Buerger v. Apfel, C.A. No. 6539-VCL (Del. Ch. Mar. 15, 2012) (Laster, V.C.)
In this memorandum opinion, the Court of Chancery granted in part and denied in part defendants’ motion for judgment on the pleadings, holding that laches barred certain challenges by plaintiffs to (i) stock options granted in 2004 and 2005, and (ii) compensation received by defendants under their employment agreements and the decision by defendants to provide a rent-free sublease, to the extent that the compensation was received and the rent-free sublease was provided prior to the relevant limitations period. The Court also held that plaintiffs had not met their pleading burden for equitable tolling to be applied to certain of their claims but granted leave to amend in order to allege facts necessary to properly invoke the doctrine.
Defendants Dennis Apfel, Jason Apfel and Eric Apfel own approximately 68% of the outstanding stock of Fragrancenet.com, Inc., (the “Company”) and comprise the entire board of directors of the Company. Plaintiffs are minority stockholders in the Company and filed a complaint challenging a series of transactions approved by the defendants. Defendants filed an answer responding to the allegations and moved for judgment on the pleadings, asserting a number of defenses, including that a majority of plaintiffs’ claims were presumptively time-barred under the equitable doctrine of laches. In its opinion, the Court solely addressed defendants’ laches defense. Due to the procedural posture of the case, the Court considered only the information in the pleadings, drawing all reasonable inferences from the facts in the light most favorable to the non-moving party, the plaintiffs.
The Court first addressed plaintiffs’ challenge to certain employment agreements that defendants entered into with the Company in August 2003. Plaintiffs alleged that the Apfels breached their fiduciary duties by adopting the agreements in 2003 and continuing to receive what plaintiffs alleged was excessive compensation under the agreements. The Court determined that plaintiffs’ challenge to the initial adoption of the employment agreements was untimely, because the agreements were approved more than four years before the tolling date. The Court further opined that plaintiffs’ challenges to the compensation defendants received pursuant to the employment agreements was untimely to a degree. While any claims relating to compensation received prior to the tolling date were barred by laches, the Court held that plaintiffs could challenge defendants’ failure to terminate or modify the employment agreements and the compensation defendants received during the period after the tolling date. The Court explained that in the case of an allegedly self-dealing contract, “[w]hen fiduciaries have the power to terminate or modify an agreement, the decision to leave the agreement in place and continue to receive self-dealing benefits can be challenged as a breach of duty.” Because the terms of the employment agreements allowed the Company to terminate the agreements on thirty-days’ written notice and allowed defendants to amend the agreements, the Court held that plaintiffs could challenge defendants’ failure to do so since the tolling date. The Court also explained that because any challenge to the initial decision to enter into the employment agreements was time-barred, plaintiffs must litigate the fairness of the compensation based on the existence of valid employment agreements, where termination decisions would have contractual consequences to the Company.
The Court reached a similar determination regarding an informal rent-for-service arrangement in place since 2006, by which the Company allowed a law firm in which Dennis Apfel is a partner to sublease office space at its headquarters in exchange for legal services provided to the Company. The Court held that challenges to the sublease prior to the tolling date were barred by laches. But, because the informal sublease was terminable at any time, the Court held that plaintiffs could challenge defendants‘ decision not to terminate it from the tolling date through the present.
The Court also addressed plaintiffs’ argument that the limitations period for several of their claims was equitably tolled. The Court explained that “[u]nder this doctrine, the limitations period will not run on claims for wrongful self-dealing when a plaintiff reasonably relies on the competence and good faith of a fiduciary.” In such a case, the limitations period is tolled until the plaintiff is put on inquiry notice. The Court determined that based on the allegations in the complaint, it was reasonably conceivable that plaintiffs did not gain knowledge of some of the alleged wrongdoing until after the tolling date as determined by the Court. The Court held, however, that plaintiffs failed to meet the pleading requirements for equitable tolling because they did not identify the date when they alleged to have gained the knowledge for which their claims were based. The Court explained that without this information, the doctrine of equitable tolling could not be applied. Nevertheless, the Court concluded that fairness required granting plaintiffs leave to amend their complaint to cure the isolated omission, because the Court stated that it appeared likely that equitable tolling should apply.