IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
WALTER E. RYAN, JR., )
)
Plaintiff, )
)
v. )
)
NAREN GURSAHANEY, THOMAS )
COLLIGAN, TIMOTHY DONAHUE, )
ROBERT DUTKOWSKY, BRUCE ) C.A. No. 9992-VCP
GORDON, BRIDGETTE HELLER, )
KATHLEEN HYLE, DINESH PALIWAL, )
KEITH MEISTER, and CORVEX )
MANAGEMENT LP, )
)
Defendants, )
)
and )
)
THE ADT CORPORATION, a Delaware )
Corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 8, 2014
Date Decided: April 28, 2015
Jessica Zeldin, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington,
Delaware; Clinton A. Krislov, Esq., Michael R. Karnuth, Esq., Christopher M. Hack,
Esq., KRISLOV & ASSOCIATES, LTD., Chicago, Illinois; Merrill G. Davidoff, Esq.,
Lawrence Deutsch, Esq., Robin Switzenbaum, Esq., BERGER & MONTAGUE, P.C.,
Philadelphia, Pennsylvania; Attorneys for Plaintiff Walter E. Ryan, Jr.
Stephen P. Lamb, Esq., Daniel A. Mason, Esq., PAUL, WEISS, RIFKIND, WHARTON
& GARRISON LLP, Wilmington, Delaware; Daniel J. Kramer, Esq., Robert N. Kravitz,
Esq., PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New
York, Alexandra M. Walsh, Esq., PAUL, WEISS, RIFKIND, WHARTON &
GARRISON LLP, Washington, D.C.; Attorneys for Defendants Naren Gursahaney,
Thomas Colligan, Timothy Donahue, Robert Dutkowsky, Bruce Gordon, Bridgette Heller,
Kathleen Hyle, Dinesh Paliwal and Nominal Defendant The ADT Corporation.
Brock E. Czeschin, Esq., A. Jacob Werrett, Esq., RICHARDS, LAYTON & FINGER
P.A., Wilmington, Delaware; Nancy Chung, Esq., Michael A. Asaro, Esq., Patrick M.
Mott, Esq., AKIN GUMP STRAUSS HAUER & FELD LLP, New York, New York;
Attorneys for Defendants Keith Meister and Corvex Management LP.
PARSONS, Vice Chancellor.
The plaintiff in this case, a stockholder of The ADT Corporation, seeks to bring a
derivative action on behalf of the company against its board of directors. In 2012, a
hedge fund acquired a 5% stake in ADT, and the fund‟s principal contended publicly that
the company would benefit from incurring debt to repurchase a significant portion of its
common stock. The plaintiff alleges that the director defendants breached their fiduciary
duties by appointing the hedge fund‟s principal to the board, engaging in a stock
repurchase plan similar to the one he advocated for, and then ultimately repurchasing the
hedge fund‟s block of ADT stock at the then-prevailing, but allegedly inflated, market
price. The plaintiff also accuses the hedge fund of aiding and abetting the director
defendants‟ alleged breaches of fiduciary duty, and charges the fund and its principal
with unjust enrichment.
The director defendants moved to dismiss the complaint, as did the hedge fund and
its principal. They all contend that, because the plaintiff did not make a pre-suit demand
on the board of directors, and demand is not excused in these circumstances, this action
should be dismissed under Court of Chancery Rule 23.1. Each of the defendants also
argue that, under Rule 12(b)(6), the complaint fails to state a claim against them. For the
reasons stated in this Memorandum Opinion, I conclude that demand is not excused
1
under Aronson v. Lewis1 and its progeny. Accordingly, I grant the defendants‟ motion to
dismiss under Rule 23.1 and do not reach their other arguments in favor of dismissal.
I. BACKGROUND2
A. Facts
Plaintiff Walter E. Ryan, Jr. brings this action derivatively on behalf of The ADT
Corporation (“ADT” or the “Company”). ADT, a Delaware corporation based in Florida,
is an alarm and security systems company. Its stock began trading on the NYSE in
September 2012, when the Company was spun off from Tyco International, Inc.
(“Tyco”). Ryan has owned shares of ADT common stock continuously since that time.
1
473 A.2d 805 (Del. 1984). In Brehm v. Eisner, 746 A.2d 244, 253-54 (Del. 2000),
the Delaware Supreme Court overruled seven precedents, including Aronson, to
the extent those precedents reviewed a Rule 23.1 decision by the Court of
Chancery under an abuse of discretion standard or otherwise suggested deferential
appellate review. See id. at 253 n.13 (overruling in part on this issue Scattered
Corp. v. Chicago Stock Exch., 701 A.2d 70, 72-73 (Del. 1997); Grimes v. Donald,
673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d
950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v.
