Calesa Associates, L.P.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CALESA ASSOCIATES, L.P.; )
CALESA FAMILY TRUST, JULY 6, )
2000; FRED APPLEGATE; JAY )
BERNSTEIN; GRAEME W. BUSH; )
CRAWFORD FAMILY TRUST, )
SEPTEMBER 8, 2000; PETER C. )
FARRELL; FRANK NORMAN )
FJELDHEIM II; STEVEN R. )
HOWARD; LEONARD GLINER; )
ANDREW HARRISON; ROBERT S. )
KRIM; JOEL LIFFMANN; THOMAS )
LLOYD; JAMES P. MCGUCKIN; RLR )
GROUP, LLC; RICHARD RUBIN; )
STEVEN RUBIN; RUBIN FAMILY )
FUND, LLC; CHARLES ANDREW )
RUSSELL; JACK SCHNEIDER; )
SHERMAN-CALESA )
FAMILY TRUST, FEBRUARY 10, )
1998; and JASON WILD, )
)
Plaintiffs, )
)
v. ) C.A. No. 10557-VCG
)
AMERICAN CAPITAL, LTD.; )
AMERICAN CAPITAL EQUITY I, )
LLC; AMERICAN CAPITAL EQUITY )
II, LP; JEFFREY M. COHEN; NEIL M. )
HAHL; MICHAEL JANISH; JOHN L. )
LEWIS IV; and GORDON O’BRIEN, )

Defendants.

MEMORANDUM OPINION

Date Submitted: November 13, 2015
Date Decided: February 29, 2016
Thaddeus J. Weaver, of DILWORTH PAXSON LLP, Wilmington, Delaware; OF
COUNSEL: Joseph H. Jacovini and Thomas S. Biemer, of DILWORTH PAXSON
LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.

Gregory V. Varallo, Robert J. Stearn, Jr., and Richard P. Rollo, of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: John C.
Massaro and Dana Y. Elliott, of ARNOLD & PORTER LLP, Washington, District
of Columbia, Attorneys for Defendants.

GLASSCOCK, Vice Chancellor
 The Plaintiffs, a group of minority stockholders of Halt Medical, Inc. (“Halt”

or the “Company”), filed this action against certain current and former directors of

Halt and its alleged controller, stockholder American Capital, Ltd. (“American

Capital”) and its affiliates, in connection with a transaction (the “Transaction”) that

the Plaintiffs denominate a “squeeze-out merger,” but which was in fact an issuance

of equity that diluted the interest in the Company held by the Plaintiffs, who remain

stockholders. The Complaint alleges breaches of fiduciary duty, aiding and abetting

breaches of fiduciary duty, and violations of Sections 242(b)(1) and 228 of the

Delaware General Corporation Law (“DGCL”). The fiduciary duty claims are

derivative in nature, but the Plaintiffs have eschewed the opportunity to so pursue

them; instead, they seek to proceed only directly, under the rubric, concisely stated

by this Court in Carsanaro v. Bloodhound Technologies, Inc.,1 that a breach of

loyalty resulting in dilution in favor of an insider represents an extraction of value

from the unaffiliated stockholders, a claim which may be advanced directly. The

Plaintiffs seek money damages and a judgment rescinding the Transaction. The

Defendants, in turn, move to dismiss the Complaint on the grounds of acquiescence,

estoppel, and laches, or alternatively, for failure to state a claim. For the following

reasons, that motion is, with one narrow exception, denied.

1
65 A.3d 618 (Del. Ch. 2013).
1
 I. BACKGROUND FACTS2

A. The Parties

Non-party Halt is a Delaware corporation, founded in 2004 by Edward F.

Calesa for the purpose of supporting and marketing a procedure to treat fibroid

tumors in women.3 Calesa is a former Halt director and served as Chairman of the

Halt board of directors (the “Board”) at the time of the Transaction.4 Halt’s

intellectual property includes valuable patents and trademarks related to the

Acessa™ System, an FDA-approved procedure and technology for the treatment of

fibroid tumors in women, which is said to substantially reduce the pain, trauma, and

potential cancer risk associated with the once-traditional use of power morcellators.5

As such, the Acessa™ System is well-positioned to become the standard of care for

women in the treatment of fibroid tumors, according to the Complaint.

