IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE EBIX, INC. : CONSOLIDATED
STOCKHOLDER LITIGATION : C.A. No. 8526-VCN
MEMORANDUM OPINION AND ORDER
Date Submitted: June 10, 2015
Date Decided: January 15, 2016
Michael Hanrahan, Esquire, Paul A. Fioravanti, Jr., Esquire, Kevin H. Davenport,
Esquire, Eric J. Juray, Esquire, and John G. Day, Esquire of Prickett, Jones &
Elliott, P.A., Wilmington, Delaware; Stuart M. Grant, Esquire and Michael J.
Barry, Esquire of Grant & Eisenhofer P.A., Wilmington, Delaware; and
Michael A. Wagner, Esquire of Kessler Topaz Meltzer & Check, LLP, Radnor,
Pennsylvania, Attorneys for Plaintiffs.
Samuel A. Nolen, Esquire, Catherine G. Dearlove, Esquire, Susan M. Hannigan,
Esquire, and Christopher H. Lyons, Esquire of Richards, Layton & Finger, P.A.,
Wilmington, Delaware; Charles W. Cox, Esquire of Alston & Bird LLP, Los
Angeles, California; and John A. Jordak, Jr., Esquire of Alston & Bird LLP,
Atlanta, Georgia, Attorneys for Defendants.
NOBLE, Vice Chancellor
I. INTRODUCTION
Over two years ago, a corporation attempted to complete a going-private
merger with a financial partner. Within roughly one month of the participants’
announcement of a merger agreement, a dozen lawsuits had been filed and
consolidated into the present action. Just as the wheels of discovery began to turn,
however, the merger was abandoned. With a sort of Darwinian resilience, this
litigation survived this development, as well as several motions to dismiss, through
persistent evolution.1 The present motion to dismiss challenges the third iteration
of Plaintiffs’ consolidated complaint.
This latest complaint asserts claims—some old, some new—based on
conduct that occurred both before the abandoned merger and more than a year after
it. In particular, plaintiffs challenge three classes of conduct: (1) directors’
disclosures about, as well as the adoption and maintenance of, certain executive
compensation agreements; (2) a series of corporate actions directors took in 2014
with an alleged intent to entrench; and (3) disclosures made in a proxy statement
issued in advance of the corporation’s 2014 annual meeting. Defendants have
1
The first consolidated complaint was filed June 17, 2013. In response to two
motions to dismiss filed on July 1, 2013, plaintiffs filed a second consolidated
complaint (“Amended Complaint”) on August 27, 2013. That complaint
withstood, in part, a motion to dismiss filed September 26, 2013. The third
consolidated complaint, the Verified Second Amended and Supplemented Class
Action and Derivative Complaint (“Second Amended Complaint,” “Complaint,” or
“Compl.”), the one the present motion challenges, was filed January 16, 2015.
1
moved to dismiss on the grounds that two settlements approved by the United
States District Court for the Northern District of Georgia extinguished the Second
Amended Complaint’s counts related to executive compensation, certain claims are
moot, and remaining counts fail under Court of Chancery Rule 12(b)(6). For
reasons that follow, the motion is granted in part and denied in part.
II. BACKGROUND
This section assumes the reader’s familiarity with this Court’s July 24, 2014
memorandum opinion (the “July 2014 Opinion”) that describes an appreciable
portion of facts relevant to the present motion.2 The Court cautions, however, that
the facts stated in that opinion derive from an earlier complaint (the “Amended
Complaint”) that is not the operative complaint that Defendants now attack, the
Second Amended Complaint.3 Further, the Second Amended Complaint updates
facts alleged in the Amended Complaint and subsequently described in the July
2014 Opinion.4 These differences only concern conduct that occurred during and
before 2013 and, more importantly, do not affect the following analysis.
Accordingly, this section only describes new factual allegations in the Second
2
See In re Ebix, Inc. S’holder Litig., 2014 WL 3696655 (Del. Ch. July 24, 2014).
3
Co-lead Plaintiffs in this action are Desert States Employers & UFCS Union
Pension Plan (“Desert States”) and Gilbert C. Spagnola. Compl. at 1; see id.
¶¶ 11–12.
4
For example, the July 2014 Opinion states that Robin Raina, Ebix’s Chairman
and Chief Executive Officer, and Raina’s foundation owned approximately 9.3%
of Ebix’s stock as of June 2013. Ebix, 2014 WL 3696655, at *2. The Second
Amended Complaint provides a 9.9% figure accurate as of 2014. Compl. ¶ 14.
2
Amended Complaint that are not mere updates—i.e., post-2013 facts—as well as
new, relevant facts outside the Second Amended Complaint that the Court may
properly consider on a motion to dismiss.5
A. The Federal Securities Class Action Settlement and the
Federal Derivative Action Settlement
The Second Amended Complaint contains six counts: the first three
challenge pre-2013 conduct and the following three challenge 2014 conduct.
Defendants6 now argue that two settlements approved by the Northern District of
Georgia contain releases that extinguish Counts I–III. This section prefaces
discussion of those settlements by briefly summarizing Counts I–III.
The Second Amended Complaint’s first three counts concern three
documents that either describe or purport to create certain executive compensation
arrangements that Ebix, Inc. (“Ebix”) entered into in 2009 and 2010: (1) an
Acquisition Bonus Agreement (“ABA”) authorized in 2009, (2) a 2010 Stock
Incentive Plan (the “2010 Plan”), and (3) a proxy statement issued before Ebix’s
5
On a motion to dismiss under Court of Chancery Rule 12(b)(6), the Court may
consider “allegations in the Complaint, the documents integral to the Complaint,
and those matters as to which the Court may take judicial notice under Delaware
Uniform Rules of Evidence Rules 201 and 202.” Metro. Life Ins. Co. v. Tremont
Gp. Hldgs., Inc., 2012 WL 6632681, at *12 (Del. Ch. Dec. 20, 2012) (taking
judicial notice of “documents filed of record in [an action in the United States
District Court for the Southern District of New York] that are not likely to be in
dispute.”).
6
Defendants in this action are Ebix and Ebix’s board of directors. Compl. ¶¶ 13–
19.
3
2010 annual meeting (the “2010 Proxy Statement”) in which Ebix’s board of
directors (the “Board”) recommended approval of the 2010 Plan. In Count I,
Plaintiffs challenge the Board members’ maintenance of the ABA as a breach of
their fiduciary duties because, in Plaintiffs’ view, the ABA is an unreasonable
antitakeover device by virtue of the payments it authorizes in the event of an
acquisition. In Count II, Plaintiffs challenge the 2010 Proxy Statement as
materially misleading and incomplete. And in Count III, Plaintiffs challenge the
Board members’ disbursement of incentive compensation to themselves under the
2010 Plan as a breach of fiduciary duties. These alleged facts and accompanying
legal theories overlap with those that animated the two federal actions to some
disputed extent.
In the first federal action, filed on November 28, 2011 (the “Federal
Securities Class Action”), representative plaintiffs brought class action claims
against Ebix and two individuals—Robin Raina, who served as Ebix’s CEO,
President, and Chairman of the board, and Robert Kerris, who served as Ebix’s
CFO—for making “materially false and misleading statements [between May 6,
2009 and June 30, 2011] in press releases, analyst conference calls, and filing [sic]
with the U.S. Securities and Exchange Commission (“SEC”)” in violation of
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as well as
4
Rule 10b-5.7 In particular, the complaint alleged that defendants had artificially
inflated Ebix’s stock price by misrepresenting certain financial figures and
obscuring both the absence of adequate internal controls and the company’s
participation in a “sham tax strategy.”8 Accordingly, plaintiffs sought relief for a
class of persons who bought Ebix’s stock when its price was artificially high and
suffered economic harm when the price subsequently fell.9
The parties to the Federal Securities Class Action later submitted a
stipulation of settlement (“Federal Securities Class Action Settlement”) for the
district court’s approval.10 On June 11, 2014, the court approved the settlement
and certified a class of “all Persons who purchased the common stock of Ebix,
between May 6, 2009 and June 30, 2011, inclusive and who were damaged
thereby,” excluding defendants and certain affiliates, under Federal Rule of Civil
Procedure 23.11 Gilbert Spagnola, an Ebix shareholder who is one of the co-lead
Plaintiffs in this action,12 opted out of the Federal Securities Class Action
7
Transmittal Affidavit of Christopher H. Lyons, Esq. (“Lyons Aff.”) Ex. F
(Federal Securities Class Action Compl.) ¶¶ 1–7, 11–17, 263–77. See infra
Part III.A.1 for discussion on this Court’s ability to consider items in the federal
docket in the context of this motion to dismiss.
8
Federal Securities Class Action Compl. at 18, 45, 53; id. ¶¶ 137, 271.
9
Id. at 149–50; id. ¶¶ 19–24.
10
Lyons Aff. Ex. C (Federal Securities Class Action Settlement); Lyons Aff. Ex. A
(Federal Securities Class Action Order).
11
Federal Securities Class Action Order ¶¶ 3–5.
12
Compl. at 1.
5
Settlement by timely requesting exclusion from the class.13 As part of the
settlement, the court-appointed lead plaintiff and each class member discharged all
“Released Claims,”14 which the stipulation broadly defined as:
[A]ny and all rights, demands, claims (including “Unknown Claims”
as defined below), liabilities, suits, debts, obligations, damages,
losses, judgments, matters, issues, and causes of action of every nature
and description, in law or equity, whether accrued or unaccrued, fixed
or contingent, liquidated or un-liquidated, matured or un-matured,
known or unknown, discoverable or undiscoverable, concealed or
hidden, disclosed or undisclosed, whether arising under federal, state,
local, statutory, common law, foreign law, or any other law, rule, or
regulation, and whether class and/or individual in nature, that Lead
Plaintiff or any Member of the Class asserted, could have asserted, or
in the future could or might have asserted in this Litigation or any
other action, court, tribunal, proceeding, or forum against any of the
Released Persons arising out of, in connection with, or in any way
relating to, directly or indirectly, the purchase, acquisition, holding, or
sale of Ebix common stock during the Class Period or the acts, facts,
matters, allegations, representations, transactions, events, disclosures,
statements or omissions that were or could have been alleged or
asserted in the Litigation.15
In its final judgment and order, however, the district court clarified that “Released
Claims” only include claims that “arise out of the identical factual predicate as the
claims settled in this action.”16 The order cites two cases—Thomas v. Blue Cross
13
Federal Securities Class Action Order ¶ 6, Ex. A.
14
Id. ¶ 6.
15
Federal Securities Class Action Settlement ¶ 1.21.
16
Federal Securities Class Action Order ¶ 6 n.1. Desert States objected to the
settlement in the Federal Securities Class Action “on the ground that the Proposed
Settlement may release completely unrelated claims currently being litigated in”
this action. Lyons Aff. Ex. G 1–2. After conducting a fairness hearing at which
Desert States appeared, the Northern District approved the settlement over Desert
6
& Blue Shield17 and TBK Partners Ltd. v. Western Union Corp.18—as authority for
that proviso.19
The second federal action, filed in the same court on May 20, 2013 (the
“Federal Derivative Action”), brought both derivative and class action claims
against Kerris and the Board (including Raina), and on behalf of Ebix as nominal
defendant.20 As with the Federal Securities Class Action, the Federal Derivative
Action took issue with certain disclosures transmitted between May 2009 and June
2011 that, in plaintiffs’ view, “falsely portrayed the financial condition of the
Company.”21 Further, the complaint asserted that because several proxy
statements, including the 2010 Proxy Statement, “contained false and misleading
statements regarding Ebix’s corporate governance, risk management, and the
accuracy of Ebix’s financial statements,”22 equitable relief was appropriate,
including “an order invalidating the shareholder vote on the [2010 Plan].”23 In
States’ objection but modified its terms to add the above-quoted proviso. See
Lyons Aff. Ex. I; Day Aff. Ex. C 17–18. Desert States did not opt out of that
settlement. See Federal Securities Class Action Order ¶ 6, Ex. A.