Perot, 539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624-25
(Del. 1984); and Aronson, 471 A.2d at 814). The Brehm Court held that going
forward, appellate review of a Rule 23.1 determination would be de novo and
plenary. Brehm, 746 A.2d at 254. The seven partially overruled precedents
otherwise remain good law. In this decision, I do not rely on any of them for the
standard of appellate review. Although the technical rules of legal citation would
require noting that each was reversed on other grounds by Brehm, I have chosen,
as this Court has on other occasions, to omit the cumbersome subsequent history,
which creates the misimpression that Brehm rejected core elements of the
Delaware derivative action canon. See Quadrant Structured Prods. Co. v. Vertin,
102 A.3d 155, 181 n.7 (Del. Ch. 2014).
2
The facts are drawn from Plaintiff‟s Verified Amended Derivative Complaint (the
“Complaint”) and the documents attached or integral thereto.
2
Defendant Naren Gursahaney is the CEO and a director of ADT. Defendants
Thomas Colligan, Timothy Donahue, Robert Dutkowsky, Bruce Gordon, Bridgette
Heller, Kathleen Hyle, and Dinesh Paliwal (together with Gursahaney, the “Board” or the
“Director Defendants”) also were ADT directors at all relevant times.3
Defendant Keith Meister was a member of ADT‟s board of directors from
December 2012 to November 2013. Meister also is the founder, managing director, and
principal partner of Defendant Corvex Management LP (“Corvex”), a Delaware limited
partnership with its principal place of business in New York. Corvex is a hedge fund,
and from October 2012 to November 2013, it owned or controlled roughly 5% of ADT‟s
issued and outstanding common stock.
1. Corvex takes a position in ADT, and the Board responds
In the process of dividing itself into three separate companies, Tyco spun off its
security solutions division into an independent entity, ADT. On September 28, 2012,
Tyco stockholders, including Plaintiff, received one-half share of ADT stock for each
share of Tyco stock they owned. From the time of the spinoff through late October 2012,
Corvex accumulated a 5% stake in ADT, at prices ranging from $36 to $39 per share. 4
One day before disclosing its ADT investment to the Securities and Exchange
3
Defendant Paliwal resigned from ADT‟s Board effective March 13, 2014, before
the commencement of this action. Each of the other Director Defendants still
holds the position of director.
4
In addition to owning shares and call options for a total of roughly 11 million
shares, Corvex also shared voting power over 575,000 shares of ADT beneficially
owned by Soros Fund Management LLC (“Soros”). Compl. ¶ 22.
3
Commission (“SEC”) on October 25, 2012, Corvex made a public presentation at an
investing conference. In that presentation, according to the Complaint, Meister asserted
that ADT was undervalued and would outperform its financial expectations. Meister
criticized ADT‟s capital structure, however. In particular, he argued that unlocking
ADT‟s true value would require the Company to incur more debt and repurchase stock,
with a goal of raising its ratio of debt to EBITDA from 1.5x to 3.0x. He estimated that
those maneuvers would double ADT‟s stock price from its current $30 to $40 per share
range, and provide significant returns to the stockholders.5
ADT‟s management and several directors met with Meister on November 17,
2012, and he reiterated those investment theses to them. On November 26, the full Board
met telephonically. Among the subjects they discussed were the Company‟s capital
allocation and the merits of a share repurchase program. The Board also was informed
that Meister wanted to become a director of the Company. The following day, ADT
publicly announced its financial results for the fourth quarter of fiscal year 2012 and
provided its forecasts for 2013.6 The Board also announced that it had approved a stock
repurchase program, pursuant to which the Company planned to buy back 17% or $2
billion of its common stock over the next three years, thereby raising its debt to EBITDA
ratio to 2.0x (the “Stock Repurchase Program”).
5
Id. ¶¶ 23-34.
6
ADT‟s 2012 fiscal year ended on September 28, 2012; its 2013 fiscal year ended
September 27, 2013.
4
In the meantime, Meister continued to seek appointment to ADT‟s board. In this
regard, Plaintiff‟s allegations focus on a December 13, 2012 Board meeting at which
Defendant Gordon, Chairman of the Board, advised the other directors that if Meister
were not asked to join the Board, Corvex “likely” would make a stockholder proposal to
get himself and possibly other nominees elected. The meeting minutes allegedly state
that the “cost and distraction of any potential proxy contest, the likely consequences of
winning or losing such a contest, and Mr. Meister‟s qualification to serve as a Director of
ADT” were among the topics the Board considered as to whether Meister should be
appointed as a director.7
In discussing this issue, the Director Defendants also heard presentations or
“pitches” from the investment banking firms of MacKenzie Partners, Goldman Sachs,
Credit Suisse, and Lazard Freres. Although it is not alleged that any of them actually
were hired to advise the Board, the firms‟ various pitch presentations discussed Corvex‟s
investment history and gauged the potential that it would take an aggressive, activist
stance toward ADT. Quoting from these presentations, the Complaint reveals that the
Board was informed, for example, that Corvex “has positioned itself as a traditional non-
activist hedge fund,” and “has vowed to be less confrontational” than Meister‟s former
employer, Carl Icahn.8 On the other hand, it was reported that Corvex previously
7
Compl. ¶ 41.
8
Id. ¶ 38.