2
The facts, drawn from the Plaintiffs’ Verified Complaint (the “Complaint”) and from documents
incorporated by reference therein, are presumed true for purposes of evaluating the Defendants’
Motion to Dismiss. The parties dispute whether I may consider the documents related to the
Transaction (the “Transaction Documents”), attached as Exhibit 1 to the Plaintiffs’ Complaint, in
evaluating the Defendants’ Motion to Dismiss. Generally, the Court “may consider documents
outside of the pleadings only when: (1) the document is integral to a plaintiff’s claim and
incorporated in the complaint or (2) the document is not being relied upon to prove the truth of its
contents.” In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *8 (Del. Ch. Oct.
24, 2014) (citation omitted). Here, because the Complaint cites to and relies upon the Transaction
Documents as the basis for many alleged facts—for instance, facts regarding the independence of
Messrs. Hahl, Janish, and O’Brien—I find that it is appropriate to consider them in my analysis.
The parties also dispute whether the Court may take judicial notice of the Halt Capitalization Table.
See Defs’ Reply Br. 32. I do not address this argument, however, as the Capitalization Table is
not pertinent to my analysis.
3
Compl. ¶¶ 52–53.
4
Id. at ¶¶ 52, 68.
5
Id. at ¶ 3. To morcellate is to physically reduce a body to small bits convenient to extraction.
2
 Plaintiffs Calesa Associates, L.P. and Calesa Family Trust, July 6, 2000

(collectively, the “Calesa Entities”) are stockholders and minority investors in Halt.6

Calesa serves as General Partner and Trustee, respectively, to these entities.7

Plaintiffs Fred Applegate; Jay Bernstein; Graeme W. Bush; Crawford Family Trust,

September 8, 2000; Peter C. Farrell; Frank Norman Fjeldheim II; Leonard Gliner;

Andrew Harrison; Steven R. Howard; Robert S. Krim; Joel Liffmann; Thomas

Lloyd; James P. McGuckin; RLR Group, LLC; Richard Rubin; Steven Rubin; Rubin

Family Fund, LLC; Charles Andrew Russell; Jack Schneider; Sherman-Calesa

Family Trust, February 10, 1998; and Jason Wild are stockholders and minority

investors in Halt.8 Many of the Plaintiffs also hold debt, options, or warrants as part

of their investments in the Company.9

Defendant American Capital, Ltd. (“American Capital”), a Delaware

corporation with its principal place of business in Bethesda, Maryland, is a publicly

traded private equity firm.10 It is the largest stockholder in Halt and, the Plaintiffs

allege, controls the Halt Board.11 Defendant American Capital Equity I, LLC, a

Delaware limited liability company and affiliate of American Capital, is a

6
Id. at ¶¶ 21–22.
7
Id.
8
Id. at ¶¶ 23–43.
9
Id. at ¶ 1.
10
Id. at ¶ 44.
11
Id.
3
“participant” in American Capital’s investments in Halt.12 Defendant American

Capital Equity II, LP (collectively with American Capital and American Capital

Equity I, LLC, “ACAS”)13 is a Delaware limited partnership and affiliate of

American Capital, and is a “participant” in American Capital’s investments in Halt.14

Collectively, ACAS held a 26 percent equity interest in Halt prior to the

Transaction.15

Defendants Jeffrey M. Cohen, Neil M. Hahl, Michael Janish, John L. Lewis

IV, and Gordon O’Brien (collectively, the “Director Defendants”) are all current or

former Board members of Halt who the Plaintiffs assert were under the control of

ACAS. Cohen is the Chief Executive Officer (CEO) of Halt and a current member

of the Board.16 Prior to the Transaction, the Halt Board voted to more than double

Cohen’s compensation and to raise his secretary’s salary by more than $100,000.17