17
333 F. App’x 414, 420 (11th Cir. 2009).
18
675 F.2d 456, 460 (2d Cir. 1982).
19
Federal Securities Class Action Order ¶ 6 n.1.
20
Lyons Aff. Ex. E (Federal Derivative Action Compl.) ¶¶ 22–30.
21
Id. at 4.
22
Id. ¶¶ 137–39.
23
Id. at 72; see also id. ¶ 138 (“The misrepresentation [sic] and omissions in the
2010, 2011, and 2012 Proxy Statements were material and were an essential link in
the reelection of the Individual Defendants, the ratification of CBH as Ebix’s
7
addition to disclosure-based claims, the Federal Derivative Action asserted that
Ebix’s directors breached their fiduciary duties in at least two ways: (1) causing
Ebix to commit waste by commencing a stock repurchase while its stock price was
artificially inflated24 and (2) pressing the Abandoned Merger forward for self-
interested purposes, including avoiding “personal liability arising from their
participation in the illegal conduct which is at issue in the derivative litigation
already pending against the [board]”25 and “reaping massive financial benefits for
themselves.”26 The complaint also noted that Ebix’s sale would net Raina “tens of
millions of dollars from a change-in-control bonus,” a larger ownership stake in
Ebix, and continued employment as CEO.27
Parties to the Federal Derivative Action eventually agreed to a stipulated
settlement (the “Federal Derivative Action Settlement”)28 that the district court
approved in a final order and judgment issued December 2, 2014.29 Although
plaintiffs had designated several counts in the complaint as class claims, the order
expressly approved the settlement pursuant to Federal Rule of Civil Procedure 23.1
auditor, approval of the Stock Incentive Plan, and approval of the 2010 and 2011
executive officer compensation plan, as alleged herein.”).
24
Id. ¶ 126.
25
Id. ¶¶ 142–43.
26
Id. ¶ 13.
27
Id. ¶¶ 24, 95.
28
Lyons Aff. Ex. D (Federal Derivative Action Settlement).
29
Lyons Aff. Ex. B (Federal Derivative Action Order).
8
and found that notice of the proposed settlement was sufficient under that rule.30
Further, the parties discharging the so-termed “Released Claims” were two
representative plaintiffs31 “acting on their own behalf and derivatively on behalf of
Ebix,” Ebix, and “each Ebix stockholder.”32
This time, “Released Claims” were defined as:
[A]ny and all claims or causes of action (including Unknown Claims),
debts, demands, disputes, rights, suits, matters, issues, damages,
obligations, or liabilities of any kind, nature, and/or character
whatsoever (including, but not limited to, any claims for damages,
interest, attorneys’ fees, expert, or consulting fees, and any and all
other costs, expenses, or liabilities whatsoever), whether known or
unknown, whether under federal, state, local, statutory, common law,
foreign law, or any other law, rule, or regulation, whether fixed or
contingent or absolute, accrued or unaccrued, liquidated or
unliquidated, at law or in equity, matured or unmatured, discoverable
or undiscoverable, concealed or hidden, asserted, or that have been
could or might have been, or in the future might be asserted by
Plaintiffs (both individually and derivatively on behalf of Ebix), Ebix,
or Ebix’s Stockholders, or any of them, against the Released Persons
based upon, arising out of, or related to (a) the facts, transactions,
events, occurrences, disclosures, statements, alleged mismanagement
and/or misconduct, acts, omissions, or failures to act, statement,
concealment, misrepresentation, sale of stock, violation of law, or
other matter which was or could have been alleged in or encompassed
by the Actions, regardless of upon what legal theory based, including,
without limitation, claims for negligence, gross negligence,
recklessness, fraud, breach of fiduciary duty, breach of duty of care
and/or loyalty, or violations of the common law, administrative rule or
30
See id. ¶¶ 3, 7.
31
See id. ¶ 5; Federal Derivative Action Settlement ¶¶ 1.9, 1.16, 1.28 (defining the
term “Plaintiffs”).
32
Federal Derivative Action Order ¶ 5. As is discussed below, however, “Released
Claims” do not include direct claims of Ebix stockholders; only derivative ones.
See infra Part III.A.2.
9
regulation, tort, contract, equity, or otherwise of any state or federal
statutes, rules, regulations, or common law, or the law of any foreign
jurisdiction; or (b) the defense or Settlement of the Actions and or the
Released Claims, including the payments provided herein. Nothing
set forth herein shall constitute a release by or among the Company
and the Individual Defendants or Released Persons of the rights and
obligations relating to indemnification and advancement of defense
costs arising from the Company’s or any of its subsidiary’s,
division’s, or related or affiliated entity’s certificate of incorporation
or bylaws, Delaware law, or any indemnification agreement or similar
agreement. For purposes of clarity, and without narrowing the
scope of the releases provided herein, “Released Claims” only
include those claims that can be released under applicable law.
See, e.g., Thomas v. Blue Cross & Blue Shield, 333 Fed. App’x 414,
420 (11th Cir. 2009). Nothing set forth herein shall constitute a
release by the Settling Parties of any rights or obligations to enforce
the terms of the Settlement embodied in this Stipulation.33
The Federal Derivative Action Order repeated the stipulation’s disclaimer that
“Released Claims only include those claims that can be released under applicable
law,” before citing the same Thomas v. Blue Cross & Blue Shield case.34
B. The 2014 Corporate Actions
After this Court’s July 2014 Opinion constrained Plaintiffs’ ability to
challenge pre-2014 conduct by dismissing certain claims, Plaintiffs amended their
complaint to include two new counts (Counts IV and V) based on actions
Defendants took between August and December, 2014, and a third new count
(Count VI) based on disclosures made in a proxy statement issued in advance of
Ebix’s 2014 annual meeting (the “2014 Proxy Statement”). Counts IV and V
33
Federal Derivative Action Settlement ¶ 1.20 (emphasis added).
34
Federal Derivative Action Order ¶ 5 n.1.
10
challenge three actions in particular: (1) Ebix’s execution of a Credit Agreement
containing a “proxy put” provision (the “Proxy Put”), (2) Ebix’s entry into a
Director Nomination Agreement with a dissenting shareholder, and (3) the Board’s
unilateral adoption of a bundle of bylaws (together, the “2014 Corporate Actions”).
Plaintiffs characterize each action as an “entrenchment device”35—that is, a
mechanism the directors endorsed because of its functional capacity to help them
maintain control of the company or otherwise keep their jobs. This conjecture
drives Count IV’s assertion that the Board’s approval of each 2014 Corporate
Action amounts to a breach of fiduciary duty.36 Count V asserts that the Bylaw
Amendments are invalid.37
The first 2014 Corporate Action Plaintiffs challenge is the Board’s adoption
of the Credit Agreement containing the Proxy Put. On August 5, 2014, Ebix,
certain Ebix subsidiaries, and various lenders executed a Credit Agreement for a
$150 million credit facility.38 A Proxy Put provision in that agreement enabled
lenders to accelerate repayment if a majority of incumbent directors were replaced
with persons either the incumbents did not approve or who received a nomination
35
E.g., Compl. ¶ 73.
36
Id. ¶ 133 (asserting that the board’s “adoption of additional anti-takeover devices
warrants strict scrutiny”).
37
Id. ¶ 136.
38
Id. ¶ 74.
11
due to an actual or threatened proxy contest.39 Recent amendments to the Credit
Agreement, however, removed the Proxy Put.40
The second challenged action took place shortly after November 11, 2014,
the date on which an activist shareholder, Barrington Capital Group, L.P.
(“Barrington”), conveyed an intent to replace four of Ebix’s six directors.41 That
shareholder sent a letter to Raina attributing Ebix’s low stock price to pending
39
Id. ¶¶ 74–75.
40
Lyons Aff. Ex. J (Feb. 2015 Form 8-K) Ex. 10.1 § 2(a). This fact is not in
dispute. See Opening Br. in Supp. of Defs.’ Mot. to Dismiss the Second Am.
Compl. (Opening Br.) 25–27; Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to
Dismiss (Answering Br.) 8 (conceding that “Defendants have since mooted this
claim by removing the proxy put”). On a motion to dismiss, the Court may
consider “uncontested factual admissions of the parties contained in the record.”
Berger v. Intelident Solutions, Inc., 911 A.2d 1164, 1166 n.1 (Del. Ch. 2006).
41
See Compl. ¶¶ 78, 81, 103. Relevant passages in the Second Amended
Complaint do not clearly indicate whether Barrington’s plan was to replace four
incumbents, place four new directors on the board by adding seats, or otherwise
gain control of four board seats through some combination of the two. This detail
matters, of course, because the first scenario would win Barrington majority
control of Ebix’s six-member Board, while the second would not and third might
not. The ambiguity arises because the Second Amended Complaint describes
Barrington’s announcement as conveying a plan to “propose four new directors” or
“place four independent directors to the Ebix Board”—neither of which clearly
denotes replacement. Id. ¶¶ 78, 103. The Complaint does, however, state that
Barrington had “announced a proxy contest” and characterizes Barrington’s
actions—albeit in conclusory fashion—as amounting to a “threat to [the Board’s]
control of Ebix.” See id. ¶¶ 10, 81. These allegations, viewed in a light most
favorable to Plaintiffs, permit a logical inference that Barrington planned to win
majority control of Ebix’s Board by replacing incumbents with independent
nominees. See In re Gen. Motors S’holder Litig., 897 A.2d 162, 168 (Del. 2006)
(stating the well-established rule that, in the context of a Rule 12(b)(6) proceeding,
a trial court need not accept “every strained interpretation of the allegations
proposed by the plaintiff,” but rather must “draw reasonable inferences in the
plaintiff’s favor”).
12
litigation and investigations, poor financial reporting, substandard corporate
governance and a lack of independent directors, and the Abandoned Merger.42
Further, Barrington recommended termination of the ABA, which the letter
characterized as “egregious.”43 Barrington indicted the ABA’s “extremely
depressed base price,” capacity to be triggered whether or not Raina remained
employed by Ebix, functional grant to Raina of a de facto “personal veto” over
acquisition offers, and contribution to Raina’s ability to negotiate favorable terms
for himself before the 2013 merger was abandoned.44
On November 26, 2014, Ebix entered into a Director Nomination Agreement
with Barrington that contemplated expanding Ebix’s six-member board to eight,
filling the two new seats with Barrington designees, and renominating all six
incumbents. It further obligated the Board to support the two Barrington designees
and pay Barrington $140,000, and required Barrington to withdraw its prior
nominees and vote its shares in favor of Ebix’s six renominated incumbents.45
Further, Barrington relinquished the ability to engage in certain forms of dissenting
conduct during an extendable “standstill period.”46 During this period, Barrington
must vote all of its stock for the Board’s nominees and in harmony with Board
42
Compl. ¶ 78.
43
Id. ¶ 79.
44
Id. ¶¶ 79–80.
45
Id. ¶ 81.
46
Id. ¶¶ 81, 83.
13
recommendations on matters that include advisory executive compensation votes,
as well as refrain from soliciting proxies, presenting proposals, or initiating
litigation.47 The standstill period lasted until the earlier of ninety days before
Ebix’s 2015 annual meeting and ten days before any advance notice deadline for
making director nominations.48 Ebix could extend this period to an equivalent time
frame surrounding the 2016 annual meeting, however, by recommending or
committing to recommend re-election of Barrington’s designees.49
The third subset of challenged conduct is Defendants’ adoption of a series of
bylaws (the “Bylaw Amendments”) that had been prepared on November 17, 2014
and adopted on December 19, 2014.50 A December 1, 2014 Form 8-K discloses
Ebix’s entry into the Director Nomination Agreement, but no “other planned
defensive measures.”51 Nor did a number of other intermediate disclosures
mention the Bylaw Amendments, including a December 1, 2014 Joint Press
Release of Barrington and Ebix, a December 16, 2014 notice of annual meeting,
and the 2014 Proxy Statement.52 The disclosure revealing the amendments, a
47
Id.
48
Id. ¶ 83.
49
Id.
50
Id. ¶ 84.