5
“demonstrated a willingness to escalate to a proxy fight” when a company in which it had
invested did not fully implement its demands.9
The Board met again on December 14, 2012 to continue its discussion and reach a
decision. Three days later, ADT publicly announced that it had entered a standstill
agreement with Meister, Corvex, and Soros (the “Standstill Agreement”). 10 Pursuant to
that agreement, the size of ADT‟s Board was increased from eight to nine members, and
Meister was appointed to fill the new vacancy. The Standstill Agreement also provided
that Meister, Corvex, and Soros would vote in favor of the Company‟s slate of directors
(including Meister), and that they would not acquire more than a prescribed number of
shares of ADT stock. The Standstill Agreement was to expire on the date Meister left the
Board or December 5, 2013, whichever was later. The December 5 date was one week
before the deadline for stockholder proposals and nominations relating to ADT‟s 2014
annual meeting. Effective December 19, 2012, Meister joined ADT‟s Board as a
director.
2. ADT continues repurchasing stock, and Corvex exits
Plaintiff asserts that increased competition negatively affected ADT‟s business
through the first half of 2013, making Meister‟s lofty expectations look more and more
unrealistic. On July 31, 2013, ADT released its financial results for the third quarter of
its 2013 fiscal year. As part of that announcement, ADT disclosed that it had decided to
9
Id.
10
Id. ¶ 42.
6
increase its leverage ratio further to 3.0x debt to EBITDA, signaling a likely increase in
the ongoing Stock Repurchase Program. Meister, then a member of the ADT Board,
allegedly pushed for even more accelerated stock repurchases. According to the
Complaint, the Board received materials from consultants at Centerview Partners
indicating that if the Company did not adopt Corvex‟s preferred timetable for
accomplishing the leveraged buybacks, Corvex might “present an alternative capital
allocation framework (a „Public IPO‟) and run a competing slate of directors” to be voted
on at ADT‟s 2014 annual meeting.11
The Board met on September 7 and September 20, 2013, and Corvex‟s proposal
for accelerating the ongoing stock repurchases was among the items discussed. 12 On
September 23, ADT announced a special dividend, and disclosed a plan to offer $1
billion in new debt. The Company released its financial results for the fourth quarter of
its 2013 fiscal year on November 20, 2013. In that announcement, ADT authorized an
increase in the next quarterly dividend, and provided an update on the Stock Repurchase
Program. About $1.6 billion of stock already had been repurchased, and the Company
disclosed an agreement to buy another $400 million of stock back from JP Morgan
Chase. ADT further disclosed that the initial $2 billion phase of the Stock Repurchase
Program would be completed by the first half of fiscal year 2014, and that the Board had
11
Id. ¶ 69. That meeting was expected to occur early in calendar year 2014.
12
The Complaint does not allege whether Meister attended these meetings. See id.
¶¶ 70-74.
7
increased the repurchase authorization from $2 to $3 billion. As the market digested
these announcements, ADT‟s stock traded moderately upward, to around $44 per share.
The Complaint accuses Corvex and Meister of pursuing a self-interested “pump-
and-dump” scheme. In that regard, Plaintiff casts all the Director Defendants‟ actions—
from appointing Meister to the Board in the Standstill Agreement to adopting the
leveraged Stock Repurchase Plan—as reflecting the directors‟ acquiescence to Meister‟s
proposals and demands in support of that scheme.13 Plaintiff asserts that by the second
half of 2013, Meister had succeeded in “pumping” up the price of ADT‟s stock. The
alleged “dump” came on November 25, 2013, when the Board announced that it had
entered into an agreement to repurchase most of Corvex‟s ADT stock (the “Corvex
Repurchase”) at the then-prevailing market price. ADT agreed to pay $44.01 per share or
roughly $450 million in the Corvex Repurchase, and Corvex allegedly reaped a profit of
$60 million. In exchange, Meister agreed to step down from the Board, and he and
Corvex accepted an amendment to the Standstill Agreement under which it would remain
effective until the Company‟s 2019 annual meeting.
The Complaint criticizes the Corvex Repurchase as nefarious “hush mail.”14
Plaintiff also takes particular issue with the fact that the price was fixed at $44.01 per
share, in contrast to the JPMorgan Chase buyback and a similar one entered into with
Credit Suisse shortly thereafter. Both of those transactions allegedly were structured
13
E.g., id. ¶¶ 1, 42, 61, 62, 69, 81, 97, 101.
14
Id. ¶¶ 89, 96.
8
such that ADT would repurchase the stock at a volume-weighted price calculated over
time, to adjust for any abnormal returns associated with the buyback itself. Shortly after
the Corvex Repurchase, the market price of ADT‟s stock slipped to about $40 per share.15
On or about December 9, 2013, the Board received materials in preparation for an
upcoming meeting. That information allegedly identified and highlighted ongoing risks
ADT was facing, including increased competition, lower sales, and higher customer
attrition rates. On January 30, 2014, ADT released its report for the fiscal quarter ending
December 31, 2013. According to the Complaint, the reported financial results “badly
missed the Company‟s guidance and analysts‟ consensus estimates and revealed a far-
worse-than-forecasted financial condition and diminished future prospects.”16
Plaintiff asserts that Meister “undoubtedly knew” these “non-public facts” when
the Corvex Repurchase was negotiated and executed.17 According to the Complaint,
Barclays issued a report in the wake of the January 30, 2014 announcement questioning
the structure of the Corvex Repurchase.18 ADT‟s stock price dropped to about $31 per
share as of the close of trading on January 30, 2014, and settled around $28 per share in
the first few days of February. Based on these allegations, the Complaint avers that the
Director Defendants “misallocated the Company‟s resources to incur debt and overpay
15
Id. ¶ 85.
