Firefighters’ Pension Sys. of the City of Kansas City, Missouri Tr. v. Presidio Inc., C.A. No. 2019-0839-JTL (Del. Ch. Jan 29, 2021) (Laster, V.C.)
In a stockholder class action claiming breaches of fiduciary duty and aiding and abetting in the sale of Presidio Inc. (the “Company” or “Presidio”), the Court of Chancery denied in part defendants’ motion to dismiss, holding that the plaintiff stockholder of Presidio adequately alleged LionTree Advisors LLC (“LionTree”), the financial advisor in the transaction, tipped off a bidder, BC Partners Advisors L.P. (“BCP”), and subsequently that Robert Cagnazzi (“Cagnazzi”), Presidio’s chairman and CEO, may have steered the transaction toward BCP. The Court granted the motion to dismiss as to the rest of the Presidio board (the “Board”) and Apollo Global Management LLC (“Apollo”), the Company’s allegedly controlling stockholder.
According to the allegations in the complaint, in May 2019, without notifying or receiving authorization from the Presidio board, Apollo and LionTree began to explore the sale of the Company, meeting with potential buyers including BCP and Clayton Dubilier & Rice, LLC (CD&R). While CD&R was, according to the plaintiff, better positioned to offer a higher price, BCP was allegedly more likely to retain Presidio’s management team, including Cagnazzi. In June, Cagnazzi and a representative from LionTree met again with CD&R, purportedly to discuss a potential transaction, which was not authorized by or disclosed to the Presidio board until after the Company engaged with BCP.
In July 2019, the Board decided to move forward with an offer from BCP for $16.00 per share, signing an agreement which would be subject to a “Go-Shop Phase.” During the Go-Shop Phase, CD&R made a confidential offer of $16.50 per share, with the expectation that, pursuant to the merger agreement with BCP, only the identity of CD&R would be disclosed. Nevertheless, according to the complaint, LionTree tipped off BCP as to the price in the CD&R proposal and BCP responded by increasing its “final offer” of $16.00 per share to $16.60 per share, subject to a twenty-four-hour deadline for Presidio’s response. Without knowledge of the alleged tip and despite allegedly receiving a new commitment from CD&R for a bid of at least $17.00 per share, the Board chose to accept the bid from BCP. The plaintiff stockholder brought claims for breaches of fiduciary duties against Cagnazzi, the other directors, and Apollo, and for aiding and abetting against LionTree and BCP. The complaint also asserted a claim in the alternative against Apollo for aiding and abetting, but for purposes of the motion to dismiss, the defendants did not dispute that Apollo was a controlling stockholder that owed fiduciary duties.
In evaluating the appropriate standard of review for a claim of damages against a fiduciary defendant, the Court of Chancery noted that, while enhanced scrutiny provides the proper lens for evaluating the breach of duty claim, plaintiffs must make pleadings beyond a failure to satisfy Revlon. That is, to state a claim for damages against a defendant protected by the Company’s exculpatory provision pursuant to 8 Del. C. § 102(b)(7), plaintiffs must plead allegations supporting a reasonable inference that a board’s failure to obtain the best deal available was caused by interestedness, lack of independence, or bad faith. Concluding that the standard of review was not subject to Corwin cleansing or the Synthes safe harbor, the Court applied enhanced scrutiny.
In granting the motion to dismiss as to both the directors affiliated with Apollo and the outside directors, the Court held that plaintiff’s complaint failed to plead a non-exculpated claim. As to the outside directors, the Court reasoned that, although the alleged failure to identify foul play by LionTree could potentially support an argument for breach of the duty of care, it does not adequately plead bad faith. And because plaintiff did not allege that the outside directors were interested or lacked independence, the outside directors were exculpated from monetary damages. Similarly, the Apollo directors were exculpated from monetary damages because their interests were aligned with Apollo, and the complaint failed to adequately plead that Apollo had interests that diverged from the stockholders in connection with the merger. In granting the motion to dismiss as to Apollo, the Court held that, because Apollo’s interests were aligned with the stockholders at large, the only available theory of recovery would be a breach of the duty of care, for which plaintiff failed to adequately plead facts supporting an inference of gross negligence.
In denying the motion to dismiss as to the aiding and abetting claims against LionTree and BCP, the Court held that plaintiff adequately plead facts to show a fiduciary relationship existed and was subsequently breached by the fiduciary defendants, and that damages were proximately caused by that breach. The Court then focused its analysis on scienter and concluded that the complaint supported an inference that both LionTree and BCP knew the alleged tip was wrongful. Finally, applying the same standard for Cagnazzi as applied to the directors, the Court found that the complaint supported an inference that Cagnazzi, acting with self-interest in preserving his management role, steered the deal toward BCP and away from CD&R. Because of that alleged self-interest, Cagnazzi would not be eligible for exculpation as a director. Further, to the extent Cagnazzi may have acted as CEO, he would also not be exculpated in his capacity as an officer, and thus, the complaint sufficiently plead a claim for money damages.