Davidow v. LRN Corporation, C.A. No. 2019-0150-MTZ (Del. Ch. Feb. 25, 2020) (Zurn, V.C.)
In this memorandum opinion, the Court of Chancery denied a motion to dismiss a former stockholder’s claim that defendant directors of a corporation breached their fiduciary duties by launching a coercive self-tender at an unfair price, providing inadequate disclosures, and conducting a self-interested and unfair self-tender (the Court of Chancery granted the motion to dismiss with respect to the corporation itself).
The plaintiff alleged that LRN Corporation (“LRN”) and its directors Dov Seidman (“Seidman”), Lee Feldman, and Mats Lederhausen (the “Individual Defendants”) historically gave LRN’s stockholders minimal and selective disclosures, rarely held annual stockholders’ meetings, and had not provided proxy statements, timely notices of major transactions, or quarterly financial reports. In addition, LRN previously granted stock options and bought LRN stock at arbitrary prices with inadequate disclosures which benefited the Individual Defendants. These self-dealing transactions culminated with the instant disputed transactions, which began with a secret grant of “spring-loaded” stock options to the Individual Defendants which suspiciously preceded a $20 million influx of cash payments to LRN from undisclosed origins. The Individual Defendants then initiated a self-tender for $1.35 per share, whereby stockholders tendered 9,092,278 shares, representing roughly 23% of LRN’s 39,705,818 issued and outstanding shares. The plaintiff tendered all of his shares of LRN stock in the self-tender. The self-tender materially increased the value of the Individual Defendants’ undisclosed holdings in LRN and gave Seidman near total control over LRN. Seidman, as controlling stockholder, then approved LRN’s acquisition by Leeds Equity Partners (“Leeds”) for $255 million, or $7 per share of LRN stock. Seidman received the majority of the merger consideration, and as a result of the subsequent sale of LRN, the Individual Defendants received a windfall compared to what the LRN stockholders received in the self-tender.
The plaintiff alleged that the Individual Defendants breached their fiduciary duties by issuing materially misleading and incomplete disclosures in connection with the self-tender, launching a coercive tender offer, and conducting a self-interested and unfair self-tender.
The Court determined that the plaintiff pled facts sufficient to state a claim that the Individual Defendants breached their duty of disclosure in connection with the self-tender because their proffered reasons for the transactions were intended to obscure the real motivations for the self-tender, the $1.35 offer price was unfair and the disclosures related to that price were intended to conceal that fact, and the Individual Defendants did not adequately disclose their interestedness in the self-tender. While the materially inadequate disclosures alone were sufficient to state a claim regarding the coercive self-tender, the Court further held that the plaintiff pled that the self-tender was also structurally coercive due to plaintiff’s reasonable belief that he would receive little or no return on his investment in LRN unless he tendered at the low price offered by the Individual Defendants.
The Court found that the self-tender should be reviewed under the entire fairness standard because the plaintiff adequately alleged that the self-tender was coercive, both because of its structural components and the deficient disclosures related thereto and the fact the Individual Defendants were interested in the transaction. The plaintiff alleged that the Individual Defendants placed their own interests above those of LRN’s stockholders by buying out LRN stockholders at a low price and then receiving a disproportionate benefit from the sale of LRN to Leeds. Having triggered entire fairness, the Court held that the plaintiff had also adequately alleged that the self-tender was the product of both an unfair process and resulted in an unfair price. The Court deemed the process unfair because of the materially misleading, false and incomplete disclosures from the Individual Defendants and the initiation of the self-tender prior to the sale of LRN to Leeds for a higher price. In light of the alleged coercion and director interestedness, the Court found that the plaintiff adequately alleged unfair price due to LRN’s history of arbitrary pricing and the much higher $7.00 per share from the sale of LRN to Leeds. As alleged by the plaintiff, the Individual Defendants’ self-tender for their benefit amounted to a non-exculpated breach of the duty of loyalty, and the Court held that the Individual Defendants’ exculpation arguments pursuant to a Section 102(b)(7) provision was not grounds for dismissal at the pleading stage. Finally, because plaintiff did not bring any of its claims against or seek any relief from LRN, the motion to dismiss on all counts was granted with respect to LRN.