16
Id. ¶ 91.
17
Id. ¶ 90.
18
Id. ¶ 93.
9
for its own stock through significant stock repurchases, including those from Corvex, an
effective insider.19
B. Procedural History and Parties’ Contentions
Plaintiff filed this derivative action on August 1, 2014, and amended his complaint
on October 3, 2014. As amended, the Complaint charges the Director Defendants with
breaching their fiduciary duties of care and loyalty, and accuses Corvex of aiding and
abetting those alleged breaches. Meister and Corvex also are subject to an additional
claim for unjust enrichment. The Director Defendants and Meister and Corvex each filed
motions to dismiss this action. Those motions were fully briefed, and I heard argument
as to both on December 8, 2014.
The Director Defendants seek dismissal of the Complaint under Court of Chancery
Rule 23.1, contending that Plaintiff failed to make a pre-suit demand on ADT‟s board, or
to plead adequately that such a demand would have been futile. In the alternative, they
argue that the Complaint fails to state a claim under Rule 12(b)(6). Meister and Corvex
join the Director Defendants in asserting that the Complaint should be dismissed in its
entirety for failure to plead demand futility. In addition, Meister and Corvex further
contend that, even if demand were not futile, the claims against them must be dismissed
on Rule 12(b)(6) grounds.
Plaintiff concedes he made no pre-suit demand on the ADT Board, but maintains
that the Complaint alleges sufficient facts to demonstrate that demand was excused. In
19
Id. ¶ 96.
10
particular, he contends that any demand would have been futile because: (1) the Board
was not disinterested and independent with respect to the decisions relating to the
Standstill Agreement, the Stock Repurchase Program, and the Corvex Repurchase; and
(2) the Complaint‟s allegations as to those transactions are sufficient to rebut the
protection of the business judgment rule. As to both of those contentions, Plaintiff asserts
that the Director Defendants “feared for their positions because Meister threatened to
seek their replacement in two separate instances and in response, secured for themselves
two Standstill Agreements from Meister and Corvex.”20 In this regard, Plaintiff argues
that, in assenting to the Standstill Agreement and later the Corvex Repurchase, the
Director Defendants were motivated solely by a desire to entrench themselves. Plaintiff
further asserts that the Director Defendants‟ acceptance of the Corvex Repurchase at a
fixed per-share price over $44 was an “absolute failure” to increase stockholder value,
because they allegedly knew that the stock price was inflated and would decline after the
Corvex Repurchase was announced. Based on those allegations, Plaintiff argues that pre-
suit demand was futile and therefore excused.
II. ANALYSIS
I address Defendants‟ Rule 23.1 argument first. For the reasons set forth below, I
agree that the Complaint fails to plead adequately that demand was excused. Because
such a failure requires dismissal of the Complaint in its entirety, I do not address the
separate arguments for and against dismissal on grounds of Rule 12(b)(6).
20
Pl.‟s Answering Br. 28; id. at 38-39.
11
A. Legal Standard
Under Court of Chancery Rule 23.1, a stockholder plaintiff seeking to bring an
action derivatively on behalf of the corporation must “allege with particularity the efforts,
if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or
comparable authority and the reasons for the plaintiff‟s failure to obtain the action or for
not making the effort.”21 The demand requirement in Rule 23.1 is “a recognition of the
fundamental precept that directors manage the business and affairs of corporations.”22
Accordingly, the right of a stockholder to prosecute a claim of the corporation on its
behalf is limited to situations where either: (1) the stockholder has demanded that the
directors pursue a corporate claim and the directors wrongfully have refused to do so; or
(2) demand is excused because the directors are incapable of making an impartial
decision regarding whether to institute such litigation.23
In cases like this one, where Plaintiff did not make pre-suit demand upon the
Company‟s board of directors, the Complaint must be dismissed unless it alleges
particularized facts showing that demand would have been futile.24 The well-known
Aronson test controls my determination of whether demand is excused as futile in a case
21
Ct. Ch. R. 23.1(a).
22
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); see also 8 Del. C. § 141(a).
23
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 366-67 (Del.
2006).
24
In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 132 (Del. Ch. 2009)
(citing Stone, 911 A.2d at 367 n.9).
