Kihm v. Mott, C.A. No. 2020-0938-MTZ (Del. Ch. Aug. 31, 2021) (Zurn, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted motions to dismiss class action claims brought by a former stockholder of an oncology company in connection with the company’s acquisition. The Court dismissed the claims after finding that the business judgment rule was the appropriate standard of review under Corwin v. KKR Financial Holdings LLC because the stockholder failed to plead facts from which one might reasonably conceive that the stockholder vote approving the transaction was not fully informed.
The plaintiff, John Kihm (“Kihm”), is a former stockholder of Tesaro Inc., a Delaware corporation (the “Company”), who alleged breaches of fiduciary duty by the members of the Company’s board of directors and certain officers of the Company, as well as aiding and abetting by the Company’s financial advisors and the Company’s long-term private equity sponsor, stemming from the January 2019 cash sale of the Company to GlaxoSmithKline (the “Acquisition”). Kihm alleged that the Company’s private equity sponsor, New Enterprise Associates, Inc., along with its associated funds (collectively, “NEA”) favored the Acquisition so that NEA could exit its position in the Company, and that the sale process was rushed and inadequate. The Court noted that Kihm stopped short of alleging that NEA was a controlling stockholder of the Company.
The Court held that the breach of fiduciary duty claims against the Company’s board of directors and officers must be dismissed because, although the Acquisition was presumptively subject to at least enhanced scrutiny under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Acquisition was ratified by a fully informed majority of the Company’s disinterested stockholders in the absence of a conflicted controlling stockholder pursuant to Corwin v. KKR Financial Holdings LLC. Kihm failed to allege that the Acquisition was coerced, that the Acquisition failed to receive the approval of a majority of disinterested stockholders, or that there was a conflicted controlling stockholder. Thus, the question for the Court was whether Kihm pled facts from which one might reasonably conceive that the vote in favor of the Acquisition was not fully informed.
In evaluating whether the Company’s stockholders were fully informed, the Court considered whether the Company’s disclosures apprised the stockholders of all material information and did not materially mislead them. At the pleading stage, this requires a plaintiff to identify a deficiency in the operative disclosure document. If the plaintiff makes such a showing, the burden then shifts to the defendants to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect of the vote. Here, Kihm alleged four separate disclosure deficiencies that he believed would preclude Corwin’s cleansing of the Acquisition.
Kihm first alleged that the Schedule 14D-9, recommending the Company’s stockholders tender their shares (the “Recommendation Statement”), omitted certain projections that were material. The Court ultimately held that the theoretical inclusion of the omitted projections would not have significantly altered the total mix of information available to the Company’s stockholders, as the projections that were included as part of the Recommendation Statement were nearly identical to the omitted projections. Thus, although the omitted projections may have been helpful to the stockholders, their omission was not material.
Second, Kihm alleged that the Recommendation Statement did not fully disclose the extent of the financial advisors’ conflict of interest with GlaxoSmithKline. The Court disagreed and held that the Recommendation Statement sufficiently informed stockholders about the financial advisors’ potential conflict of interest with GlaxoSmithKline because it disclosed that the financial advisors had and continued to represent GlaxoSmithKline on a variety of matters, as well as the specific amount of fees GlaxoSmithKline paid the financial advisors over the prior two years.
Kihm next alleged that the Recommendation Statement materially omitted the fact that NEA and David Mott, who served as both the chairperson of the Company’s board of directors as well as a general partner of NEA, had a “liquidity conflict” that motivated their approval of the Acquisition. The Court ruled that the Recommendation Statement properly disclosed that Mott was a dual fiduciary to both NEA and the Company. Additionally, the Court reiterated that Kihm did not argue that NEA was a controlling stockholder of the Company and, accordingly, the Board was under no obligation to disclose the business model of a minority stockholder, even if that model conflicted with the Company’s pursuit of value.
Finally, Kihm complained that the Recommendation Statement omitted valuation analyses for several of the Company’s previously abandoned fundraising deals. The Court again struck down this argument, as Kihm failed to demonstrate that the Company’s stockholders were not fully informed when they tendered their shares. The Court noted that the Recommendation Statement disclosed that the Board had explored several strategic transactions with anonymized parties that would not have required a sale, and reiterated that Delaware law does not require disclosure of a play-by-play of negotiations leading to a transaction or of potential offers that a board has determined were not worth pursuing.
Thus, the Court held that Kihm failed to plead that the Company’s stockholders’ decision to tender their shares was not fully informed. In light of the fact that Kihm did not plead a claim for waste, the Acquisition was effectively cleansed by the stockholder approval pursuant to Corwin.
The Court also granted the motions to dismiss with respect to Kihm’s aiding and abetting claims against NEA and the financial advisors, holding that the complaint lacked a well-plead predicate breach of fiduciary duty.