Cohen was also allowed to continue as CEO after the Transaction and became

eligible to participate in a management incentive plan created as a part of the

Transaction, which will give him six percent of the net equity in Halt.18 The

12
Id. at ¶ 45.
13
The Complaint, at points, appears to conflate “American Capital” and “ACAS.” Subsequent
quoted references to “American Capital” or “ACAS,” for purposes of this Memorandum Opinion,
refer to the alleged control group of American Capital, Ltd.; American Capital Equity I, LLC; and
American Capital Equity II, LP.
14
Compl. ¶ 46.
15
Id. at ¶ 11(b).
16
Id. at ¶ 47.
17
Id. at ¶ 70.
18
Id. at ¶ 71.
4
Plaintiffs concede that Cohen “has not always been a controlled director,” but argue

that he “became a controlled director when ACAS became empowered to decide

whether Mr. Cohen would continue to receive material benefits in the form of salary

and incentives.”19

Hahl was appointed to the Halt Board by ACAS around January 2012.20 He

has also served as a member of the board of directors of American Capital since

1996.21 Throughout his service on the Halt Board, Hahl has consistently taken

positions “that favor American Capital or that are in accord with ACAS’s desires.”22

In documents created by Halt related to the Transaction (the “Transaction

Documents”), Hahl was identified as being “affiliated with American Capital, Ltd.,”

and following the Transaction, Hahl became Chairman of the Halt Board.23

Janish was appointed to the Halt Board by ACAS in late 2013 or early 2014

and served until September 2014.24 Janish also served as President and Chief

Executive Officer of Avalon Laboratories, an American Capital portfolio company

in which ACAS “had invested” over $66 million, until September 2014.25 While

19
Id. at ¶ 69. See also id. at ¶ 108 (“While recognizing that ACAS’s conduct was detrimental, Mr.
Cohen supported ACAS through his votes as a director because he knew that his job as Halt’s
Chief Executive Officer and his income depended upon ACAS’s support.”).
20
Id. at ¶ 48.
21
Id.
22
Id. at ¶ 72.
23
Id. (quoting id. at Ex.1 (the “Transaction Documents”), at 19).
24
Id. at ¶ 49.
25
Id.
5
serving on the Halt Board, Janish “consistently favored positions beneficial to

American Capital and voted in lockstep with other ACAS Controlled Directors.”26

Like Hahl, Janish is identified in the Transaction Documents as being “affiliated

with American Capital, Ltd.”27 Janish’s resignation from the Halt Board in

September 2014 immediately followed ACAS’s “sale of Avalon Laboratories.”28

Lewis joined the Halt Board at American Capital’s request around January

201229 and fills the so-called independent director seat.30 He is also the co-founder

of Gardner Lewis Asset Management, which “was among the largest” investors in

ACAS.31 Lewis is currently the second largest senior debt holder in Halt, after

ACAS.32 Lewis is also a close friend of ACAS Chairman Malon Wilkus33 and has

“consistently voted with ACAS-designated directors for positions favoring

American Capital.”34 In January 2014, Calesa asked Lewis to either resign from the

Halt Board or to fill an ACAS-designated seat, but Calesa “was defeated by ACAS

and . . . Lewis remained on the Halt board as the ‘independent director.’”35

Finally, O’Brien was appointed to the Halt Board by ACAS around January

26
Id. at ¶ 75.
27
Id. (quoting Transaction Documents, at 19).
28
Id. at ¶ 76.
29
Id. at ¶ 50.
30
Id. at ¶ 77.
31
Id. at ¶ 50.
32
Id. at ¶ 79.
33
Id. at ¶ 80.
34
Id. at ¶ 81.
35
Id.
6
2012.36 O’Brien also serves as President, Special Finance and Operations, for ACAS

and is one of seven executive officers of ACAS.37 The Transaction Documents

identify O’Brien as being “affiliated with American Capital, Ltd.,”38 and O’Brien