12
such as this, where Plaintiff alleges that the Director Defendants made a decision or took
an action in breach of their fiduciary duties.25 A plaintiff demonstrates demand futility
under Aronson and its progeny by pleading particularized facts that create a reasonable
doubt as to whether: (1) the directors made the challenged decision with disinterestedness
and independence; or (2) the challenged decision or transaction was otherwise the
product of a valid exercise of business judgment.26 Because the “stringent requirements”
of Rule 23.1 govern here, as opposed to the lesser requirements of ordinary notice
pleading, Plaintiff must set forth the “particularized factual statements that are essential
to the claim.”27 In assessing whether Plaintiff has met his pleading burden in this regard,
I accept all non-conclusory allegations in the Complaint as true and draw all reasonable
factual inferences that logically flow from them in Plaintiff‟s favor.28
B. The Complaint Does Not Give Reason to Doubt the Board’s Disinterestedness
and Independence
Under the first prong of Aronson, demand is excused as futile if the Complaint
raises a reasonable doubt that the Board will be entitled to the protection of the business
25
Wood v. Baum, 953 A.2d 136, 140 (Del. 2008); compare Rales v. Blasband, 634
A.2d 927, 936-37 (Del. 1993) (stating standard of review for demand futility in
situations “where the board that would be considering the demand did not make a
business decision which is being challenged in the derivative suit”).
26
Wood, 953 A.2d at 140; see also Aronson, 473 A.2d at 814.
27
Brehm, 746 A.2d at 254 (emphasis added).
28
Id. at 255; see also Beam ex rel. Martha Stewart Living Omnimedia, Inc. v.
Stewart, 845 A.2d 1040, 1048-49 (Del. 2004); Citigroup, 964 A.2d at 120.
13
judgment rule with respect to the challenged transaction.29 The relevant inquiry in this
regard is whether a majority of the Director Defendants were either interested in the
challenged transaction or lacked the independence necessary to make the challenged
decision on its merits rather than on the basis of extraneous influences, such as being
beholden to or otherwise under the influence of another.30
In this case, Plaintiff does not attempt to allege a conflict of interest in the classic
sense of self-dealing. The Aronson line of cases also recognizes, however, that a
stockholder derivative plaintiff can raise a reasonable doubt as to the board‟s
disinterestedness and independence in situations where the particularized factual
allegations demonstrate that the directors‟ sole or primary motivation was
entrenchment.31 Plaintiff‟s argument as to the futility of demand relies heavily on his
contention that the Director Defendants were driven by a desire to entrench themselves.
In that regard, Plaintiff contends that the Complaint contains particularized allegations
that the Director Defendants “believed themselves to be vulnerable” to removal by
Corvex, and that the primary reason they agreed to the Standstill Agreement, the Stock
29
Aronson, 473 A.2d at 814-15.
30
Id.; see also Rales, 634 A.2d at 936-37 (defining “interest” and “independence”).
31
Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988) (“In order to satisfy Aronson‟s
first prong involving director disinterest, plaintiffs must plead particularized facts
demonstrating either a financial interest or entrenchment on the part of the GM
directors.”) (citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.
1985)).
14
Repurchase Program, and the Corvex Repurchase was to avoid this possibility. 32 The
non-conclusory allegations in the Complaint, however, do not raise a reasonable doubt as
to the Director Defendants‟ disinterestedness or independence based on this entrenchment
theory, for several reasons.
1. Actual Threat of Removal
First, the particularized facts do not support a reasonable inference that the
Director Defendants perceived an actual “threat” of removal and were motivated to avoid
it. Corvex is not alleged to have initiated a proxy contest or other public campaign to
remove one or more ADT directors. The Complaint does not allege that Meister or
Corvex even took any preliminary steps to prepare for such an endeavor. The strongest
non-conclusory, particularized allegations in this regard are two-fold: (1) that ADT‟s
Board Chairman, Defendant Gordon, stated (before the Board voted in December 2012 to
appoint Meister a director and obtain the Standstill Agreement) that Corvex “likely”
would make a stockholder proposal to elect Meister and possibly others to the Board; and
(2) that the pitch presentation materials the Board received from at least two financial
advisors contained similar indications that Corvex could or might become aggressive and
run a proxy contest or other activist campaign.
Even taking those allegations as true and drawing all reasonable inferences from
them in Plaintiff‟s favor, however, I cannot conclude, in light of the relevant case law,
that the allegations suggest the existence of a “threat” sufficient to rebut the business
32
Pl.‟s Answering Br. 31.
15
judgment rule and raise a doubt as to the Director Defendants‟ disinterestedness and
independence for purposes of Aronson.33 In Grobow v. Perot, the Delaware Supreme
Court addressed an argument by stockholder derivative plaintiffs that demand should be
excused as futile. As in this case, the plaintiffs there challenged a decision of a board of
directors to repurchase the stock of a dissident stockholder.34 The plaintiffs in Grobow
contended that the General Motors (“GM”) board lacked disinterestedness and
independence for purposes of considering a demand because, pursuant to the buyback
agreement, the GM board paid a significant premium over the per-share market price, and
the dissident stockholder agreed to stop publicly criticizing the board and promised not to
buy GM stock or run a proxy contest for five years. 35 The Grobow Court held that the
plaintiffs‟ allegations, which attempted to invoke Unocal-type heightened scrutiny, were
“too speculative to raise a reasonable doubt of director disinterest” under the first prong
33
See, e.g., Kahn ex rel. DeKalb Genetics Corp. v. Roberts, 679 A.2d 460, 466 (Del.
