COURT OF CHANCERY
OF THE
STATE OF DELAWARE
D ONALD F. PARSONS, JR. New Castle County Courthouse
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
Date Submitted: October 5, 2015
Date Decided: October 29, 2015
Seth D. Rigrodsky, Esq. Michael J. Maimone, Esq.
Brian D. Long, Esq. Gregory E. Stuhlman, Esq.
Gina M. Serra, Esq. Greenberg Traurig
Rigrodsky & Long, P.A. The Nemours Building
2 Righter Parkway, Suite 120 1007 North Orange Street, Suite 1200
Wilmington, DE 19803 Wilmington, DE 19801
Gregory P. Williams, Esq. Bradley R. Aronstam, Esq.
J. Scott Pritchard, Esq. Ross Aronstam & Moritz LLP
Richards, Layton & Finger, P.A. 100 South West Street, Suite 400
920 North King Street Wilmington, DE 19801
Wilmington, DE 19801
Re: In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
Dear Counsel:
On October 1, 2015, this Court issued its Memorandum Opinion (the
―Opinion‖)1 denying Defendant Merrill Lynch‘s2 motion to dismiss Plaintiffs‘
1
In re Zale Corp. S’holders Litig., 2015 WL 5853693 (Del. Ch. Oct. 1, 2015).
2
Terms not otherwise defined herein have the same meaning as in the
Opinion.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 2
Complaint, which alleged that Merrill Lynch aided and abetted the Director
Defendants‘ breach of their duty of care. On October 5, 2015, Merrill Lynch
timely moved for reargument pursuant to Court of Chancery Rule 59(f) (the
―Motion‖). Plaintiffs opposed the Motion on October 9. For the reasons that
follow, the Motion is granted.
I. Legal Standard
To prevail on a motion for reargument under Rule 59(f), the moving party
must demonstrate that the Court either overlooked a decision or principle of law
that would have controlling effect or misapprehended the facts or the law such that
the outcome of the decision would be different.3 To justify reargument, a
misapprehension of the facts or the law must be both material and outcome-
determinative of the earlier decision.4 Mere disagreement with the Court‘s
3
See, e.g., Preferred Invs., Inc. v. T&H Bail Bonds, 2013 WL 6123176, at *4
(Del. Ch. Nov. 21, 2013); Medek v. Medek, 2009 WL 2225994, at *1 (Del.
Ch. July 27, 2009); Reserves Dev. LLC v. Severn Sav. Bank, FSB, 2007 WL
4644708, at *1 (Del. Ch. Dec. 31, 2007).
4
See, e.g., Preferred Invs., 2013 WL 6123176, at *4; Aizupitis v. Atkins, 2010
WL 318264, at *1 (Del. Ch. Jan. 27, 2010); Medek, 2009 WL 2225994, at
*1.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 3
resolution of a matter is not sufficient, and the Court will deny a motion for
reargument that does no more than restate a party‘s prior arguments.5
II. The Motion Supports Reconsideration of the Opinion’s Reasoning
In the Motion, Merrill Lynch contends that its motion to dismiss should be
granted based on a Delaware Supreme Court decision that was issued on October
2, 2015, one day after I issued the Opinion. The crux of the Motion is that, in
evaluating whether the Director Defendants breached their fiduciary duties, I
applied the Revlon enhanced scrutiny standard of review (―Revlon‖) when I should
have applied the business judgment rule standard of review (―BJR‖). In In re KKR
Financial Holdings LLC Shareholder Litigation, this Court held that, although the
entire fairness standard of review generally would apply to a merger where a
majority of the corporation‘s directors were not independent, BJR applies when the
merger is approved by a majority vote of disinterested, fully informed
stockholders, even if that vote is statutorily required as opposed to voluntarily
5
See, e.g., Preferred Invs., 2013 WL 6123176, at *4; In re Mobilactive
Media, LLC, 2013 WL 1900997, at *1 (Del. Ch. May 8, 2013); Brown v.