“routinely represent[ed] ACAS’s interests in ACAS’s negotiations with Halt,”

including in negotiations related to the Transaction.39 The Plaintiffs allege that, upon

information and belief, American Capital Chairman Malon Wilkus directed O’Brien

regarding his dealings with Halt and the Halt Board.40

B. Factual Overview

1. ACAS Investments in Halt

On June 22, 2007, American Capital announced its first investment, along

with Defendant American Capital Equity I, LLC, of $8.9 million in Halt.41 Under

the terms of this initial investment, ACAS was granted two ACAS-designated

directors on Halt’s five-seat Board42 and the right to block any subsequent pari passu

investments in Halt.43 From that point on, the relationship between ACAS and Halt

began to deteriorate. ACAS did not make any further investments in Halt over the

36
Id. at ¶ 51.
37
Id.
38
Id. at ¶ 83 (quoting Transaction Documents, at 19).
39
Id.
40
Id. at ¶ 84.
41
Id. at ¶ 59.
42
Id. at ¶ 66(a).
43
Id. at ¶ 62.
7
next three-and-a-half years,44 often misleading Halt as to whether it intended to

provide or extend funding.45 Instead, certain Halt investors—including Calesa and

the Plaintiff investors—established a bridge loan (the “Bridge Note”) that provided

all of Halt’s financing during this period.46 The Bridge Note consisted of junior debt

at a 15% interest rate plus “options, warrants, and/or conversion rights.”47 Over the

course of this three-and-a-half year period, the Bridge Note came due and was

extended several times by the investors.48

In June 2011, in response to Halt’s need for additional funds, ACAS offered

to provide $5 million in exchange for a 50% interest in Halt.49 The Halt Board

declined the offer,50 instead entering into a short-term loan agreement with

Broadband Capital, under which Broadband Capital provided $5 million secured by

Halt’s intellectual property.51 Miles Arnone, Managing Director of American

Capital’s Technology Group and one of ACAS’s designated directors at the time,

informed the Halt Board that it had made a “big mistake” in not taking American

44
Id. at ¶ 61.
45
See id. at ¶ 85; id. at ¶ 87 (“On several occasions, ACAS, through its designated directors,
informed the Halt board either collectively or through Mr. Calesa that it would provide additional
funding, only to withdraw or never formally make the offer, forcing the Halt board to negotiate
under duress, which was to Halt’s detriment and American Capital’s benefit.”).
46
Id. at ¶ 61.
47
Id. at ¶ 62.
48
Id.
49
Id. at ¶ 89.
50
Id. The Plaintiffs allege that “ACAS’s offer also would have severely diluted the interests of
other shareholders and delayed repayment to debt holders who had been carrying Halt for much
of the preceding three-and-a-half years.” Id.
51
Id. at ¶ 90.
8
Capital’s offer.52 Four months later, Arnone informed the Halt Board that ACAS

had “secretly” purchased the Broadband note and security interest in Halt’s

intellectual property.53

In the fall of 2011, again needing additional funds, the Board negotiated a

potential deal with investors “Genesis” and “Novaquest” for a combined $35 million

investment at a 15% interest rate, subject to ACAS’s waiver of its blocking rights.54

Instead, ACAS exercised those blocking rights, offering, as an alternative, to loan

Halt an additional $20 million at a 22% interest rate, with the right to add one Board

member and appoint Lewis as the “independent director.”55 Halt accepted ACAS’s

offer.56

By the fall of 2013, Halt owed ACAS $50 million under a note due at the end

52
Id. at ¶ 91.
53
Id. at ¶ 92.
54
Id. at ¶ 93. While the Complaint does not specify that the proposed Genesis and Novaquest
investment would consist of senior debt, in order for ACAS’s blocking rights to apply, Genesis
and Novaquest presumably sought a pari passu investment to that of ACAS.
55
Id. at ¶ 94.
56
The Complaint omits details regarding several subsequent issuances of senior secured debt. In
January 2012, the Company sold $12.5 million in Term A Senior Secured Promissory Notes
(“Term A Notes”) and $8.25 million in Term B Senior Secured Promissory Notes (“Term B
Notes”). Id. at Ex. 1, at 9 (Ex. 1, at 1–10 is hereinafter referred to as the “Information Statement”).
In December 2012, the Company sold $15 million of Term C Senior Secured Convertible
Promissory Notes. The Company, in connection with this financing, also agreed to issue an
additional $2,411,111.13 of Term A Notes and an additional $1,453,083.33 in Term B Notes in
exchange for an extension of the maturity dates of the existing Term A Notes and Term B Notes.
Id.
9
of 2013.57 Despite indications that ACAS would extend the note,58 in September