1996) (“Absent an actual threat to corporate control or action substantially taken
for the purpose of entrenchment, the actions of the board are judged under the
business judgment rule.”) (rejecting stockholder derivative plaintiff‟s argument
that demand was excused as futile where the board had entered into a repurchase
agreement with a dissident stockholder, because the purported threat of removal
was “ephemeral” and too speculative to justify rebuttal of the business judgment
rule).
34
Grobow, 539 A.2d at 188.
35
Id. at 184-85.
16
of Aronson, because the directors‟ positions were not “actually threatened.”36 Rather, the
plaintiffs “merely argue[d]” that Perot‟s public criticism of GM management “could
cause the directors embarrassment sufficient to lead to their removal from office.”37 The
Court concluded that “[s]uch allegations are patently insufficient to raise a reasonable
doubt as to the ability of the GM Board to act with disinterest,” and it therefore found the
plaintiffs‟ “entrenchment claim to be essentially conclusory and lacking in factual
support sufficient to establish [demand] excusal.”38 In so holding, the Grobow Court
expressly considered the premium paid to Perot, the allegedly ill-considered nature of the
repurchase transaction, and the “hush mail” aspect of that agreement.39
Plaintiff‟s allegations here are insufficient to satisfy Aronson‟s first prong on an
36
Id. at 188. The dissident in Grobow, H. Ross Perot, held only 0.8% of GM‟s
voting stock, but the value of his stock (and contingent notes he held) was
substantial, making him GM‟s largest stockholder. Id. at 184.
37
Id. (emphasis added).
38
Id.
39
Id. After the Supreme Court‟s decision in Grobow, the plaintiffs amended their
complaint and again sought to plead demand futility. The Court of Chancery
refused to re-hear the plaintiffs‟ entrenchment argument, despite their contention
that its deficiencies had been “cured, because their present complaint now alleges
that [the dissident stockholder] forcibly and publicly advocated that the GM Board
should be replaced.” Grobow v. Perot, 1990 WL 146, 16 Del. J. Corp. L. 310, 320
(Del. Ch. Jan. 3, 1990), aff’d sub nom. Levine v. Smith, 591 A.2d 194 (Del. 1991).
The Court noted that, even if the plaintiffs could re-litigate the entrenchment issue,
their amended complaint still failed to raise a doubt as to the GM board‟s
disinterestedness and independence, because it still had “not alleged that [the
dissident stockholder] took or threatened to take any concrete action to unseat the
Board, such as commencing a tender offer or a proxy or consent solicitation. The
plaintiffs have not, therefore, adequately alleged that [he] posed a genuine threat to
the Board . . . .” Id. at 320 n.7.
17
“entrenchment” theory because, like the plaintiffs in Grobow, Plaintiff has not alleged
that the Director Defendants were “actually threatened” with removal from their positions
by Corvex and Meister. At most, the Complaint alleges that Corvex and Meister might
have attempted to remove the Director Defendants from their board positions, if the
Board refused to appoint Meister in the first place, or refused to adopt a leveraged stock
repurchase strategy as he advocated for, or refused to enter into the Corvex Repurchase
Agreement. As to any of those three decision points, however, the Complaint does not
allege that Corvex or Meister actually took action aimed at removing one or more of the
Director Defendants, by running a competing slate of directors, making a tender offer, or
otherwise.
The Complaint does not even allege that Meister or Corvex publicly advocated for
the Board‟s removal. The only particularized factual allegations supporting the
proposition that the Director Defendants actually perceived a threat of removal—
Defendant Gordon‟s opinion as to the possibility of Corvex becoming more aggressive in
December 2012, and the pitch presentation materials—are “tenuous at best and are too
speculative to raise a reasonable doubt of director disinterest.”40 If anything, those
allegations merely underscore that a control contest against which the Board might
choose to defend was something that may have arisen in the future. The speculative
nature of that possibility is particularly acute in a case like this where Corvex held only
5% of ADT‟s stock. Moreover, there are no allegations that other hedge funds that held a
40
Grobow, 539 A.2d at 188.
18
significant amount of ADT stock were coordinating with Corvex or otherwise following
its lead.41
Cases like Grobow instruct that absent an actual (as opposed to possible or
theoretical) “struggle for corporate control,” the presumption of directorial
disinterestedness and independence is not rebutted under the Aronson analysis.42 The
Complaint in this case fails adequately to allege any such actual struggle. Thus, based on
the lack of particularized factual allegations suggesting that the Board perceived an
“actual threat” of removal, I reject Plaintiff‟s contention that demand upon the ADT
Board was futile because the Director Defendants sought to entrench themselves.