Wiltbank, 2012 WL 5503832, at *1 (Del. Ch. Nov. 14, 2012).
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 4
sought by the directors.6 The Supreme Court affirmed that holding in Corwin v.
KKR Financial Holdings LLC and agreed that the fully informed vote of a majority
of disinterested stockholders also invokes BJR review in cases in which Revlon
otherwise would apply.7
In the Opinion, I found, based on the allegations in the Complaint, that the
Merger was approved by a majority of disinterested stockholders in a fully
informed vote.8 Despite acknowledging the strength of the reasoning in KKR, I
declined to follow this Court‘s holding in that case because I interpreted the
Supreme Court‘s decision in Gantler v. Stephens9 as ―holding that an enhanced
standard of review cannot be pared down to the business judgment rule as a result
of a statutorily required stockholder vote, even one rendered by a fully informed,
disinterested majority of stockholders.‖10 As Merrill Lynch notes, however, the
6
101 A.3d 980, 1001 (Del. Ch. 2014), aff’d sub nom., Corwin v. KKR Fin.
Hldgs. LLC, – A.3d –, 2015 WL 5772262 (Del. Oct. 2, 2015).
7
2015 WL 5772262, at *3 (―[T]he Chancellor‘s analysis of the effect of the
uncoerced, informed stockholder vote is outcome-determinative, even if
Revlon applied to the merger.‖).
8
Zale, 2015 WL 5853693, at *9-10.
9
965 A.2d 695 (Del. 2009).
10
Zale, 2015 WL 5853693, at *10.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 5
Supreme Court in Corwin interpreted Gantler ―as a narrow decision focused on
defining a specific legal term, ‗ratification,‘ and not on the question of what
standard of review applies if a transaction not subject to the entire fairness standard
is approved by an informed, voluntary vote of disinterested stockholders.‖11
I therefore grant Merrill Lynch‘s motion for reargument as to my
interpretation of Gantler because, in the Opinion, I misapprehended the law
regarding the cleansing effect of a fully informed, statutorily required vote by a
disinterested majority of stockholders in the circumstances of the Zale case. This
misapprehension was both material and potentially outcome-determinative as to
Merrill Lynch‘s aiding and abetting liability because I incorrectly applied Revlon
rather than BJR when I reviewed the Complaint to determine whether it adequately
alleged that the Director Defendants breached their fiduciary duties.
III. BJR Is the Appropriate Standard
In the Opinion, I concluded, under Revlon, that it was reasonably
conceivable that the Director Defendants breached their fiduciary duty of care and
that Merrill Lynch aided and abetted that breach.12 Merrill Lynch argues that BJR
11
2015 WL 5772262, at *5.
12
Zale, 2015 WL 5853693, at *18-20, *22.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 6
rather than Revlon should apply because: (1) the Supreme Court held that the fully
informed vote of a disinterested majority of stockholders invokes BJR review in
cases in which Revlon otherwise would apply; and (2) I held that the Merger was
approved by a majority of disinterested stockholders in a fully informed vote.
Plaintiffs oppose the Motion and contend that, even under Corwin, BJR
should not apply in this case because a majority of the Zale stockholders approving
the Merger were not disinterested and the vote was not fully informed. I explicitly
addressed in the Opinion, however, the grounds on which Plaintiffs base these
arguments. Specifically, I concluded that Plaintiffs failed to allege adequately that
Golden Gate was interested as to the Merger or that the Proxy materially was
deficient. Because Plaintiffs fail to highlight a decision or principle of law or a
fact that I overlooked or misapprehended in the Opinion that would justify
reargument on this point, their opposition represents a mere disagreement with the
Opinion that does no more than restate their prior arguments. I decline, therefore,
to revisit those arguments and agree with Merrill Lynch that BJR is the appropriate
standard of review based on my previous determination that Plaintiffs had failed to
allege facts from which one conceivably could infer that the Merger was not
approved by a disinterested majority of Zale‘s stockholders in a fully informed
vote.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 7
IV. The Motion Supports Dismissal of the Complaint
A. The standard for a breach of the duty of care is gross negligence, not
waste
Having granted in part Merrill Lynch‘s motion for reargument and decided
that BJR is the appropriate standard of review, my final task is to determine
whether the Opinion‘s conclusion as to Merrill Lynch‘s motion to dismiss should
change. As an initial matter, I must ascertain whether: (1) the cleansing effect of
the stockholder vote requires Plaintiffs to state a claim for waste regarding the
Director Defendants‘ actions in order to defeat Merrill Lynch‘s motion to dismiss;
or (2) whether Plaintiffs may rebut the BJR presumption as to the Director
Defendants‘ duty of care and defeat Merrill Lynch‘s motion to dismiss by showing
that it is reasonably conceivable that the Director Defendants‘ actions were grossly
negligent.