51
Id. ¶ 85.
52
Id. ¶¶ 84–85.
14
December 24, 2014 Form 8-K, was not sent to stockholders.53 The bylaws
implement various reforms as described below.
A “Special Meeting Bylaw” regulates stockholders’ ability to call and
conduct business at special meetings. It provides that, in the event stockholders
owning 10% of Ebix’s stock request a special meeting, Ebix’s Board will
determine the meeting’s location and schedule the meeting for a date no later than
120 days after the request.54 Stockholders submitting the request must describe the
business to be conducted, provide the text of any resolutions, agree that disposition
of shares before the record date “revokes the special meeting request as to those
shares,” update information previously provided within five days of the record
date, and provide other information reasonably requested by Ebix.55 The Board
may add its own matters to the agenda and a Board member sitting as the special
meeting’s chairman conducts the meeting, decides what business is properly before
the meeting, and decides whether to adjourn.56 Finally, the Board can deny a
special meeting request for seven reasons, including (1) if the request is made
“during the period from 120 days prior to the anniversary of the last annual
meeting through the earlier of the next annual meeting or 30 days after that
anniversary”; (2) if, in the Board’s judgment, a “Similar Item” not including the
53
Id.
54
Id. ¶ 86.
55
Id.
56
Id.
15
election of directors was raised at a meeting within twelve months before the
request or a “Similar Item” including an election of directors was presented within
120 days before the request; and (3) if a “Similar Item” appears in the notice “of an
annual or special meeting that has been called but not yet held or that is called for a
date within 120 days of the request.”57 These requirements are said to enable the
Board to prevent stockholders from ever electing directors at a special meeting.58
The “Control of Meeting Bylaw” gives a meeting chairman—either the
Chairman of the Board or the Board’s designee—discretionary authority over how
the meeting is run.59 The meeting chairman has authority over who may attend, as
well as opening and closing of the polls.60
The “Advance Notice Bylaws” impose certain conditions on a stockholder’s
ability to make a proposal or nominate a director. Two features of these bylaws
are noteworthy: timing requirements and information requirements. First, the
Advance Notice Bylaws create, in certain circumstances, a 30-day window during
which stockholders must give notice of proposals and nominations. That is, if the
annual meeting is called to occur on a date within 25 days of the 1-year
57
Id. ¶ 87 (internal quotation marks omitted).
58
Id. ¶ 89. This result does not automatically obtain. However, Plaintiffs allege
that it might if the Board implements the Special Meeting Bylaw’s terms, as stated
in the Second Amended Complaint, in a strategic manner. The pleadings can be
reasonably read as supporting that comparatively modest inference.
59
Id. ¶ 95.
60
Id.
16
anniversary of the previous annual meeting, a stockholder’s notice of a proposal or
director nomination “must be received not fewer than 90 days nor more than
120 days prior to that anniversary.”61 Ebix may then postpone or adjourn the
meeting.62 Second, a stockholder seeking to make a proposal or nomination must
disclose certain information about whether and the extent to which that
stockholder, its nominee, and/or certain affiliated parties have (i) entered into any
transaction, such as an option or short interest, “with respect to” Ebix stock, or
(ii) any other arrangement, such as a short position, made to manage risk or
increase or decrease voting power or economic interest.63 Further, stockholders
providing such notice must update and supplement information they provide.64
The chairman of the meeting may decide to bar presentation of a stockholder
proposal or nominee, as well as decide whether the bylaws are satisfied.65
The “Consent Bylaw” requires a stockholder seeking action by consent to
request the Board to specify a record date. The Board then has 10 days from
receipt of that request to set a record date.66 Because the Board may fix a record
date occurring up to 10 days after it decides to pass the resolution setting that date,
61
Id. ¶ 93.
62
Id.
63
Id. ¶ 94.
64
Id. ¶ 95.
65
Id.
66
Id. ¶ 97.
17
the Consent Bylaw allows action by stockholder consent to be delayed up to
20 days.67
The “Indemnification Bylaw” bars “advancement or indemnification of any
director who brings an action against the Corporation, including a counterclaim for
contribution.”68
C. The 2014 Proxy Statement
The last new claim the Second Amended Complaint levies is Count VI’s
assertion that the Board members breached their fiduciary duties by “issuing the
materially misleading and incomplete 2014 Proxy Statement.”69 The 2014 Proxy
Statement was issued on December 16, 2014 (three days before the Board adopted
the Bylaw Amendments) and set a record date of November 13, 2014 for the next
annual meeting (the “2014 Annual Meeting”), which was scheduled for January 9,
2015.70 At the 2014 Annual Meeting, Ebix stockholders were to vote on certain
issues, including the proposed reelection of directors and advisory say-on-pay.71
The 2014 Proxy Statement allegedly makes the following misstatements and
omissions:
67
Id.
68
Id. ¶ 98.
69
Id. ¶ 139.
70
Id. ¶¶ 84, 99.
71
See id. ¶¶ 99, 104; id. at 2, 68.
18
Does not mention the Proxy Put or any implications adding Barrington’s
designees would have on triggering the Proxy Put;72
Describes the Director Nomination Agreement, but does not describe
Barrington’s letter, Barrington’s plan to propose four new directors, or the
Bylaw Amendments;73
Provides information on Raina’s compensation between 2011 and 2013, but
not 2014;74
Discloses Raina’s receipt of a $1.2 million retention bonus designed to keep
him aboard through the 2013 Abandoned Merger, but obscures other details
about what Raina bargained for during negotiations, such as the fact that he
would receive a larger equity interest;75
Provides procedural guidance in apparent tension with Ebix’s bylaws.76
72
Id. ¶ 101.
73
Id. ¶¶ 102–03.
74
Id. ¶ 104.
75
Id. ¶ 104.
76
Id. ¶ 106. Plaintiffs allege that the 2014 Proxy Statement’s procedural guidance
is incorrect in three ways. First, the Complaint asserts that it provides incorrect
information concerning the date by which nominations for the 2015 annual
meeting must be received. As of December 16, 2014, Ebix’s bylaws contained no
advance notice bylaw. Three days later, the newly-enacted Advance Notice Bylaw
required that notice of nominations and proposals be given within a certain thirty-
day window. In Plaintiffs’ view, the 2014 Proxy Statement’s directive that
nominations “must be received by August 15, 2015” comports with neither bylaw
regime. Second, Plaintiffs assert that the 2014 Proxy Statement’s claim that “[t]he
Board applies the same standards in considering candidates submitted by
stockholders as it does in evaluating candidates submitted by members of the
19
In light of these disclosures, Plaintiffs seek a declaration from this Court that the
2014 Proxy Statement is materially misleading and incomplete and that actions
approved at the 2014 Annual Meeting, including the election of directors, are
invalid, as well as an order requiring Ebix to hold a new annual meeting at which
stockholders may make nominations and proposals.77
III. DISCUSSION
Defendants’ motion to dismiss raises three principal questions. First, do the
settlements approved by the United States District Court for the Northern District
of Georgia extinguish some or all of the claims presented in Counts I–III? Second,
do Plaintiffs’ various challenges to the 2014 Corporate Actions as improper
entrenchment devices fail as moot or under Court of Chancery Rule 12(b)(6) for
failure to state a claim? Finally, does Plaintiffs’ assertion that the 2014 Proxy
Statement contains materially false and misleading disclosures fail under
Rule 12(b)(6)? Each is addressed in turn.
Board” conflicts with the Advance Notice Bylaws. Third, the Complaint
challenges deadlines the 2014 Proxy Statement provides by which stockholders
must submit proposals under Rule 14a-8 and 14a-4(c); complying with these
deadlines, argue Plaintiffs, “would appear to render the stockholder’s proposals
invalid under the Advance Notice Bylaws.” Id. ¶ 106. Some of these allegations
are factual and others are conclusory. It is not necessary to make those
classifications at this juncture.
77
Id. at 68.
20
A. The Effect of the Federal Settlements on Plaintiffs’ Claims
Because the releases in both the Federal Securities Class Action Settlement
and the Federal Derivative Action Settlement contain broadly inclusive language,
Defendants argue that each precludes claims asserted in this action. Plaintiffs
counter with five arguments: (1) Defendants cannot raise the affirmative defense of
release in the context of this Rule 12(b)(6) motion; (2) the Federal Derivative
Action Settlement cannot release any of Plaintiffs’ class claims due to a black-
letter law preventing derivative settlements from releasing class claims; (3) neither
release has the legal capacity to release Plaintiffs’ claims in light of applicable law
prohibiting settled claims from releasing class claims that are not based on an
identical factual predicate; (4) the Federal Securities Class Action Settlement does
not apply to Spagnola and other unspecified class members in this action because
this action’s putative class diverges from the class certified in the Federal
Securities Class Action; and (5) the releases in fact fail to extend to certain claims
because the parties did not intend them to.
This section assesses the effect of the federal settlements by proceeding in
that order. This Opinion does not address arguments (4) or (5), however, because
conclusions reached upon consideration of argument (3) render that exercise
unnecessary.
21
1. Whether Defendants May Raise a Defense of Release
in the Context of this Motion to Dismiss
Plaintiffs’ first argument attempts to avoid Defendants’ release defense in its
entirety by asserting that this Court may not consider that defense’s factual bases—
neither the settlement documents themselves nor the various public filings and
letters Defendants have also proffered—given this proceeding’s procedural
posture. According to Plaintiffs, relevant precedent teaches that if the factual bases
for affirmative defenses asserted through a motion to dismiss are not
“incontrovertibly established by” the pleadings, the tribunal may deny the motion.
Accordingly, Plaintiffs argue that dismissal is inappropriate here because the
Second Amended Complaint makes no mention of any document—most notably,
the releases themselves—upon which Defendants rely. Plaintiffs further argue that
Defendants’ attempt to use these documents converts their motion to dismiss into a
motion for summary judgment, thereby warranting rejection of Defendants’ motion
to afford Plaintiffs the chance for discovery. Plaintiffs’ construction of applicable
law, however, is too narrow.
Ordinarily, “the existence of a release is an affirmative defense that must be
asserted in a responsive pleading.”78 Nonetheless, this Court has, on multiple
occasions, considered releases in deciding motions to dismiss where the complaint
78
Seven Invs., LLC v. AD Capital, LLC, 32 A.3d 391, 396 (Del. Ch. 2011); see
also Ct. Ch. R. 8(c).
22
referenced or otherwise relied upon the release at issue.79 Courts in those cases did
not, however, explicitly consider the conceptually distinct question posed here:
whether the Court may consider a release in the event the complaint fails to
reference it at all.
The answer to that question is a qualified “yes” for the simple reason that the
decisions referenced above are properly read as following a broader rule of law
which this Court has previously explained as follows:
Court of Chancery Rule 12(b) provides that if “matters outside the
pleading are presented to and not excluded by the Court, the motion
[under Rule 12(b)(6)] shall be treated as one for summary judgment
and disposed of as provided in Rule 56.” If purportedly extraneous
matter is presented, Rule 12(b) implies that the Court may, sua sponte,
exclude it and hear the motion to dismiss, consider it and convert the
motion into one for summary judgment, or conclude it is not
extraneous but rather integral to the claims and then proceed with the
motion to dismiss. Indeed, this Court frequently does determine these
issues sua sponte in its disposition of the underlying motion.80
79
See, e.g., Seven Invs., 32 A.3d at 396. (“The General Release nevertheless can
be considered on a 12(b)(6) motion because the Complaint incorporates the
Termination Agreement by reference.”); see also Canadian Commercial Workers
Indus. Pension Plan v. Alden, 2006 WL 456786, at *2 n.9, (Del. Ch. Feb. 22, 2006)
(“The Court may consider the Release in deciding a motion to dismiss because the
Complaint makes reference to it.”).
80
In re Gardner Denver, Inc., 2014 WL 715705, at *4 (Del. Ch. Feb. 21, 2014)
(citations omitted) (alteration in original).