2. Entrenchment Motivation
Second, even if the Complaint had alleged particularized facts that supported a
reasonable inference that the threat of removal facing the Director Defendants was more
than speculative, Plaintiff‟s entrenchment theory still fails to demonstrate demand futility
under Aronson‟s first prong. The reason is that the Complaint lacks sufficient allegations
41
Compl. ¶ 38. In that respect, I note that this Court‟s determination of whether a
stockholder poses an “actual threat” for purposes of entrenchment allegations is a
context-specific analysis in which the size of the dissident stockholder‟s
ownership stake is one consideration. See, e.g., Grobow, 539 A.2d at 188
(rejecting demand futility argument based on entrenchment theory; 0.8%
stockholder); Kahn, 679 A.2d at 466 (same; 33% stockholders); Green v. Phillips,
1996 WL 342093, at *4 (Del. Ch. June 19, 1996) (same; 10.7% stockholder); but
see In re Chrysler Corp. S’holders Litig., 1992 WL 181024, 18 Del. J. Corp. L.
619, 627 (Del. Ch. July 27, 1992) (finding demand excused because of well-pled
entrenchment allegations relating to a poison pill; 9.8% stockholder).
42
Grobow, 539 A.2d at 188; see also Kahn, 679 A.2d at 466.
19
to impugn the Director Defendants‟ motivation in appointing Meister to the Board,
approving the Stock Repurchase Program, and agreeing to the Corvex Repurchase. To
demonstrate demand futility under Aronson, “[i]t is the plaintiff‟s burden to allege with
particularity that the [claimed] improper motive in a given set of circumstances, i.e.,
perpetuation of self in office or otherwise in control, was the sole or primary purpose of
the wrongdoer‟s conduct.”43
Seven of the nine members of ADT‟s Board during the relevant time period were
independent, non-management directors.44 The Complaint‟s only allegations bearing on
the interest or motivations of those Defendants is that they sought to entrench themselves
in order to maintain their director compensation. The Complaint does not allege,
43
Pogostin v. Rice, 480 A.2d 619, 627 (Del. 1984); see also Benihana of Tokyo, Inc.
v. Benihana, Inc., 906 A.2d 114, 121-22 (Del. 2006) (“It is settled law that,
„corporate action . . . may not be taken for the sole or primary purpose of
entrenchment.‟”) (alteration in original) (quoting Williams v. Geier, 671 A.2d
1368, 1381 n.28 (Del. 1996)).
44
It appears to be undisputed that Defendant Gursahaney, CEO of ADT, was either
interested or lacked independence. Defs.‟ Opening Br. 3. Defendant Meister was
not involved in the Board decision that led to his appointment, but was a director
during the rest of the relevant period. He does not contest that, as the principal of
Corvex, he had a conflict of interest with respect to the Corvex Repurchase.
Corvex Opening Br. 17. The Complaint does not allege, however, that Meister
participated in either the Board‟s discussions or voting on the Corvex Repurchase.
Ultimately, I find that Gursahaney and Meister‟s conflicts of interest are not likely
to have any impact on the issues decided in this Memorandum Opinion, because
none of the other seven directors are alleged to have had any such conflict or lack
of independence, and the relevant inquiry under the first prong of Aronson is
whether there is a reasonable doubt as to the disinterestedness and independence
of a majority of the directors. See, e.g., Wood, 953 A.2d at 141; Citigroup Inc.,
964 A.2d at 121.
20
however, that the compensation paid to the Director Defendants was extraordinary or
excessive. Nor does Plaintiff identify any reason why, in the particular circumstances of
this case, the Court should conclude that the compensation package unduly influenced
one or more of the directors‟ decisionmaking.45 Delaware law is clear that absent
particularized factual allegations indicating such a disabling conflict, “ordinary director
compensation alone is not enough to show demand futility.”46
The Complaint and Plaintiff‟s arguments make clear that he disagrees with the
decisions made by the ADT Board during the relevant time period. The Complaint does
not provide the Court any reason, however, to doubt that a majority of the Director
Defendants were disinterested and independent with respect to the challenged actions.
Plaintiff has not alleged a conflict of interest and has failed to allege non-conclusory facts
from which I could infer that the Director Defendants sought to entrench themselves.
Thus, demand is not excused as futile under the first part of the Aronson analysis.
45
As a general matter, a director‟s compensation conceivably can impact her
disinterestedness and independence if, for example, “the fees were shown to
exceed materially what is commonly understood and accepted to be a usual and
customary director‟s fee.” Orman v. Cullman, 794 A.2d 5, 20 n.62 (Del. Ch.
2002). There are no allegations in the Complaint here regarding materially
excessive directors‟ fees having been paid to the Director Defendants.
46
A.R. DeMarco Enters. v. Ocean Spray Cranberries, Inc., 2002 WL 31820970, at
*5 (Del. Ch. Dec. 4, 2002); see also, e.g., Grobow, 539 A.2d at 188 (“The only
averment permitting such an inference is the allegation that all GM‟s directors are
paid for their services as directors. However, such allegations, without more, do
not establish any financial interest.”).
21
C. The Complaint also Does Not Provide a Reason to Doubt that the Challenged
Transactions were a Valid Exercise of the Board’s Business Judgment
Under the second prong of the Aronson test, demand may be excused as futile if
the complaint creates “a reasonable doubt that „the challenged transaction was otherwise
the product of a valid exercise of business judgment.‟”47 The presumption of the
business judgment rule can be rebutted if the particularized facts raise a reasonable doubt
“that the informational component of the directors‟ decisionmaking process, measured by
concepts of gross negligence, included consideration of all material reasonably
available.”48 A plaintiff seeking to establish demand futility under Aronson‟s second
prong bears a “heavy burden.”49 Here, Plaintiff failed to carry it.