2013, ACAS unexpectedly demanded repayment in full by December 31, 2013.59

Calesa called a Halt Board meeting to discuss different proposals for how Halt might

raise money, including a possible sale from within a Chapter 11 proceeding,

effectively prohibiting voluntary bankruptcy relief absent ACAS consent.60 In

October 2013, ACAS loaned Halt an additional $3 million to help it operate through

the end of 2013, in return for Halt agreeing to a supermajority vote requirement for

any future Chapter 11 proceeding.61 The Plaintiffs allege that a majority of the Board

approved the loan and that, at the time, ACAS had control of four of Halt’s then-six

Board seats: two designated directors, Hahl and O’Brien, and two captured directors,

Lewis and Cohen.62 At some point “thereafter,” Janish also became a member of

the Board.63

Around the same time, the Board launched and conducted a sales process,

57
Compl. ¶ 100. It is not clear from the Complaint whether the $50 million note includes the $20
million loaned to Halt in March 2012. See infra note 61.
58
The Plaintiffs allege that, speaking on behalf of ACAS, O’Brien made it clear to the Board that
they should not be concerned about the $50 million note and that ACAS would extend it if the
need arose. Id. at ¶ 101.
59
Id. at ¶ 102.
60
Id. at ¶ 103.
61
Id. at ¶¶ 104, 106. See also Information Statement, at 9 (describing the Company’s sale of $3
million in Term D Senior Secured Convertible Promissory Notes). The Plaintiffs allege that this
note was an extension of the $20 million March 2012 note, Compl. ¶ 106, and that ACAS “intended
the supermajority voting requirement to give ACAS the absolute authority as to whether Halt could
ever file a voluntary Chapter 11 proceeding.” Id. at ¶ 104.
62
Id. at ¶¶ 105; 66(c).
63
Id. at ¶ 109. It is unclear whether Janish joined the Board in connection with the October 2013
financing or early the following year. See id. at ¶ 49.
10
discussing other alternative transactions with potential advisors, investors, and

acquirers.64 Most recently prior to the Transaction, in December 2013, the Board

approved a proposal from Davidson Kempner Capital Management LCL for a

recapitalization and debt financing, but Davison Kempner could not proceed with

the transaction because, according to Davidson Kempner, its investment committee

did not approve the deal.65 Ultimately, none of these negotiations came to fruition;66

they either could not meet Halt’s working capital needs (operating expenses and

payroll, for example), or were unlikely to close before the maturity dates of Halt’s

existing senior secured notes.67

2. The Transaction

Given Halt’s failure to secure financing elsewhere, and under pressure from

the impending due date of the $50 million note, Calesa, as representative of Halt,

met with O’Brien, as representative of ACAS, to “negotiate a deal that would allow

Halt to be sold to a third party, with Mr. Calesa leading the selling effort.”68 Cohen,

along with ACAS’s Robert Sacks, documented the proposed deal in the Transaction

64
Id. at ¶¶ 95–96; Information Statement, at 10.
65
Information Statement, at 10.
66
Compl. ¶¶ 103, 110.
67
Information Statement, at 10. The Complaint also omits discussion of additional notes issued
in early 2014. In January 2014, the Company sold $500,000 in convertible promissory notes that
were convertible into debt instruments issued in the Transaction financing. Information Statement,
at 9. Additionally, in February and March 2014, the Company sold $1.2 million in additional Term
A Notes. Id.
68
Compl. ¶ 110.
11
Documents.69

The Transaction Documents called for a series of actions including, among

others, the following. First, the Company would form Halt Merger Sub, Inc.