Merrill Lynch argues that ―[u]nder the business judgment rule, plaintiffs
must ‗show that the board‘s decision cannot be attributed to any rational business
purpose—which, in effect, is the standard for waste under Delaware law.‘‖ 13
Further, in KKR, Chancellor Bouchard stated, ―the legal effect of a fully-informed
13
Merrill Lynch‘s Mot. ¶ 8 (quoting Calma on Behalf of Citrix Sys., Inc. v.
Templeton, 114 A.3d 563, 577 (Del. Ch. 2015)).
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 8
stockholder vote of a transaction with a non-controlling stockholder is that the
business judgment rule applies and insulates the transaction from all attacks other
than on the grounds of waste.‖14
In Corwin, however, although the Supreme Court generally affirmed KKR,
the Court also suggested that ―the gross negligence standard for director due care
liability under Van Gorkom‖ is the proper standard for evaluating ―post-closing
money damages claims.‖15 While the Court in Corwin quotes KKR and a law
review article for the proposition that a fully informed majority vote of
disinterested stockholders insulates directors from all claims except waste in the
explanatory parentheticals of two footnotes,16 the Court itself does not hold that
anywhere in its opinion. And, in In re TIBCO Software, Inc. Stockholders
Litigation, which was issued after Corwin, Chancellor Bouchard, the author of
KKR, denied a motion to dismiss after finding it reasonably conceivable that the
directors had breached their duty of care by acting in a grossly negligent manner,
14
101 A.3d at 1001.
15
2015 WL 5772262, at *6.
16
See id. at *4 nn.13 & 19 (quoting KKR, 101 A.3d at 1001; and William T.
Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function Over Form: A
Reassessment of Standards of Review in Delaware Corporation Law, 56
BUS. LAW. 1287, 1317-18 (2001)).
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 9
despite the absence of any indication that the merger was not approved by a
majority of disinterested stockholders in a fully informed vote.17
Based on the language in Corwin and the approach taken by this Court in
TIBCO, I conclude that when reviewing a board of directors‘ actions during a
merger process after the merger has been approved by a majority of disinterested
stockholders in a fully informed vote, the standard for finding a breach of the duty
of care under BJR is gross negligence. Thus, although I concluded in the Opinion
that it was reasonably conceivable that the Director Defendants breached their duty
of care under a Revlon reasonableness standard, I have reexamined in the context
of the pending Motion the Director Defendants‘ actions to determine whether it is
reasonably conceivable that they were grossly negligent.18 If it is reasonably
conceivable that the Director Defendants breached their duty of care by acting in a
grossly negligent manner, then my conclusion in the Opinion as to Merrill Lynch‘s
17
2015 WL 6155894 (Del. Ch. Oct. 20, 2015).
18
As I noted in Zale, ―[t]he threshold for finding a breach of the duty of care in
the Revlon reasonableness context is lower than in the business judgment
rule context . . . [which] is predicated upon concepts of gross negligence.‖
2015 WL 5853693, at *19 n.106 (citing In re Netsmart Techs., Inc.
S’holders Litig., 924 A.2d 171, 192 (Del. Ch. 2007); and McMullin v.