23
The record properly before the court on a motion to dismiss under
Rule 12(b)(6) includes “allegations in the Complaint, the documents integral to the
Complaint, and those matters as to which the Court may take judicial notice under
Delaware Uniform Rules of Evidence Rules 201 and 202.”81 This Court has
repeatedly held federal court decisions, orders, and filings judicially noticeable.82
Although Plaintiffs challenge Defendants’ alleged reliance on public filings to
build their release defense, Defendants submit that this Court need not look beyond
the federal court filings to find in their favor.83 Because this Court takes judicial
notice of filings of record in the two Northern District of Georgia actions, it may
consider the release defense. Accordingly, Plaintiffs’ attempt to nip Defendants’
release defense in the bud fails.
2. Whether the Federal Derivative Action Release May Release
Direct Claims Asserted by Co-Lead Plaintiffs
Plaintiffs’ next argument seeks to accomplish comparatively less. Instead of
taking aim at Defendants’ release defense in its entirety, their second argument
asserts that the Federal Derivative Action Release cannot bar any of Plaintiff’s
class claims. The Federal Derivative Action Settlement’s broad definition of
81
Metro. Life, 2012 WL 6632681, at *12 (considering “documents filed of record”
in federal court “that are not likely to be in dispute”).
82
See, e.g., id.; Beiser v. PMC-Sierra, Inc., 2009 WL 483321, at *1 & n.2 (Del.
Ch. Feb. 26, 2009) (collecting cases); W. Coast Mgmt. & Capital, LLC v. Carrier
Access Corp., 914 A.2d 636, 641 (Del. Ch. 2006).
83
Tr. of Oral Arg. Def.’s Mot. to Dismiss (“Tr.”) 15–16.
24
“Released Claims” might be read as including direct claims; its express terms
provide that “Released Claims” include “any and all claims or causes of action . . .
that have been could or might have been, or in the future might be asserted by
Plaintiffs (both individually and derivatively on behalf of Ebix), Ebix, or Ebix’s
Stockholders . . . .”84 The Federal Derivative Action Order, however, constrains
that definition by clarifying that “Released Claims only include claims that can be
released under applicable law.”85 Plaintiffs assert that because a black letter tenet
of applicable law is that representative shareholders in derivative actions cannot
release direct claims belonging to absent stockholders, “Released Claims” do not
include Plaintiffs’ direct claims.
Defendants dispute neither the existence of this rule as phrased nor its
pertinence as “applicable law.” Instead, Defendants argue that the Co-lead
Plaintiffs in this case, Spagnola and Desert States, should nonetheless be barred
from bringing claims because they are not the sort of “people that this general rule
is designed to protect.”86 In support of that contention, Defendants assert that
Spagnola and Desert States had actual notice of the Federal Derivative Action
Settlement but “[sat] on their hands.”87 Accordingly, argue Defendants, Spagnola
84
Federal Derivative Action Settlement ¶ 1.20.
85
Federal Derivative Action Order ¶ 5 n.1.
86
Reply Br. in Further Supp. of Defs.’ Mot. to Dismiss the Second Am. Compl.
(“Reply Br.”) 7.
87
Id.
25
and Desert States remain bound by the release and the direct claims asserted in
Counts I and II fail as a matter of law for lack of a lead plaintiff.
“The judgment in a derivative suit will not preclude any right of action that
an absent stockholder might have in the stockholder’s individual capacity against
the corporation or the real defendants in the derivative suit.”88 Delaware courts
have applied this general rule in the context of settlement fairness hearings under
Court of Chancery Rule 23.1 by declining to approve derivative settlements
purporting to release claims owned by individuals.89 Discussion on the rationale
underlying this rule appears in Carlton Investments v. TLC Beatrice Holdings,
Inc.,90 where the Court contrasted structural protections that inhere in Rule 23 class
action settlements with those that inhere in Rule 23.1 derivative action settlements.
88
7C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure
§ 1840 (1969–1985). A conceptual knot this Court need not attempt to untangle at
present is how this rule might apply in the context of a claim that is simultaneously
direct and derivative. See, e.g., Gentile v. Rossette, 906 A.2d 91 (Del. 2006).
Cleanly applying a bright-line rule may prove problematic in contexts where, as in
the case of classifying a given claim as direct or derivative, the lines creating the
operative distinction themselves may blur. See Tooley v. Donaldson, Lufkin &
Jenrette, Inc., 825 A.2d 1031, 1032 (Del. 2004) (cautioning, before clarifying the
applicable standard, that “[d]etermining whether an action is derivative or direct is
sometimes difficult . . . .”).
89
In re La.-Pac. Corp. Deriv. Litig., 705 A.2d 238, 239–41 (Del. Ch. 1997);
Carlton Invs. v. TLC Beatrice Hldgs., Inc., 1997 WL 208962, at *1–2 (Del. Ch.
Apr. 21, 1997) (“What the court has no authority to do in this or any other
derivative action (putting aside instances of counter or cross claims) is to
adjudicate or release claims belonging to persons other than the corporate
defendant or those defendants who are validly subject to its jurisdiction and against
whom claims have been stated.”).
90
1997 WL 208962, at *2.
26
The Carlton court explained that the existence of a rule preventing a board that has
seized control of a derivative claim brought on behalf of the corporation from
settling direct claims
. . . should be obvious, but it may be obscured by the practice in class
actions in which the doctrine of virtual representation does allow the
rights of a class member to be affected over their objection. But the
distinction between class actions (especially (b)(1) and (b)(2) actions
where no opt-out rights are provided) and this action is that in the
class action setting the party presenting the proposed settlement
satisfies all of the requirements of Rule 23 and thus offers protections
of the shared right that is subject of the settlement and the settlement
will contemplate consideration of some type flowing directly to class
members in exchange for the release of their claim. In the derivative
action, the corporation does not share rights in the property of its
shareholders and may not release or assign that property as part of a
settlement of claims that it owns. Nor in the derivative suit settlement
does consideration flow directly to shareholders as arguably
consideration for the release of their individual claims.91
The “property” to which the Carlton court referred is the shareholders’ right to
bring claims on their own behalf—not on behalf of the corporation.92
Defendants appear to have obscured the effects of Rule 23 as hypothesized
in Carlton. Their suggestion that an absentee direct shareholder plaintiff assumed
to have actual notice93 falls outside the ambit of the general rule stated above both
contradicts settled law and assuages neither concern noted in Carlton concerning
91
Id. (internal citations omitted).
92
Id.
93
The Court need not decide this factual issue and instead assumes it arguendo.
27
the relinquishment of another’s property and the absence of consideration.94 When
parties to the Federal Derivative Action settled, “applicable law” enabled them to
release claims owned by the corporation, not claims owned by Spagnola and
Desert States. Accordingly, Plaintiffs are correct that the Federal Derivative
Action Settlement does not bar any direct claims asserted in Counts I–III.
This Court has previously held that Count II’s disclosure-based claim is
direct and Count III’s self-payment-based claim is derivative.95 In light of the
above, the Federal Derivative Action Settlement cannot affect Count II but might,
subject to additional analysis, release Count III. For reasons stated below,
however, neither federal settlement releases Count I. Thus, the Court need not
decide its nature as direct or derivative at this juncture.
3. Whether Claims in Counts I–III Fall Within the Scope
of the Federal Settlement Releases
Both federal settlements’ capacity to extinguish this action’s state law claims
depends on whether settled claims are “based on the ‘same identical factual
predicate’ or the ‘same set of operative facts’ as the underlying action.” 96 Each
court-approved settlement release limits its own reach by announcing adherence to
94
These two considerations were also deemed critical in La.-Pac. Corp., 705 A.2d
at 240.
95
Ebix, 2014 WL 3696655, at *18.
96
In re Phila. Stock Exch., Inc., 945 A.2d 1123, 1146 (Del. 2008) (quoting
UniSuper Ltd. v. News Corp., 898 A.2d 344, 347 (Del. Ch. 2006)); see also
Nottingham P’rs v. Dana, 564 A.2d 1089, 1106–07 (Del. 1989) (providing the
standard followed in both Philadelphia Stock Exchange and UniSuper).
28
this rule. The Federal Class Action Settlement states that it does not purport to
release:
any claim that does not arise out of the identical factual predicate as
the claims settled in this action. Thomas v. Blue Cross & Blue Shield,
333 Fed. App’x 414, 420 (11th Cir. 2009); TBK Partners Ltd. v.
Western Union Corp., 675 F.2d 456, 460 (2d Cir. 1982).97
Similarly, the Federal Derivative Action Settlement states that it only releases:
those claims that can be released under applicable law. See, e.g.,
Thomas v. Blue Cross & Blue Shield, 333 Fed. App’x 414, 420 (11th
Cir. 2009).98
The Thomas case cited in both orders provides, at the pinpoint citation specified in
both provisos, the following rule that also appears in the TBK Partners case cited
in the Federal Securities Class Action proviso:
[A] court may permit the release of a claim based on the identical
factual predicate as that underlying the claims in the settled class
action even though the claim was not presented and might not have
been presentable in the class action.99
“Delaware law favors settlements and treats them as binding contracts.”100
The federal orders will be interpreted using principles of contract interpretation.101
97
Federal Securities Class Action Order ¶ 6 n.1.
98
Federal Derivative Action Order ¶ 5 n.1.
99
Thomas, 333 F. App’x at 420.
100
Christiana Care Health Servs. v. Davis, 2015 WL 6689642, at *3 n.27 (Del.
Nov. 3, 2015) (quoting Crescent/Mach I P’rs, L.P. v. Dr. Pepper Bottling Co. of
Tex., 962 A.2d 205, 208 (Del. 2008)).
101
See In re Heizer Corp., 1991 WL 24736, at *2 (Del. Ch. Feb. 25, 1991) (“As a
matter of contract interpretation, I have no hesitation in finding that the definition
of liquidation value in [a previous order entered by the Court of Chancery] does
29
The issue for this Court, then, is whether either federal settlement could have
released claims Plaintiffs have brought in this action by virtue of sharing an
identical factual predicate within the meaning of TBK Partners, and thereby did or
did not achieve as much pursuant to the express contractual terms quoted above.
A given claim in this action will be deemed released if either the Federal Securities
Action Settlement’s release or the Federal Derivative Action Settlement’s release
properly applies.
In TBK Partners, the United States Court of Appeals for the Second Circuit
applied the “identical factual predicate” test in the context of a dispute over the
value of minority shareholders’ interest in a target company absorbed in a short-
form merger. There, a representative plaintiff, acting on behalf of a class of
minority shareholders, challenged the price offered for the class’s stake as too low
and brought federal claims on three legal theories: that the acquirer (1) violated
federal securities laws by making certain deficient disclosures concerning the
minority interest’s value, (2) violated its fiduciary duty to the target, in which it
owned a 95.3% stake, by effecting a merger on terms that undervalued the minority
interest, and (3) violated the terms of a lease by depriving the minority full value
not encompass the environmental claim”); cf. In re Transamerica Airlines, Inc.,
2009 WL 2217748, at *4 (Del. Ch. July 22, 2009), aff’d sub nom. Transamerica
Airlines, Inc. v. Akande, 991 A.2d 19 (Del. 2010).
30
for their interest.102 The parties eventually agreed to a settlement including a
release that had the effect of enjoining class members from bringing state law
appraisal claims.103 Objectors to the settlement argued that the district court lacked
authority to extinguish the state law claims that were not and could not have been
brought in the federal action.104 Nonetheless, the district court upheld the
settlement and the Second Circuit affirmed, reasoning that “both the class action
and the state appraisal proceeding hinge[d] on the identical operative factual
predicate: the correct valuation of [the minority interest].”105
The TBK Partners court explained that barring claims under the “identical
factual predicate” rule is analogous to “barring claims that could have been
asserted in the class action” so long as “there is a realistic identity of issues
between the settled class action and the subsequent suit, and . . . the relationship
between the suits is at the time foreseeably obvious to notified class members.”106
Accordingly, the court assessed whether the “gravamen” or “[core] settled
questions” of the class action, considered alongside the notice describing the
settlement sent to class members, simultaneously enabled objectors to anticipate
102
TBK P’rs, 675 F.2d at 458–59.
