Houseman v. Sagerman, C.A. No. 8897-VCG (Del. Ch. Apr. 16, 2014) (Glasscock, V.C.)
In this opinion, the Court of Chancery held that the plaintiffs failed to adequately plead that the board failed to satisfy its Revlon duties in good faith and to negotiate consideration for alleged derivative claims that arose in connection with a merger. The Court of Chancery, however, held that the plaintiffs stated a claim for breach of fiduciary duty relating to the board’s post-merger-negotiation decision to authorize the early vesting of options and warrants, which decision allegedly benefited certain directors. The Court also held that plaintiffs failed to adequately plead that the board’s financial advisor knowingly participated in any alleged breaches of fiduciary duty.
Plaintiffs Aaron and Nancy Houseman were stockholders and creditors of Universata, Inc. (the “Company”), which merged with a subsidiary of HealthPort Technologies, LLC (“HealthPort”) in 2011. Mr. Houseman was also a Company director and participated in the process culminating in the 2011 merger. Plaintiffs instituted this action to challenge certain actions by the Company’s board of directors and its financial advisor, KeyBanc Capital Markets, Inc. (“KeyBanc”), in connection with the 2011 merger. The director defendants owned approximately 55% of the Company’s voting shares.
In 2010, HealthPort and at least one other interested party approached the Company about a potential acquisition. At counsel’s suggestion, the Company contacted and ultimately retained KeyBanc, which had previously assisted the Company in an attempt to sell some of its assets. Due to expense, the board decided to limit KeyBanc’s engagement to assisting in due diligence and identifying additional potential acquirors. KeyBanc was not retained to provide a fairness opinion.
On May 10, 2011, the Company entered into a merger agreement with HealthPort. Because the director defendants held a majority ownership interest in the Company, the board did not solicit stockholder approval of the transaction. Instead, the director defendants executed a written consent as stockholders approving the merger. Mr. Houseman did not execute a consent in favor of the merger.
Also on May 10, 2011, the board made two other decisions challenged by plaintiffs. The board voted to amend the Company’s 2008 equity incentive plan so that certain stock options would be treated like outstanding shares of stock upon a change of control. The board also voted to vest all outstanding “in the money” warrants to purchase Company stock. According to plaintiffs, some of these warrants were improperly issued to certain Company directors (together, the “Incentive Claims”). Finally, plaintiffs alleged that due to irregularities in the 2009 hiring of the Company’s CEO, it was improper to pay the CEO change in control payments in 2011 (the “CEO Change of Control Claim,” together with the Incentive Claims, the “Litigation Assets”).
Plaintiffs ultimately filed this suit in the Court of Chancery. Among others, they asserted claims for: (i) breach of fiduciary duty against the board for failing to satisfy their Revlon duties in good faith; (ii) breach of fiduciary duty against the board for failing to obtain consideration for the Litigation Assets; and (iii) aiding and abetting breaches of fiduciary duty against KeyBanc. All defendants filed motions attacking the sufficiency of the Complaint.
The Court granted the director defendants’ motions in part. The Court first held that plaintiffs did not adequately allege a claim that the board failed to satisfy their Revlon duties in good faith. Relying upon Lyondell Chemical Co. v. Ryan, 970 A.2d 235 (Del. 2009) and plaintiffs’ contention that the board never acted with any interest other than maximizing shareholder value, the Court reasoned that, while the board’s process was not perfect, it did not utterly fail to take any action to maximize shareholder value. The Court explained that the board had, among other things, retained KeyBanc to provide limited financial advisory services, negotiated several revisions to HealthPort’s letter of intent, and sought legal advice when reviewing the terms of the merger agreement. Insofar as any process failures constituted breaches of the director defendants’ duties of care, they were exculpated by a Section 102(b)(7) provision in the Company’s charter.
The Court next addressed plaintiffs’ claims that the board failed to obtain consideration for the Litigation Assets. Plaintiffs contended that the Litigation Assets were derivative claims belonging to the Company and that the board was required to obtain consideration for them under In re Primedia, Inc. Shareholders Litigation, 67 A.3d 455 (Del. Ch. 2013). The director defendants contended that these claims could only have come into existence on the day the merger agreement was approved and therefore they could not have negotiated consideration for the Litigation Assets. The Court agreed, holding that the board had no duty to negotiate a price for the value of alleged breaches of fiduciary duty that had not yet occurred.
Regarding the Incentive Claims, the Court did hold, however, that plaintiffs pled a claim for unfair diversion of merger consideration under Golaine v. Edwards, 1999 WL 1271882 (Del. Ch.) and related cases. The Court reasoned that plaintiffs adequately alleged the warrants and options arose in a self-dealing context, that post-merger-negotiation action by the director defendants, which caused those warrants and options to vest rather than lapse, was self-dealing, and that the diversion of merger consideration was material.
The Court granted KeyBanc’s motion to dismiss. After explaining that financial advisors do not benefit from a corporation’s Section 102(b)(7) provision, the Court held that plaintiffs had failed to adequately allege that KeyBanc knowingly participated in any alleged breach of duty. Plaintiffs’ chief complaints against KeyBanc were its purported failures to issue a fairness opinion and to run a sales process. But, the Court reasoned, plaintiffs did not plead that KeyBanc misled the board, created an informational vacuum, or otherwise purposely induced any breach of fiduciary duty.