(“Merger Sub”), a Delaware corporation,70 and purchase 100 shares of common

stock of Merger Sub.71 Merger Sub and the Company would enter into an

Agreement and Plan of Merger, pursuant to which Merger Sub would merge with

and into the Company.72 As a result of the merger, the Company’s Certificate of

Incorporation would be amended;73 all issued and outstanding shares of the

Company’s common stock would remain outstanding and be unaffected; all issued

and outstanding shares of the Company’s preferred stock would be “cancelled and

extinguished and delivered in exchange” pursuant to the terms of the merger

agreement; and any shares of capital stock of the Merger Sub would be cancelled.74

Additionally, the stockholders would waive any appraisal rights under the DGCL or

other applicable laws,75 and the bylaws of the Company would be amended and

restated.76

The Company and its stockholders would also enter into a Note Purchase and

69
Id. at ¶ 112.
70
Information Statement, at 1.
71
Compl. ¶ 125; Information Statement, at 1.
72
Compl. ¶ 125; Information Statement, at 1.
73
Compl. ¶ 125; Information Statement, at 1.
74
Information Statement, at 2.
75
Id. at 6.
76
Compl. ¶ 125; Information Statement, at 11.
12
Exchange Agreement with ACAS, pursuant to which ACAS would loan the

Company up to $73 million.77 ACAS would get a blanket first priority security

interest in the Company’s assets and certain other rights as set forth in the Purchase

Agreement and related agreements.78 Additionally, the Transaction Documents

called for the cancellation of any outstanding warrants to purchase common stock or

preferred stock issued pursuant to prior agreements,79 and the adoption of a

management incentive plan, under which 12% of the proceeds of a subsequent sale

of Halt, after repayment of any ACAS debt, would be divided among certain

employees.80 The management incentive plan, the Plaintiffs allege, was adopted

mainly for the benefit of Jeffrey Cohen.81 Finally, the Transaction called for changes

to subordinated notes affecting the Plaintiffs, including provisions in the Transaction

Documents providing that, if Halt were not sold within one year of the Transaction

(by March 2015), the subordinated debt owned by minority investors would be

77
Compl. ¶ 11(a). The Plaintiffs allege that, of the $73 million note, $55 million would be used
to repay existing senior secured notes held by ACAS, plus accrued interest. Id. I note, however,
that the Halt Information Statement suggests that ACAS was not the sole participant in the $73
million note, Information Statement at 3 (“[T]he Company [will] enter into a Note Purchase and
Exchange Agreement with certain investors . . . , pursuant to which the [investors] will loan the
Company up to approximately $73,000,000 and the Company will issue to the Lenders senior
secured promissory notes . . . and shares of its Series AA Preferred Stock, Series BB Preferred
Stock, and Common Stock.”) (emphasis added), and that the Complaint elsewhere indicates that
investors other than ACAS participated, Compl. ¶ 11(b) (“Following the Merger, the holders of
the $73 million note, primarily ACAS, held approximately 66% of the equity in Halt.”) (emphasis
added).
78
Information Statement, at 3.
79
Compl. ¶¶ 11(e), 127.
80
Id. at ¶ 11(c).
81
Id. at ¶ 11(c).
13
converted to equity,82 and the Series BB preferred stock owned by minority investors

would be cancelled.83

3. The Transaction Documents

The Plaintiffs received copies of the Transaction Documents on March 11,

2014 via e-mail with instructions to sign and return them by the end of the following

day.84 The 297-page set of Transaction Documents consists of an “Information

Statement,” 14 other agreements, and various attachments.85 The Information

Statement provides an overview of the Transaction’s structure and key terms. The

Plaintiffs allege that the terms recorded in these Transaction Documents are

significantly different from the deal negotiated by Calesa and O’Brien, to the benefit

of ACAS,86 and that of these documents, several were “incomplete, in draft form, or