Beran, 765 A.2d 910, 921 (Del. 2000)).
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 10
aiding and abetting liability would not change. If, however, it is not reasonably
conceivable that the Director Defendants were grossly negligent, then there would
be no predicate fiduciary duty breach for Merrill Lynch to have aided and abetted,
and Merrill Lynch‘s motion to dismiss would be granted.
B. It is not reasonably conceivable that the Director Defendants were
grossly negligent
To support an inference of gross negligence, ―the decision has to be so
grossly off-the-mark as to amount to reckless indifference or a gross abuse of
discretion.‖19 Delaware law instructs that the core inquiry in this regard is whether
there was a real effort to be informed and exercise judgment.20 ―Judicial inquiry
into whether directors have exercised ‗due care‘ in the decision-making context . . .
involves an examination of whether the directors informed themselves, before
‗making a business decision, of all material information reasonably available to
19
Solash v. Telex Corp., 1988 WL 3587, at *9 (Del. Ch. 1988) (internal
citations omitted).
20
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 968 (Del. Ch.
1996) (―Where a director in fact exercises a good faith effort to be informed
and to exercise appropriate judgment, he or she should be deemed to satisfy
fully the duty of attention.‖).
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 11
them.‘‖21 ―In the context of a motion to dismiss, then-Vice Chancellor Strine
explained that gross negligence ‗requires the articulation of facts that suggest
a wide disparity between the process the directors used . . . and [a process] which
would have been rational.‘‖22
In TIBCO, this Court found it reasonably conceivable that the target‘s board
was grossly negligent in the context of a merger price that potentially was
depressed due to an error in several capitalization tables as to the number of
outstanding target company shares.23 Although the target‘s financial advisor
notified the board of the error, it did not notify the board that the acquirer had
relied on the erroneous number of shares in making its bid. After learning of the
error, the board met several times to ―assess and respond to the situation‖—just as
the Director Defendants did after learning of Merrill Lynch‘s presentation to
Signet—but the board did not inquire further with their financial advisor to
21
R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF
CORPORATIONS & BUSINESS ORGANIZATIONS § 4.15 at 4-105 (3d ed. 2013)
(quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)).
22
TIBCO, 2015 WL 6155894, at *23 (emphasis in original) (quoting Guttman
v. Huang, 823 A.2d 492, 508 n.39 (Del. Ch. 2003)).
23
TIBCO, 2015 WL 6155894, at *23-24.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 12
determine if the acquirer had relied on the erroneous share count in making its
bid.24 Thus, Chancellor Bouchard stated:
One rationally would expect, for example, the Board to
press [its financial advisor], which was responsible for
negotiating with potential bidders and interacted directly
with [the acquirer], for a complete explanation
concerning the circumstances of the share count error
(e.g., what caused it, who was responsible, etc.) and for
whatever information it could provide concerning [the
acquirer‘s] understanding of the share count error. . . .
[T]he failure to make such basic inquiries does raise
litigable questions over whether the Board acted in a
grossly negligent manner and thus failed to satisfy its
duty of care during the period between the discovery of
the share count error and closing of the Merger.25
Although the board in TIBCO was exculpated from monetary liability for a breach
of the duty of care due to the 102(b)(7) provision in its charter, the Court found it
reasonably conceivable that the financial advisor aided and abetted the board‘s
duty of care breach by withholding the acquirer‘s reliance on the erroneous share
count in order to increase the odds of the merger being consummated, thereby
earning a significantly larger fee for its services.26
24
Id. at *23.
25
Id.
26
Id. at *24-26.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 13
In this case, I noted in the Opinion that ―[a]rguably, the Board‘s actions as to
Merrill Lynch in this case constitute a breach of the duty of care under a gross
negligence standard as well.‖27 Interestingly, in their opposition to the Motion,
Plaintiffs made no argument that the Director Defendants breached their duty of
care under a gross negligence standard. Unlike the Court in TIBCO, I conclude
that it is not reasonably conceivable that the Zale Director Defendants breached
their duty of care by acting in a grossly negligent manner as to their engagement of
Merrill Lynch.