103
Id. at 459.
104
Id. at 459–60.
105
Id. at 460.
106
Id. at 461.
31
that their claims would be adjudicated and provided full opportunity to object.107
The Second Circuit held that the objectors in TBK Partners were “fairly apprised”
of the fact that their appraisal claims would be extinguished because (1) they were
warned that the settlement would broadly release “any claim arising out of or
connected with” the federal claims and (2) the federal and state claims were
“tightly connected.”108 Because objectors also received full opportunity to object,
the settlement justifiably precluded their state law appraisal claims.109 The Second
Circuit characterized operation of the identical factual predicate inquiry as serving
the twin goals of “prevent[ing] relitigation of settled questions at the core of a class
action” and, more generally, “encouraging settlements.”110
The Delaware Supreme Court clarified the test’s applicability in the context
of disclosure claims in Nottingham Partners v. Dana.111 In Nottingham, the Court
affirmed the Court of Chancery’s holding that allegations attacking different
particular disclosures were nonetheless based on an identical factual predicate
because they challenged the same transaction.112 The defendant corporation in
Nottingham issued a proxy statement recommending that stockholders approve a
107
See id. at 460–61.
108
Id. (“It would be hard to imagine a claim that would be more tightly connected
to those asserted in the class action than a claim in an appraisal proceeding that
[defendant] had undervalued the [minority’s interest].”).
109
Id. at 461–62.
110
Id. at 460–61.
111
564 A.2d 1089 (Del. 1989).
112
Id. at 1106–07.
32
Class B Stock recapitalization and related charter amendments.113 After the
shareholders approved the transaction, two lawsuits—one bringing federal claims,
the other state claims—attacked the proxy statement as materially misleading and
challenged the recapitalization and amendments as invalid.114 Parties in the state
action reached a settlement, but federal plaintiffs objected on the ground that the
Court of Chancery lacked authority to release their disclosure claims because they
were not based on the same set of operative facts. Although plaintiffs in the state
action conceded that “the disclosure allegations we made were not precisely the
same as what [federal plaintiffs] made,”115 the Court of Chancery concluded that
the two actions were based on an identical factual predicate, noting that “the fact
that two actions may not involve the precisely identical disclosure claim is not
determinative.”116 Instead, the Court of Chancery focused on both suits’ practical
attempt to invalidate the same “transaction”—which, in that case, was “the
adoption of the Class B plan and the issuance of the proxy statement in order to
113
Id. at 1091.
114
Id. at 1092–93.
115
Dana v. Trans-Lux Corp., C.A. No. 9755, at 14 (Del. Ch. Aug. 4, 1988)
(TRANSCRIPT) (settlement hearing).
116
Dana v. Trans-Lux Corp., C.A. No. 9755, at 6 (Del. Ch. Aug. 4, 1988)
(TRANSCRIPT) (ruling of the Court).
33
solicit the proxies.”117 The Delaware Supreme Court affirmed the Court of
Chancery’s conclusions as “correct as a matter of law.”118
Unlike in TBK Partners and Nottingham, the claims challenged as precluded
in this case do not all spring from a single factual predicate; here, there are several.
Remaining discussion in this section applies TBK Partners and Nottingham by
identifying the sets of operative facts underlying Counts I–III and comparing them
to those underlying the federal claims in search of overlap.
Count I, which seeks invalidation of the ABA and an injunction preventing
Defendants from claiming Raina is entitled to any bonus under it, derives from the
factual premise that the Board maintained the ABA as an antitakeover device that
depressed Ebix’s stock price. Thus, shorn of all legal paraphernalia, Count I’s
operative facts might be succinctly characterized as “events and conduct calling
into question the ongoing validity of the ABA.” This line-drawing aims to capture
the principle from Nottingham that a transaction—here, maintenance of the
ABA—may serve as the focal point of the inquiry.
Nottingham directly informs the search for operative facts underlying
Count II, which seeks invalidation of the 2010 Plan due to material misstatements
and omissions in the 2010 Proxy Statement. Because Nottingham held that settled
disclosure claims may have preclusive effect on pending disclosure claims that
117
Nottingham, 564 A.2d at 1107 n.37.
118
Id. at 1107.
34
challenge different aspects of a given communication so long as the two claims
share a common goal—there, challenging stockholders’ approval of a
recapitalization plan as uninformed and invalid—Count II’s operative facts are any
allegations of misstatements and omissions in the 2010 Proxy Statement showing
that shareholders’ approval of the 2010 Plan was uninformed and invalid.119
Finally, Count III challenges the Board members’ grants of incentive
compensation to themselves under the 2010 Plan as a breach of fiduciary duty and
seeks rescission of those grants, as well as disgorgement of grants already
disbursed. Count III’s operative facts, then, include those tending to show that
these self-payments were invalid.
Because claims settled in the Federal Securities Class Action Settlement do
not share the same operative facts with claims asserted in Counts I–III of this
action, that release does not preclude present claims under applicable law and,
resultantly, its own express terms. Plaintiffs’ allegations in this action, however,
traverse a narrow factual pathway to avoid such overlap.
The gravamen of the Federal Securities Class Action is that Ebix, Raina, and
Kerris artificially inflated Ebix’s stock price by obscuring Ebix’s “serious internal
control problems” and participation in a “sham tax strategy,” as well as misstating
net income, diluted earnings per share, and organic growth rates in public filings,
119
See id. at 1106–07.
35
press releases, and conference calls.120 In particular, plaintiffs in that action
challenged disclosures in Forms 10-K for 2009 and 2010, Forms 10-Q for 2009,
2010, and 2011, press releases issued in 2009, 2010, and 2011, and conference
calls conducted in 2009, 2010, and 2011. Misstatements and omissions in these
public filings and pronouncements, according to the Federal Class Action
plaintiffs, artificially inflated Ebix’s stock price between May 2009 and June 2011.
Critically, the Federal Securities Class Action does not challenge the 2010 Proxy
Statement, votes taken at the 2010 Annual Meeting, or the 2010 Plan.
Accordingly, although it brings similarly-styled claims (i.e., disclosure claims), the
Federal Securities Class Action lacks an identical factual predicate with Count II of
this action. And because the Federal Securities Class Action simply has nothing to
do with the Board’s maintenance of the ABA or usage of the 2010 Plan, the
Federal Securities Class Action Settlement has no preclusive effect under TBK
Partners, Nottingham, and the release itself.
Before describing the factual premises underlying the Federal Derivative
Action, it is perhaps useful to reiterate that the Federal Derivative Settlement’s
preclusive capacity is categorically limited. For reasons discussed above, the
Federal Derivative Action Settlement can only preclude derivative claims in
Counts I and III, not the direct claim asserted in Count II. Thus, although the
120
See, e.g., Federal Securities Class Action Compl. ¶¶ 153–66.
36
Federal Derivative Action sought, in part, to “invalidate the shareholder vote on
the 2010 [Plan],” the settlement reached in connection with that action cannot
preclude Count II.121
The Federal Derivative Action brought six counts, two of which were
expressly designated as direct class claims.122 Those two direct claims, each
challenging the Board’s actions surrounding the Abandoned Merger as amounting
to a breach of fiduciary duties, seem absent from extant claims settled in the
resulting order, which did not purport to certify a class or otherwise comport with
Federal Rule 23.123 Further, the “Actions” the release purports to settle are defined
as “the derivative actions”124 and the stipulation recites that plaintiffs and their
counsel concluded that settlement was warranted after investigating facts
surrounding “the derivative claims.”125 Thus, the facts underlying those claims
121
Federal Derivative Action Compl. at 72.
122
Id. ¶¶ 140–49.
123
See Federal Derivative Action Order ¶¶ 3, 7.
124
The Federal Derivative Action Order settles “Released Claims” and “any and all
claims (including Unknown Claims) . . . arising out of, relating to, or in connection
with, the defense, Settlement, and resolution of the Actions.” The former is
defined above. See supra note 33 and accompanying text. The “Actions” are
defined as “the Federal Action and the State Action.” Federal Derivative Action
Settlement ¶ 1.1. The “Federal Action” is defined as “the derivative actions that
were consolidated and styled as In re Ebix, Inc. Derivative Litigation, File
No. 1:13-CV-62-RWS (N.D. Ga.).” Id. ¶ 1.7. The “State Action” is defined as
“the derivative action that is styled as In re Ebix. Inc. Shareholder Derivative
Action, Case No. 2011VW205276 (Superior Court of Fulton County, Georgia).”
Id. ¶ 1.26.
125
Federal Derivative Action Settlement at 7.
37
could not have been “settled questions at the core” of the Federal Derivative
Action and the operative facts animating those claims are irrelevant for present
purposes.126 Allowing those facts to inform this analysis would violate the
rationale underlying TBK Partners; since, for whatever reason,127 the direct claims
based on the Abandoned Merger were not extant claims being settled, it was not
“foreseeably obvious” that claims based on their operative facts would be
extinguished.128
The remaining four counts challenge an Ebix stock repurchase, disclosures
in public filings and statements—including proxy statements issued in 2010, 2011,
and 2012—and seek contribution and indemnification against the Board, as well as
the creation of a constructive trust. Parsing through these claims in search of one
or several discernible factual predicates that overlap with Count I is unnecessary;
Defendants fail to provide, and the Court does not discern, any reason to conclude
that any of these claims share an identical factual thread with Count I’s challenge
to the Board’s maintenance of the ABA. Accordingly, the Federal Derivative
Action Settlement lacks the capacity to preclude Count I.
126
Cf. TBK P’rs, 675 F.2d at 462 (“If a judgment after trial cannot extinguish
claims not asserted in the class action complaint, a judgment approving a
settlement in such an action ordinarily should not be able to do so either.” (quoting
Nat’l Super Spuds, Inc. v. N.Y. Mercantile Exch., 660 F.2d 9, 18 (2d Cir. 1981))).
127
Plaintiffs assert that these claims were mooted once the merger was abandoned
in 2013, but offers no facts or law in support of that contention.
128
TBK P’rs, 675 F.2d at 461.
38
Because the Federal Derivative Action does, however, indirectly challenge
the validity of payments made under the 2010 Plan, the release’s effect on
Count III is a closer call. The Federal Derivative Action does not directly
challenge the payments in the same way as the Second Amended Complaint, which
asserts that each disbursement was “inherently self-interested” and a breach of
fiduciary duty; rather, the Federal Derivative Action Complaint knocks the
payments’ legs out by attacking the foundational document authorizing their
disbursement—the 2010 Plan—as the invalid product of an uninformed
shareholder vote. Further, federal plaintiffs did not identify specific disbursements
made under the 2010 Plan or explicitly seek disgorgement, but did allege that the
2010 Plan enabled the Board to “receive lucrative stock option awards.”129
Accordingly, the two cases’ legal and factual pathways that would (hypothetically)
result in the disbursements’ invalidity differ: the Federal Derivative Action would
invalidate the disbursements based on a disclosure theory attacking the 2010 Proxy
Statement, while Count III of this action would invalidate them based on a
fiduciary duty theory attacking particular Board decisions as inappropriately self-
interested. Thus, neither TBK Partners nor Nottingham is directly on point: TBK
129
Federal Derivative Action Compl. ¶ 72.
39
Partners dealt with different legal theories but similar factual particulars and
Nottingham dealt with similar legal theories but different factual particulars.130
Despite sharing a factual predicate—validity of the 2010 Plan—Count III of
this action and claims asserted in the Federal Derivative Action do not share an
identical factual predicate. This follows because answering the core question
central to the federal action’s disclosure claim—do misstatements and omissions in
the 2010 Proxy Statement render the shareholder vote on the 2010 Plan invalid?—
will not necessarily resolve Count III. In other words, the success or failure of
Count III, which hinges on details underlying the self-payments, does not depend
on the answer to that core question in the Federal Derivative Action because Count
III might successfully invalidate the disbursements even if the federal disclosure
claim were to fail. This was not the case in either TBK Partners or Nottingham,
where the released claims would have either succeeded or failed based on the same
set of facts that informed or could have informed the core question in the settled
action.131 The practical effect of this factual misalignment is twofold. First, it
130
Cf. TBK P’rs, 675 F.2d at 462 (noting that, in a prior case, the court had
“refused to affirm the District Court’s approval of a settlement that would release
distinct claims that not only ‘depend(ed) . . . upon a different legal theory but upon
proof of further facts’” (alterations in original) (quoting Nat’l Super Spuds, Inc. v.
