Higher Educ. Mgmt. Group, Inc. v. Mathews et al., C.A. No. 9110-VCP (Del. Ch. Nov. 3, 2014) (Parsons, V.C.)

In this memorandum opinion, the Court of Chancery granted defendants’ motion to dismiss derivative claims asserted by plaintiff stockholders on the grounds that the plaintiffs failed to adequately plead demand futility under Rule 23.1 and failed to state a claim under Rule 12(b)(6).  In reaching its conclusion, the Court found that the plaintiffs could not meet the Aronson standard for demand futility requiring them to plead with particularity facts in support of a reasonable inference that a majority of the director defendants were “interested,” nor could they satisfy the second prong requiring them to rebut the business judgment rule.  Furthermore, the Court held that the plaintiffs did not adequately plead their claims asserting waste of corporate assets and wrongful dilution.

The plaintiff stockholders of Aspen Group, Inc. (the “Company”) commenced a derivative action against the directors and former CFO of the Company for breach of the duty of loyalty, alleging that the defendants, in an attempt to mislead educational accreditors, knowingly made false and misleading statements in filings and correspondence with the SEC with respect to a $2.2 million asset on the Company’s balance sheet.  The Company had characterized the $2.2 million asset as a loan receivable that the Company had given to one of the plaintiffs.  The SEC disputed that characterization and instead characterized the transactions as improper cash advances that should have been recorded as a loss.  Plaintiffs alleged that no transfer of the money ever occurred and that the defendants attempted to coerce one of the plaintiffs into substantiating the loan.  The plaintiffs also asserted claims regarding (i) corporate waste, asserting that the Company’s CEO made improper payments to other companies that the CEO controlled and that the Company overspent on marketing, and (ii) improper dilution that related to a stock issuance that occurred prior to the time that the stockholders owned shares in the Company and a warrant issuance.  In addition, the plaintiffs alleged that the Company’s CFO aided and abetted the defendants’ breaches of fiduciary duty.

In analyzing the breach of fiduciary duty claims, the Court noted that the plaintiffs must plead demand futility under Aronson by alleging facts in support of a reasonable inference that a majority of the director defendants were “interested” by facing a substantial likelihood of liability for the claims – in other words, the plaintiffs had to show that a majority of the defendants knew that the alleged loan was a fabrication.  The Court held that the plaintiffs could only show a substantial likelihood of liability for two of the directors.  Addressing the second prong of Aronson, the Court held that the defendants’ characterization of the funds as a loan that was probably recoverable failed to amount to behavior so egregious that board approval could not constitute a valid exercise of business judgment.  Thus, the Court dismissed the breach of fiduciary duty claims, and the related aiding and abetting claim, for lack of demand under Rule 23.1.  With respect to the waste claim, the Court analyzed whether the challenged transactions were “so one sided that no business person of ordinary, sound judgment could conclude that the corporation [had] received adequate consideration.”  The Court examined the CEO’s decision to pay his other companies for services provided to the Company under the Rales standard for demand futility and found that the director defendants were not interested in the challenged transactions or otherwise beholden to the CEO in any way.  The Court also found that the challenged marketing expenses fell directly in the purview of the directors’ business judgment.  Turning to the dilution claim, the Court found that the plaintiffs lacked standing to bring claims related to the issuance of stock that occurred before the plaintiffs became stockholders, and the director defendants did not act fraudulently or in bad faith in issuing the warrants that the plaintiffs challenged.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.

Jump to Page

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.