My finding of reasonable conceivability as to the Director Defendants‘ duty
of care breach in the Opinion was based on Plaintiffs‘ allegations that the Director
Defendants, in examining whether Merrill Lynch would be an appropriate financial
advisor, did no more than: (1) consider internally the possibility that Merrill Lynch
may be conflicted; and (2) rely, without question, on Merrill Lynch‘s
representations that it had ―limited prior relationships [with Signet] and no
conflicts.‖28 ―Because of the central role played by investment banks in the
evaluation, exploration, selection, and implementation of strategic alternatives,
27
Zale, 2015 WL 5853693, at *19 n.106.
28
Id. at *19.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 14
directors must act reasonably to identify and consider the implications of the
investment banker‘s compensation structure, relationships, and potential
conflicts.‖29 Whereas in TIBCO the Court focused on the board‘s duty to
investigate and inquire further after the disclosure of the share count error, the
focus of the inquiry in this case was on whether the Director Defendants
discharged their duty of care when they first engaged Merrill Lynch.
The key issues in evaluating a duty of care claim under the gross negligence
standard are ―whether there was a real effort to be informed and exercise
judgment‖30 and ―whether the directors informed themselves . . . of all material
information reasonably available to them.‖31 The conduct of Merrill Lynch in this
case is troubling, and it was disclosed only belatedly to the Zale Board. I noted in
the Opinion that it is reasonable to expect directors to take additional steps to
obtain information material to the evaluation of their financial advisors‘
independence, such as by ―negotiating for representations and warranties in the
engagement letter as well as asking probing questions to determine what sorts of
29
In re Rural Metro Corp., 88 A.3d 54, 90 (Del. Ch. 2014).
30
Caremark, 698 A.2d at 968.
31
BALOTTI & FINKELSTEIN, supra note 21 § 4.15 at 4-105.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 15
past interactions the advisor has had with known potential buyers.‖32 Based on
Merrill Lynch‘s conduct, I am not inclined to modify that statement. In addition,
had Merrill Lynch disclosed the Signet presentation to the Board up front, it would
have better served the Zale stockholders and probably still could have obtained the
engagement.
In any event, I referenced the additional steps mentioned above in the Revlon
context addressed in the Opinion. Applying a gross negligence standard, I do not
find it reasonably conceivable that the Director Defendants‘ conduct amounted to
―reckless indifference or a gross abuse of discretion‖ or that the facts ―suggest
a wide disparity between the process the directors used . . . and [a process] which
would have been rational.‘‖33 I conclude, therefore, that the Complaint fails to
allege adequately that the Director Defendants breached their duty of care under a
gross negligence standard. Because there is no basis for a predicate fiduciary duty
breach, the Complaint also fails to allege that Merrill Lynch aided and abetted such
a breach.
32
Id.
33
See supra notes 19-22 and accompanying text.
In re Zale Corporation Stockholders Litigation
Civil Action No. 9388-VCP
October 29, 2015
Page 16
V. Conclusion
For the foregoing reasons, the Motion is granted. Accordingly, I have
reconsidered my Opinion in the context of this request for reargument. The
Complaint provides no basis for a showing of waste. Assuming that under Corwin
the gross negligence standard for a duty of care breach under BJR would apply,
Plaintiffs have not alleged sufficient facts to make it reasonably conceivable that
the Director Defendants breached their duty of care. As a result, I dismiss the
Complaint with prejudice as to the aiding and abetting claim against Merrill Lynch.
The Opinion is hereby amended in a manner consistent with this Letter Opinion.
IT IS SO ORDERED.
Sincerely,
/s/ Donald F. Parsons, Jr.
Donald F. Parsons, Jr.
Vice Chancellor
DFP/ptp