N.Y. Mercantile Exch., 660 F.2d 9, 18 n.7 (2d Cir. 1981))).
131
Id. (“Whether the payment results from a breach of fiduciary duty, a breach of
the lease, or from an appraisal proceeding, the same facts support (or limit) the
amount of recovery for the value of the reversionary interest.” (emphasis added));
Nottingham, 564 A.2d at 1106–07 (holding that two actions were based on the
40
means that enforcing the Federal Derivative Action Settlement will not “prevent
relitigation of settled questions”132 because the propriety of particular Board
decisions to issue compensation was not settled. And second, it makes the
relationship between the Federal Derivative Action and this action not “foreseeably
obvious.”133 Simply put, it is not obvious that settling the disclosure question
would immunize future Board actions not based on disclosures.134 Accordingly,
the Federal Derivative Action could not have released Count III.
In sum, neither federal settlement had the capacity to preclude Counts I–III
of this action. The Court need not address Plaintiffs’ remaining arguments.
B. Whether Entrenchment Claims in Counts IV and V Fail
Under Court of Chancery Rule 12(b)(6)
1. Procedural Standard of Review
In considering a motion to dismiss for failure to state a claim upon which
relief can be granted under Court of Chancery Rule 12(b)(6), the Court will accept
all well-pleaded facts as true, accept even vague allegations in the complaint if
they provide the defendant notice of the claim, draw all reasonable inferences in
favor of the plaintiff, and deny the motion unless the plaintiff could not recover
same set of operative facts where both hinged on whether disclosures in the same
proxy rendered the same shareholder vote invalid).
132
TBK P’rs, 675 F.2d at 460.
133
Id.
134
The Second Amended Complaint challenges options disbursed to directors
following Ebix’s 2010, 2011, 2012, and 2013 annual meetings whose value totaled
approximately $800,000. Compl. ¶ 57.
41
under any reasonably conceivable set of circumstances.135 Allegations that are
merely conclusory will not be accepted as true.136
2. Analysis
Count IV purports to bring both class and derivative claims against the
Board on the grounds that approving the Proxy Put, the Director Nomination
Agreement, and the Bylaw Amendments amounted to a breach of fiduciary duties.
Plaintiffs further argue that the 2014 Corporate Actions are defensive measures
whose adoption warrants strict scrutiny under Unocal Corp. v. Mesa Petroleum
Co.137 and its progeny. Count V purports to bring a class and derivative claim that
the Bylaw Amendments “are invalid because they are inconsistent with provisions
of the Delaware General Corporation Law and Ebix’s bylaws and/or inconsistent
with Delaware law.”138 Defendants’ motion challenges Count IV’s Proxy Put
claim as moot and remaining claims under Counts IV and V as failing to state a
claim upon which relief can be granted under Court of Chancery Rule 12(b)(6).
Because Plaintiffs concede that Defendants mooted the Proxy Put claim by
removing it, that aspect of Count IV is dismissed. Another concession further
135
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531,
536 (Del. 2011).
136
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000).
137
493 A.2d 946 (Del. 1985).
138
Compl. ¶ 136.
42
narrows analysis: Plaintiffs acknowledge that they “are not challenging the facial
validity of the bylaws like in Boilermakers.”139
Defendants argue that the business judgment rule applies to the 2014
Corporate Actions because none is a defensive measure that would trigger
heightened scrutiny under Unocal. In particular, they argue that adopting the
Director Nomination Agreement was not defensive for two reasons. First, adding
two insurgents to the board “is the antithesis of an entrenching action”140 and
characterizing that concession as defensive would otherwise be inconsistent with
cases in which Delaware courts have failed to locate a defensive action in the
absence of a looming threat. Second, Defendants argue that such a holding would
allow for the “perverse result” of encouraging directors to oppose activists in proxy
fights instead of appointing dissidents to the board since either decision would, in
Defendants’ view, give rise to an entrenchment claim.141 Further, Defendants
argue that adopting the Bylaw Amendments was not defensive because it occurred
on a “clear day”; that is, the Barrington threat had ended roughly one month prior
to the bylaws’ adoption and the Second Amended Complaint supplies no other
plausible threat. Finally, Defendants argue that the complained-of conduct was
139
Answering Br. 45. See also Boilermakers Local 154 Ret. Fund v. Chevron
Corp., 73 A.2d 934 (Del. Ch. 2013).
140
Reply Br. 20.
141
Opening Br. 28.
43
“neutral and proportionate as a matter of law” because Plaintiffs “must—but
cannot—show that the measures were not reasonable.”142
Plaintiffs respond by arguing that because the Second Amended Complaint
adequately pleads facts showing that the Board adopted each 2014 Corporate
Action in response to the threat posed by Barrington, Unocal is triggered. In
addition, Plaintiffs argue that because heightened scrutiny, once triggered, requires
Defendants to prove that their actions were reasonable and facts before this Court
do not establish reasonableness as a matter of law, dismissal is inappropriate.
Section 141 of the Delaware General Corporation Law empowers the board
of directors of a Delaware corporation to conduct the corporation’s business and
affairs.143 Directors carrying out that function owe fiduciary duties of loyalty and
care to the corporation and its shareholders.144 In assessing whether the directors’
conduct amounts to a breach of their fiduciary duties in a given scenario, Delaware
courts use three standards of review: the business judgment rule, enhanced
scrutiny, and entire fairness.145 The business judgment rule is applicable by default
and presumes that “in making a business decision the directors of a corporation
142
Id. 29–30.
143
8 Del. C. § 141(a).
144
See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.
2006); Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989).
145
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
44
acted on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the company.”146
The Delaware Supreme Court has identified certain scenarios, however, that
by their nature generate concerns requiring the Court to conduct a more searching
inquiry.147 Enhanced scrutiny under Unocal applies “whenever the record reflects
that a board of directors took defensive measures in response to a perceived threat
to corporate policy and effectiveness which touches on issues of control.”148
As this court noted in Stroud v. Grace, Unocal may also apply in contexts aside
from a board’s adoption of a defensive measure in response to a hostile takeover
attempt; Unocal has also “applied to a preemptive measure where the corporation
was not under immediate ‘attack’”149 but nonetheless enacted a measure “in
contemplation of an ephemeral threat that could somehow materialize in the
future.”150
146
Aronson v. Lewis, 473 A.3d 805, 812 (Del. 1984).
147
See, e.g., Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173
(Del. 1986); Unocal, 493 A.2d at 954–55; Weinberger v. UOP, Inc., 457 A.2d 701,
710–11 (Del. 1983).
148
Gantler v. Stephens, 965 A.2d 695, 705 (Del. 2009) (quoting Santa Fe, 669
A.2d at 71).
149
Stroud v. Grace, 606 A.2d 75, 82 (Del. 1992) (quoting Moran v. Household
Int’l, Inc., 500 A.2d 1346, 1350–53 (Del. 1985)).
150
Kahn v. Roberts, 679 A.2d 460, 466 (Del. 1996) (quoting Moran, 500 A.2d at
1350–53).
45
“Once the plaintiff establishes that defensive measures have been employed
in the context of a contest for control, the Board has the burden of showing (1) that
it ‘had reasonable grounds for believing that a danger to corporate policy and
effectiveness existed,’ and (2) ‘that [its] defensive response was reasonable in
relation to the threat posed.’”151 A board that successfully carries this burden wins
reinstatement of the business judgment rule as the applicable standard of review.152
Unocal’s threshold question of whether a defensive action has occurred is a
matter of some significance in the context of a motion to dismiss.153 In the event a
complaint pleads nonconclusory facts sufficient to support the characterization of a
given board’s action as defensive, the burden shifts to the board to prove the
reasonableness that action. Yet, as the Court in Santa Fe observed, the activation
of heightened scrutiny poses a systemic difficulty for defendants seeking dismissal
under Court of Chancery Rule 12(b)(6), given the limited record from which they
might draw to demonstrate reasonableness.154 This is a point worth clarifying
given Defendants’ backwards suggestion that Plaintiffs’ failure to disprove
reasonableness is dispositive even if this Court finds Defendants’ actions were
defensive. To the contrary, plaintiffs certainly have no incentive to plead facts
151
Santa Fe, 669 A.2d at 71 (quoting Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d
1361, 1371 (Del. 1995)).
152
Id.
153
See id. at 72.
154
Id.
46
showing a board acted reasonably, and when Unocal applies the board does not
“enjoy a presumption to that effect.”155 That said, “it does not necessarily follow
that an allegation that a board adopted a defensive device will always state a
claim.”156
Both the Director Nomination Agreement and the Bylaw Amendments
contain mechanisms that might help Ebix’s incumbent management maintain
control of the company in some manner. The Director Nomination Agreement’s
standstill and voting provisions prevent Barrington—an activist shareholder which
had voiced dissatisfaction with both particular business decisions and incumbent
management in general—from soliciting proxies, presenting proposals, or voting
against Board-recommended matters and nominees. And the Bylaw Amendments
both impose certain constraints on shareholder action and grant the Board greater
dominion over meetings, nominations, and proposals—including an ability to
prevent shareholders from electing directors through the medium of a special
meeting in ratcheting time intervals. For reasons that follow, however, enhanced
scrutiny under Unocal only applies to the Board’s approval of the Bylaw
Amendments.
155
Id.
156
In re Gaylord Container Corp. S’holders Litig., 1996 WL 752356, at *2 (Del.
Ch. Dec. 19, 1996).
47
Entry into the Director Nomination Agreement cannot be viewed as
defensive for purposes of triggering Unocal. After Barrington threatened to launch
a proxy contest for majority control of Ebix’s board on November 11, 2014, the
Individual Defendants made the strategic decision to come to the bargaining table
instead of mounting outright opposition.157 The Director Nomination Agreement,
entered into on November 26, 2014, reflects mutual concessions presumably in line
with each contracting party’s intent: Barrington principally received two board
seats and thereby a say in managing the affairs of Ebix, and Ebix received a
guarantee that Barrington would abate dissenting behavior during the standstill
period.158 Applying Unocal to the Board’s agreement to give up board seats,
though conceivable as entrenching insofar as that concession was part of a quid pro
quo earning Ebix the extinction of Barrington’s not-yet-launched proxy contest, is
counterintuitive. A corporate action with collateral effects including a tendency to
preserve incumbent control is not per se subject to Unocal scrutiny;159 and
157
Compl. ¶¶ 78–81.
158
Id.
159
See, e.g., Gantler, 965 A.2d at 705 n.23 (“Rejecting an acquisition offer,
without more, is not ‘defensive action’ under Unocal.” (citing Kahn v. MSB
Bancorp, Inc., 1998 WL 409355, at *3–4 (Del. Ch. July 16, 1998), aff’d, 734 A.2d
158 (Table) (Del. 1999))); Stroud, 606 A.2d at 83 (holding that a private contract
between shareholders and a private company whose “defensive effects” were
“collateral at best” would not receive Unocal scrutiny); Doskocil Cos. Inc. v.
Griggy, 1988 WL 85491, at *6–7 (Del. Ch. Aug. 18, 1988) (holding, in the context
of a motion for a preliminary injunction, that plaintiffs failed to establish a
reasonable likelihood of success of showing that Unocal applied to a board’s
48
applying Unocal under the specific facts of this case would sponsor the enigmatic
idea that the Board’s decision to dilute its own control of the corporation by
surrendering board seats to insurgents is best viewed as a defensive action. Simply
put, because Ebix opened its doors to Barrington, approving the Director
Nomination Agreement does not qualify as the sort of entrenchment device viewed
as categorically suspect under Unocal.