The Complaint itself reveals that the Director Defendants considered the merits of
all of the challenged decisions, receiving information from expert advisors and holding
meetings to deliberate each of them. Perhaps because of this reality, Plaintiff‟s argument
as to the second prong of Aronson largely consists of a rehash of his major argument, that
demand should be excused because the Director Defendants acted to entrench
themselves.50 As discussed above, that contention is unavailing. Some additional aspects
of Plaintiff‟s allegations, however, are relevant to his argument under Aronson‟s second
prong. In particular, Plaintiff objects to the price the Board agreed to pay in the Corvex
47
Brehm, 746 A.2d at 256 (quoting Aronson, 473 A.2d at 814).
48
Id. at 259 (citing Aronson, 473 A.2d at 812).
49
White v. Panic, 783 A.2d 543, 551 (Del. 2001).
50
Pl.‟s Answering Br. 37-39.
22
Repurchase, and, in arguing that the price was too high, he suggests that the ADT Board
knew that the market price of ADT stock in late 2013 was inflated. In addition, Plaintiff
asserts that the Board should have negotiated for some form of price protection
mechanism similar to the provisions it obtained in connection with the buybacks from
JPMorgan and Credit Suisse, for example.
Even if I were to accept Plaintiff‟s premise in this regard—i.e., that the Director
Defendants knew the per-share market price was inflated and therefore that Corvex was
receiving a sort of “premium” in the Corvex Repurchase—his Aronson argument still
would be unpersuasive. In Grobow, the plaintiffs similarly argued that demand futility
was established under Aronson‟s second prong because the GM board had agreed to pay
what the dissident stockholder called “a giant premium” to repurchase his shares. As the
Supreme Court stated in rejecting that argument, “The law of Delaware is well
established that, in the absence of evidence of fraud or unfairness, a corporation‟s
repurchase of its capital stock at a premium over market from a dissident shareholder is
entitled to the protection of the business judgment rule.”51
The Complaint contains no particularized allegation of fraud as to the repurchase
price, so Plaintiff‟s argument in this regard is, if anything, weaker than the argument the
Supreme Court rejected in Grobow. The Complaint insinuates that the Director
Defendants knew that ADT was facing stronger competitive headwinds than the
51
Id. at 189 (citing, inter alia, Polk v. Good, 507 A.2d 531, 536 (Del. 1986); Cheff v.
Mathes, 199 A.2d 548, 554 (Del. Ch. 1964)).
23
Company‟s public disclosures acknowledged. Although those allegations are conclusory,
it ultimately is immaterial whether I would find any of them well-pled, because Plaintiff
does not attempt to assert a disclosure claim or a claim for breach of the so-called “duty
of disclosure.”52 Rather, Plaintiff weaves those assertions into an overarching narrative
that the Director Defendants knowingly caused ADT to overpay to repurchase Corvex‟s
stock in order to entrench themselves. As discussed, the entrenchment aspect of
Plaintiff‟s theory is legally insufficient. The “overpayment” aspect is, too. The ADT
Board agreed to repurchase Corvex‟s stock at the prevailing market price that
(presumably) rational investors were willing to pay. Absent non-conclusory,
particularized allegations to the contrary, I find it unreasonable to infer that the ADT
Board was agreeing to pay a material “premium” in the Corvex Repurchase. More
importantly, however, even if they had so agreed, cases like Grobow foreclose the
possibility that such a decision would support finding demand excused under Aronson‟s
second prong, absent “evidence of fraud or unfairness” rising to the level of corporate
waste.53 I have considered Plaintiff‟s attempts to distinguish those cases, and I find them
52
See In re Allergan, Inc. S’holder Litig., 2014 WL 5791350, at *10 (Del. Ch. Nov.
7, 2014) (“[T]here is no independent duty of disclosure under Delaware law.
Instead, the duty of disclosure derives from the duty of care and the duty of
loyalty.”). To the extent Plaintiff might wish to have asserted such a disclosure
claim based on the ADT Board‟s public statements about the strength of the
Company‟s operations in light of competitive pressures, it is too late now to re-
amend the Complaint. See Ct. Ch. R. 15(aaa).
53
Grobow, 539 A.2d at 189.
24
unconvincing.54 For essentially the same reasons stated by the Supreme Court in
Grobow, I have determined that Plaintiff has not alleged particularized facts sufficient to
rebut the business judgment rule with respect to the challenged transactions. Thus,
demand is not excused under the second part of the Aronson test.
III. CONCLUSION
For the foregoing reasons, I conclude that the Complaint fails to plead adequately
that demand is excused as futile under Aronson. Accordingly, Defendants‟ motions to
dismiss under Rule 23.1 are granted. As a result, I need not reach Defendants‟ motions to
dismiss under Rule 12(b)(6), and express no opinion as to those issues.
IT IS SO ORDERED.
54
Pl.‟s Answering Br. 35-36; Arg. Tr. 44-50.
25