:
Two members of management (Kelly and Winborne) steered a process towards an outcome
designed to favor the Founding Investors, aided by a Special Committee populated with
the three outside directors most likely to sign off on the deal (Robel, Sharples, and Garrett).
Skilled counsel scripted a process to maximize the chances of a pleading-stage dismissal,
57
but the litigation risk was too great, so the Special Committee tossed the issue back to the
Board. At that point, everyone knew that the Company was paying $850 million to resolve
a liability valued in the Company’s public disclosures at $175.3 million, but the Voting
Directors held their noses and approved the transaction. That was what the Founding
Investors wanted. One of them was the founder of the Company without whom the
Company would not have existed. The others were powerful private equity firms who knew
how to reward helpful souls. They demonstrated that through the co-investment
opportunity for Robel, the directorship for Sweet, and the job for Kelly. The price disparity
alone is so glaring as to support a claim for waste.
At the pleading stage, the court does not decide between competing inferences. The
plaintiff receives the benefit of the inference that favors its case. See Zuckerberg II, 262
A.3d at 1048. The complaint therefore pleads facts which, when read together, support an
inference of bad faith and enable the case to survive pleading-stage review.
C. The Rule 12(b)(6) Analysis
The plaintiff asserted claims for breach of fiduciary against the directors, breach of
fiduciary duty against Winborne, and waste. Winborne did not move to dismiss the claim
against him under Rule 12(b)(6). The directors did.
“Delaware courts have recognized that the standard to be used to evaluate a
Chancery Rule 12(b)(6) motion is less stringent than the standard applied when evaluating
whether a pre-suit demand has been excused in a stockholder derivative suit filed pursuant
to Chancery Rule 23.1.” Solomon v. Pathe Commc'ns Corp., 672 A.2d 35, 39 (Del. 1996).
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“Since the standard under Rule 12(b)(6) is less stringent than the standard under Rule 23.1,
a complaint that survives a Rule 23.1 motion to dismiss generally will also survive a Rule
12(b)(6) motion to dismiss, assuming that it otherwise contains sufficient facts to state a
cognizable claim.” In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 285 (Del. Ch. 2003);
see also In re Citigroup Inc. S'holder Deriv. Litig., 964 A.2d 106, 139 (Del. Ch. 2009).
For the same reasons stated in the demand futility analysis, the complaint contains
well-plead factual allegations that state a claim against the Voting Directors for breaching
their fiduciary duties when approving the TRA Buyout. The complaint also contains well-
plead factual allegations that support a claim for waste.
III. CONCLUSION
The defendants’ motions to dismiss under Rule 23.1 and Rule 12(b)(6) are denied.
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