Plaintiffs have, however, pled facts sufficient to support an inference that the
Bylaw Amendments were entrenchment measures related to a potential change in
control. The Second Amended Complaint establishes a factual chronology that,
viewed in a light most favorable to Plaintiffs, supports Plaintiffs’ contention that
the Board adopted the new bylaws to stave off Barrington. Three facts in
particular support this inference. First, the Bylaw Amendments were prepared on
November 17, 2014, six days after Barrington conveyed an intent to launch a proxy
contest.160 The record properly before the Court provides no facts exposing this
temporal proximity as coincidental—for example, nothing indicates the Board had
been considering the Bylaw Amendments for some time before Barrington entered
the picture. And although the Board did not adopt the bylaws until December 19,
2014, by which time Barrington was contractually barred from running a slate, that
decision to approve the issuance of preferred stock containing a put provision that
triggered certain penalties in the event of an acquisition).
160
Compl. ¶ 85.
49
sequence does not end the inquiry given the second fact: the Director Nomination
Agreement’s standstill provision lasts, at most, roughly two years.161 Third and
finally, although most of the Bylaw Amendments achieved little more than making
shareholder action more cumbersome, one reform in particular has clear defensive
value: the Special Meeting Bylaw’s series of clauses that allow the Board, at the
very least, to delay stockholder-initiated special meetings for 120 days and, at
most, prevent elections from occurring at special meetings indefinitely. Bylaw
amendments enacting shorter special meeting delay periods have received Unocal
scrutiny in past cases.162
These three facts, considered in concert, permit the inference that the Bylaw
Amendments were, in the aggregate, a forward-looking prophylactic designed with
Barrington in mind, but holstered until the period of Barrington’s guaranteed
complacency expired. Delaware law supports the imposition of Unocal scrutiny in
this sort of scenario—that is, one where a board implements defensive measures in
161
Id. ¶ 83.
162
See Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 728 A.2d 25, 38–43
(Del. Ch. 1998) (applying Unocal to a bylaw amendment that gave the board of
directors authority to set a time and place for special meetings called by
stockholders and required that such meetings take place “not less than ninety (90)
nor more than one hundred (100) days after the receipt and determination of the
validity” of the shareholder request); Kidsco v. Dinsmore, 674 A.2d 483, 487–89,
494–97 (Del. Ch. 1995) (applying Unocal to a bylaw amendment that extended the
minimum allowable time for calling a stockholder-initiated special meeting from
35 days to 60 days).
50
response to a threat to corporate control that is not immediate, but rather perceived
as a future possibility.163 Accordingly, heightened scrutiny applies.
Defendants strenuously dispute the appropriateness of this result because, in
their view, the Director Nomination Agreement eliminated the Barrington threat
and the Second Amended Complaint supplies no alternative ephemeral threat
sufficient to trigger Unocal under Moran.164 This argument lacks precedential
support and is fatally shortsighted. None of the cases Defendants cite in support of
this contention controls because none involves a purposive response to a known
threat: in Goggin v. Vermillion, Inc., the board accused of entrenchment did not
know of the threat at the time it made the challenged decision;165 in Kahn v.
Roberts, there was no hostile bidder and “no real probability of any hostile acquirer
emerging or that the corporation was ‘in play’”;166 and the defendant board
members in Doskocil Cos. v. Griggy had been considering the challenged action
for more than a year before the threat emerged and “neither asked for nor wanted”
the allegedly defensive feature of the provision at issue.167 Although Barrington
could not run a slate at the time Ebix adopted the Bylaw Amendments, that is only
163
See supra notes 149–50 and accompanying text.
164
See Kahn, 679 A.2d at 466 (citing Moran, 500 A.2d at 1350–53, for the
proposition that board actions “in contemplation of an ephemeral threat that could
somehow materialize at some point in the future” trigger enhanced scrutiny under
Unocal).
165
2011 WL 2347704, at *4 (Del. Ch. June 3, 2011).
166
679 A.2d at 466.
167
1988 WL 85491, at *6.
51
half of the story. The rest—which includes Barrington’s known future capacity to
re-initiate dissenting behavior and the bylaws’ conception closely after
Barrington’s emergence—creates, at least, a reasonable inference that improper
motives were at work.168
These conclusions, however, do not necessarily require the dismissal of
claims related to the Director Nomination Agreement and the survival of claims
related to the Bylaw Amendments. Count IV’s claim that the Board members
breached their fiduciary duties by approving the Director Nomination Agreement
may yet state a claim for breach of fiduciary duty if well-pled facts overcome the
presumptions of the business judgment rule.169 Further, Counts IV and V’s
challenge to the Bylaw Amendments do not automatically state a claim because
heightened scrutiny applies. Following discussion ties up these loose ends.
Count IV’s claim that the Board breached their fiduciary duties by approving
the Director Nomination Agreement fails to state a claim because well-pled facts
do not give rise to a reasonable inference that the Board did not act “on an
informed basis, in good faith and in the honest belief that the action was taken in
168
See Gantler, 965 A.2d at 705 (affirming the Court of Chancery’s determination
that Unocal did not apply because it could not be “reasonably . . . inferred that the
defendants acted ‘defensively’”).
169
See id. at 705–06.
52
the best interests of the company.”170 The Complaint, which instead focuses on
proving an entrenchment motive, does not allege that the Board was uninformed or
otherwise failed to adequately contemplate the merits of executing the Director
Nomination Agreement. Further, the pleadings supply no facts calling into
question a majority of Board members’ disinterestedness.171 Accordingly, because
entry into the Director Nomination Agreement is clearly attributable to a rational
business purpose, this Court will not substitute its own business judgment for that
of Ebix’s Board. Count IV’s claim that the Board members breached their
fiduciary duties by entering into the Director Nomination Agreement is therefore
dismissed.
170
Id. (quoting Aronson, 473 A.2d at 812); see also Kahn, 679 A.2d at 466
(affirming the Court of Chancery’s dismissal of breach of fiduciary duty claims to
which the business judgment standard of review, not heightened scrutiny, applied
because the plaintiff failed assert facts rebutting the business judgment rule’s
presumptions).
171
Even if the Second Amended Complaint successfully alleged that Ebix’s
individual directors approved the Director Nomination Agreement for the self-
interested purpose of entrenchment, that fact, without more, might nonetheless fail
to state a claim for breach of the duty of loyalty. See Gantler, 965 A.2d at 707
(“By its very nature, a board decision to reject a merger proposal could always
enable a plaintiff to assert that a majority of the directors had an entrenchment
motive. For that reason, the plaintiffs must plead, in addition to a motive to retain
their corporate control, other facts sufficient to state a cognizable claim that the
Director Defendants acted disloyally.”).
53
Aspects of Counts IV and V premised on the Board’s approval of the Bylaw
Amendments, however, survive. In this case, heightened scrutiny requires Ebix’s
board members to show, on the face of the Second Amended Complaint, that their
adoption of the Bylaw Amendments was “within the range of reasonableness.”172
Defendants have provided no argument explaining why the Bylaw Amendments,
considered collectively,173 fall within that range as a matter of law. Instead,
Defendants attempt to vindicate each bylaw individually by citing cases upholding
similar token bylaws using diverse standards of review and under different
procedural postures.174 None considers the reasonableness of a salvo of new
provisions accomplishing the number and nature of reforms at work here—which
include (1) giving the Board authority to set the time and place of special meetings,
adjourn special meetings for certain reasons, prevent elections from occurring
through special meetings for lengthy periods of time, and delay action by consent
for twenty days; (2) imposing information and notice requirements on shareholders
172
Santa Fe, 669 A.2d at 72.
173
“Where all of the target board’s defensive actions are inextricably related, the
principles of Unocal require that such actions be scrutinized collectively as a
unitary response to the perceived threat.” Unitrin, 651 A.2d at 1387 (citing Gilbert
v. El Paso, 757 A.2d 1131, 1145 (Del. 1990)).
174
See, e.g., Stroud, 606 A.2d at 75 (reversing the Court of Chancery’s invalidation
of an advance notice bylaw variant); Mentor Graphics Corp. v. Quickturn Design
Sys. Inc., 728 A.2d 25, 38–43 (Del. Ch. 1998) (upholding a special meeting bylaw
variant challenged on Unocal and Blasius grounds after a trial on the merits);
Kidsco Inc. v. Dinsmore, 674 A.2d 482, 496–97 (Del. Ch. 1995) (upholding a
special meeting bylaw variant challenged on Unocal grounds in the context of a
motion for a preliminary injunction and for summary judgment).
54
who request special meetings or submit nominations or proposals; and (3) vesting
discretionary authority in a meeting chairman. Although many of the complained-
of features, as noted earlier, only give rise to inconvenience, the reasonableness of
a defensive response whose munitions include the ability to foreclose the use of
special meetings to hold elections requires an explanation not evident on the face
of these pleadings. Accordingly, those aspects of Counts IV and V challenging
adoption of the Bylaw Amendments as entrenchment devices withstand
Defendants’ motion.175
C. Whether the Disclosure Claims in Count VI Fail Under
Court of Chancery Rule 12(b)(6)
Count VI of the Second Amended Complaint purports to bring a class claim
against the Board members for breaching their fiduciary duties of care and loyalty
by “issuing the materially misleading and incomplete 2014 Proxy Statement.” 176
Defendants have moved to dismiss this claim under Court of Chancery
Rule 12(b)(6) on the basis of three principal arguments: (1) failure to plead
materiality adequately; (2) failure to prove reliance and causation, or some other
“connection” between the disclosures and the election of directors; and (3) failure
to plead a “cognizable measure of relief.”177
175
See Santa Fe, 669 A.2d at 72; Gaylord Container, 1996 WL 752356, at *2.
176
Compl. ¶ 139.
177
Reply Br. 45.
55
Directors’ fiduciary duties of care and loyalty give rise to a related duty “to
observe proper disclosure requirements.”178 This so-termed duty of disclosure
aims, in part, to ensure that stockholders asked to approve a given action have all
material information needed to vote on an informed basis. 179 In an action alleging
breach of the duty of disclosure, “[t]he essential inquiry” is materiality, a standard
that “is determined with respect to the shareholder action being sought.”180
Although the materiality standard does not require a given omission to “have
caused the reasonable investor to change his vote,” information is material and
must be disclosed if there exists “a substantial likelihood that [it] would have been
viewed . . . as having significantly altered the ‘total mix’ of information made
available.”181 The Court’s determination of a given misstatement or omission’s
178
Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998); RBC Capital Mkts., LLC v.
Jervis, 2015 WL 7721882, at *29 (Del. 2015) (“The Board’s ‘fiduciary duty of
disclosure, like the board’s duties under Revlon and its progeny, is not an
independent dut[y] but the application in a specific context of the board’s duties of
care, good faith, and loyalty.’” (quoting Malpiede v. Townson, 780 A.2d 1075,
1086 (Del. 2001))).
179
See Crescent, 846 A.2d at 987.
180
Malone, 772 A.2d at 12.
181
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 945 (Del. 1985) (quoting TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 426, 449 (1976)); see also Crescent, 846
A.2d at 987–88 (framing the rule as applicable to misrepresentations and
omissions).
56
materiality is a mixed question of fact and law decided from the standpoint of a
reasonable stockholder.182
Disclosure suits challenging alleged misstatements or omissions made in
connection with a request for shareholder action that seek injunctive relief do not
require the plaintiff to address reliance, causation, or quantifiable money
damages.183 Instead, the presence of a connection between the challenged
disclosure and the shareholder action is sufficient.184 More fundamentally,
plaintiffs seeking injunctive relief on the basis of disclosure claims must have
standing.185 The elements of standing are as follows:
First, the plaintiff must have suffered an injury in fact—an invasion of
a legally protected interest which is (a) concrete and particularized,
and (b) actual or imminent, not conjectural or hypothetical. Second,
there must be a causal connection between the injury and the conduct
complained of—the injury has to be fairly . . . trace[able] to the
challenged action of the defendant, and not . . . th[e] result [of] the
182
RBC, 2015 WL 7721882, at *29 (“Whether disclosures are adequate ‘is a mixed
[question] of law and fact, requiring an assessment of the inferences a reasonable
shareholder would draw and the significance of those inferences to the individual
shareholder.’” (quoting Shell Petroleum, Inc. v. Smith, 606 A.2d 112, 114 (Del.
1992))); Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I, Inc., 824 A.2d
11, 18 (Del. Ch. 2002); Crescent, 846 A.2d at 988; see Cede & Co. v. Technicolor,
Inc., 636 A.2d 956, 957 (Del. 1994).
183
In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 53 (Del. Ch. 2014).
184
Malone, 722 A.2d at 12; Dubroff v. Wren Hldgs., LLC, 2010 WL 3294219, at
*5 (Del. Ch. Aug. 20, 2010); cf. Alessi v. Beracha, 849 A.2d 939, 944 (Del. Ch.
2004) (“Malone teaches that ‘[a]n action for breach of fiduciary duty arising out of
disclosure violations in connection with a request for stockholder action does not
include the element[] of reliance.’” (alternations in original)).
185
Thornton v. Bernard Techs., Inc., 2009 WL 426179, at *4 (Del. Ch. Feb. 20,
2009).
57
independent action of some third party not before the court. Third, it
must be likely, as opposed to merely speculative, that the injury will
be redressed by a favorable decision.”186
Accordingly, this Court has found past occasion to dismiss a disclosure claim at
the motion to dismiss stage for lack of a redressable injury.187
Here, Plaintiffs challenge the 2014 Proxy Statement for things it says and
does not say about the Director Nomination Agreement, the Barrington threat,
Raina’s compensation, the Bylaw Amendments, and the (now mooted) Proxy Put.
Plaintiffs take issue with the 2014 Proxy Statement’s failure to describe the factual
context from which the Director Nomination Agreement sprung, an omission
which, in Plaintiffs’ view, inappropriately clouds the Board’s motivations.
Further, Plaintiffs argue that the 2014 Proxy Statement contains misleading
information about Raina’s salary because it both omits his 2014 compensation
information and fails to adequately describe the arrangement Raina negotiated for
himself in the Abandoned Merger despite disclosing his $1.2 million retention
bonus in connection with the same deal. Finally, the Second Amended Complaint
avers that the 2014 Proxy Statement both fails to mention the Bylaw Amendments
and misstates certain procedural requirements those bylaws would impose.
186
Id. (alterations in original) (italics omitted) (quoting Lujan v. Defenders of
Wildlife, 504 U.S. 555, 560 (1992)).
187
Id. at *4–5 (finding a lack of standing where plaintiff asserting disclosure
claims sought relief in the form of new disclosures and new elections because
neither would redress any alleged harm in light of defendant corporation’s entry
into Chapter 7 liquidation).
58
Because Plaintiffs suppose that these misstatements and omissions befouled
stockholder approvals at the 2014 Annual Meeting, including a Board election and
an advisory say-on-pay vote, Plaintiffs ask this Court to declare them invalid and
order a new annual meeting at which stockholders may submit nominations and
proposals.
Count VI fails to state a claim because Plaintiffs have failed to identify
misstatements or omissions in the 2014 Proxy Statement that are “material with
respect to the shareholder action being sought.”188 Plaintiffs challenge two forms
of shareholder action sought in the 2014 Proxy Statement: (1) a vote on director
elections and (2) an advisory say-on-pay vote.189 Accordingly, the challenged
disclosures must be material and “connect[ed] to the request” for those actions.190
For reasons that follow, a reasonable shareholder would not think the complained-
of disclosures altered the “total mix” of information made available with respect to
the election and say-on-pay vote.191 This discussion organizes the disclosures into
188
Malone, 722 A.2d at 12.
189
See Compl. ¶¶ 99-106. Through the course of litigating this Motion to Dismiss,
Plaintiffs have failed to argue that the alleged misstatements and omissions they
identify are material with respect to any other shareholder action sought in the
2014 Proxy Statement. Arguments to that effect are therefore waived. See King v.
VeriFone Hldgs., Inc., 994 A.2d 354, 360 n.21 (Del. Ch. 2010), rev’d on other
grounds, 12 A.3d 1140 (Del. 2011) (“A party’s failure to raise an argument in its
answering brief on a motion to dismiss constitutes waiver of that argument.”).
190
Malone, 722 A.2d at 12.
191
See Rosenblatt, 493 A.2d at 945.
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the following three categories: (1) disclosures about the Proxy Put, Bylaw
Amendments, and Director Nomination Agreement; (2) disclosures about Raina’s
compensation; and (3) disclosures providing procedural guidance for the 2015
annual meeting.
Challenges to the disclosures concerning the Proxy Put, Bylaw
Amendments, and factual background to the Director Nomination Agreement fall
short of the applicable standard. Omissions about the Proxy Put have been
mooted,192 and the stockholders were not asked to vote on the Director Nomination
Agreement or the Bylaw Amendments—an unsurprising circumstance given that
the Board had not adopted the Bylaw Amendments at the time the 2014 Proxy
Statement was issued. Nonetheless, Plaintiffs claim that a reasonable stockholder
might have viewed incumbent directors and Barrington’s designees with a
“jaundiced eye” had they known of the Bylaw Amendments and the fact that the
Director Nomination Agreement arose after Barrington announced its plan to
propose four new directors.193 This limited conceptual nexus does not salvage
either alleged omission. Ebix’s directors were under no obligation to unveil the
Bylaw Amendments preemptively in a proxy soliciting votes on two unrelated
items. And in any event, the Board disclosed the Bylaw Amendments in a public
filing issued on December 24, 2014—over two weeks before the annual meeting
192
See supra note 40 and accompanying text; supra Part III.B.2.
193
Compl. ¶¶ 102–03.
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scheduled for January 9, 2015. Further, the informational value of a disclosure
conveying the particulars of Barrington’s letter is dubious given the breadth of
information already disclosed in the 2014 Proxy Statement, which included
descriptions of the Director Nomination Agreement, Barrington’s standstill
obligations, and the addition of two Barrington designees who would receive
Board support.194 Accordingly, a reasonable stockholder would not think these
omissions significantly altered the “total mix” of information relating to the actions
sought.
Although the alleged omissions concerning Raina’s compensation are
“connected” to both the election and the advisory say-on-pay votes,195 they are not
material. Both omissions identified by Plaintiffs criticize the 2014 Proxy Statement
for failing to disclose compensation that Raina had not actually received. Plaintiffs
complain that 2014 compensation figures should have accompanied 2011–2013
figures, but do not allege that Raina had in fact received 100% of his 2014
compensation as of mid-December when the 2014 Proxy Statement was issued.
194
Cf. Dias v. Purches, 2012 WL 4503174, at *9 (Del. Ch. Oct. 1, 2012) (“The
drafters of an S4 or proxy statement face the difficult task of providing
stockholders enough information to make an informed decision while
simultaneously not miring the reader in insignificant details.”); Zirn v. VLI Corp.,
1995 WL 362616, at *4 (Del. Ch. June 12, 1995) (“[T]he law ought guard against
the fallacy that increasingly detailed disclosure is always material and beneficial
disclosure. In some cases the opposite will be true.”).
195
The Second Amended Complaint alleges that all directors—including Raina and
the Compensation Committee—were up for re-election at the 2014 Annual
Meeting. Compl. ¶¶ 99, 104.
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Thus, the pleadings do not support an inference, and this Court will not assume,
that a complete 2014 figure was actually available.196 Further, disclosure of an
incomplete figure might have been possible, but nonetheless difficult to interpret,
misleading, or subject to subsequent modification. Similarly, Plaintiffs’ suggestion
that the 2013 figure is materially incomplete because the 2014 Proxy Statement
does not disclose the compensation arrangement Raina bargained for but did not
receive in connection with the Abandoned Merger goes too far. What the 2014
Proxy Statement does disclose—the $1.2 million retention bonus Raina in fact
received—is far more relevant to an election and say-on-pay vote. In short, the
Board was under no duty to disclose one unrealized aspect of an eighteen month
old terminated deal.
The final batch of challenged disclosures, which itself contains three pieces
of procedural guidance on submitting shareholder nominations and proposals for
the 2015 annual meeting,197 does not provide a basis for liability for two reasons.
First, each disclosure was true at the time the 2014 Proxy Statement was issued.198
196
See Gen. Motors, 897 A.2d at 168 (“A trial court is required to accept only
those ‘reasonable inferences that logically flow from the face of the
complaint’ . . . .).
197
Those three items are: (1) the date by which nominations for the 2015 annual
meeting must be received; (2) the standards the Board applies in considering
candidates submitted by stockholders; and (3) the date(s) by which stockholders
must submit proposals for the 2015 annual meeting. Compl. ¶ 106.
198
“Directors are required . . . to provide a balanced, truthful account of all matters
disclosed in the communications with shareholders.” Malone, 722 A.2d at 12.
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Plaintiffs do not argue that the 2014 Proxy Statement’s guidance on either the 2015
annual meeting’s shareholder proposal submission deadline or the standards the
Board would use to consider stockholder nominees conflicted with Ebix’s then-
existing bylaw regime.199 And Plaintiffs’ argument that the 2014 Proxy Statement
provided a contemporaneously incorrect deadline for 2015 shareholder
nominations submissions fails. At the time, Ebix had no advance notice bylaw200
and this Court has, in the past, recognized directors’ ability to set an advance
notice deadline for future meetings in a proxy statement in the absence of such a
bylaw.201 Accordingly, the pleadings fail to sustain an inference that the 2014
Proxy Statement contained false information.
Second, these disclosures are not material in relation to the 2014 Proxy
Statement’s solicitations for shareholders’ approval of incumbent directors and
advisory say-on-pay at the 2014 Annual Meeting. Once again, the conceptual
nexus Plaintiffs provide—that directors who provide misleading procedural
disclosures are less attractive candidates—is attenuated. None of the complained-
of procedural guidance affected shareholders’ understanding of how to, say, submit
199
See Compl. ¶ 106.
200
Id.
201
See Goggin v. Vermillion, 2011 WL 2347704, at *4 (Del. Ch. June 3, 2011)
(holding, in the context of a motion for a preliminary injunction, that a party had
failed to establish a reasonable probability of success on the merits of its claim that
an advance notice requirement created in a proxy statement was an “unwarranted
defensive and entrenching behavior by the Board”).
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nominations or proposals for the 2014 Annual Meeting. And the fact that
procedural guidance relating to the 2015 annual meeting later became obsolete is
unremarkable given its correction (upon Ebix’s December 24, 2014 public filing
disclosing the Bylaw Amendments) far in advance of that meeting.202 Relatedly, as
was noted in discussion of Defendants’ alleged omission of Raina’s 2014
compensation figure, a disclosure designed to conform preemptively to the not-yet-
adopted Bylaw Amendments might have required revision should the Board have
ultimately decided to adopt those amendments in modified form or not at all.
Thus, Plaintiffs overstate these disclosures’ materiality with respect to the
challenged election.
For all of these reasons, the alleged misstatements and omissions, whether
considered individually or collectively, are not material with respect to the
challenged shareholder actions. Count VI is dismissed.
IV. CONCLUSION
For the foregoing reasons, Count IV is dismissed in part; its challenge to the
Board’s approval of the Proxy Put is dismissed as moot and its challenge to the
Board’s approval of the Director Nomination Agreement as a breach of fiduciary
202
The 2014 Proxy Statement provides an August 15, 2015 deadline for receipt of
nominations for the 2015 annual meeting. Plaintiffs argue the correct deadline is
between September 11 and October 11, 2015. Compl. ¶ 106. Either way,
stockholders had ample time to appreciate the correction that Plaintiffs allege was
necessary.
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duties is dismissed for failure to state a claim under Rule 12(b)(6). Count VI is
dismissed. Otherwise, Defendants’ Motion to Dismiss is denied.
IT IS SO ORDERED.
/s/ John W. Noble
Vice Chancellor
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