were missing entirely.”87

82
Id. at ¶ 11(d).
83
Id. at ¶ 11(f).
84
Id. at ¶ 114.
85
Id. at ¶ 124. The Transaction Documents include the Information Statement; Stockholder
Consent; Certificate of Incorporation of Merger Sub; Agreement and Plan of Merger by and
Among Halt Medical, Inc. and Halt Merger Sub, Inc.; Certificate of Merger; Amended and
Restated Certificate of Incorporation of Halt Medical, Inc.; Second Amended and Restated Bylaws
of Halt Medical, Inc.; Note Purchase and Exchange Agreement; Form of Note; Security
Agreement; IP Security Agreement; Voting Agreement; IRA Termination Agreement; Co-Sale
Agreement; 2011 Amended and Restated Certificate of Incorporation; two 2012 Amendments to
the Amended and Restated Certificate of Incorporation; 2013 Amendment to the Amended and
Restated Certificate of Incorporation; a copy of 8 Del. C. § 262; unaudited financials for Halt;
Subordination and Amendment Agreement; Second Amended and Restated Investor Rights
Agreement; and the Halt Medical Capitalization Table. Id. at ¶ 130.
86
Id. at ¶ 113.
87
Id. at ¶ 15. The allegedly missing terms were not detailed in the Complaint, but the Plaintiffs
clarified during oral argument that the Transaction Documents excluded a provision providing for
14
 Additionally, the Plaintiffs allege that “[t]he pressure to close

the . . . Transaction within one day was manufactured by American Capital in order

to force the [Plaintiffs] to sign”88 and that they were “coerced into

the . . . Transaction through ACAS’s Controlled Directors’ pressure and inequitable

conduct, including false representations by ACAS representatives that Halt would

be sold within one year, which would have given the [Plaintiffs] an opportunity to

recover some of their investments, despite the significantly dilutive impact of the

[Transaction] on the [Plaintiffs’] interests.”89 The Plaintiffs only signed, they allege,

“under a threat that if they did not sign, American Capital would demand payment

in full of its $50 Million Note, which Halt could not pay, and could no longer prevent

through a Chapter 11 proceeding.”90

Upon information and belief, the Plaintiffs allege that the Board—which at

the time consisted of Hahl, Janish, O’Brien, Lewis, Cohen, Calesa, and Lee91—also

received and signed the Transaction Documents within one day. 92 The Plaintiffs

allege that, due to this tight timeframe, the Transaction was approved by Halt’s

the sale of Halt within one year. Oral Argument Tr. 62:21–24 (“THE COURT: So what’s the
material term that was missing? Is it this agreement to sell the company in a year? MR. BIEMER:
Yes, Your Honor.”).
88
Compl. ¶ 15.
89
Id. at ¶ 13.
90
Id. at ¶ 115.
91
Id. at ¶¶ 66–67.
92
Id. at ¶ 14.
15
Board with “little or no analysis as to its fairness” to the Plaintiffs.93 Specifically,

the Board approved the Transaction without an independent valuation of the

Transaction or the benefits ACAS was to receive in exchange for its additional

financing; a fairness opinion or the assistance of a financial advisor; a special

committee of independent directors to review the Transaction; an opportunity to

solicit or explore financing from other sources under less “onerous” terms; having

read the Transaction Documents; or holding a meeting of the Board to vote on the

Transaction Documents.94

4. The Board’s Failure to Sell Halt Post-Transaction

Following the Transaction, ACAS’s position in Halt increased from

approximately 26% to almost 66%,95 and ACAS had four ACAS-designated seats

out of a total of seven, held by Hahl, Janish, O’Brien, and non-party Sacks,96 who

93
Id. at ¶ 8. But see infra, note 94.
94
Compl. ¶¶ 9, 119–23. I note, however, that the Information Statement provides that the Board
“determined that the Merger . . . represented the most attractive transaction for Halt and its
stockholders taking into account the terms of the proposal, the level of commitment on the part of
the potential investors and the likelihood that the transaction would close so that Halt could
continue its business.” Information Statement, at 10. The Board noted specifically that “the
proposed transactions provided for the simplification of the Company’s capital structure making
the Company more attractive to prospective investors, provided for the conversion of the Senior
Secured Notes and Bridge Notes, and provided the Company with additional equity financing to
meet[] its near term working capital needs.” Id.
95
Compl. ¶ 11(b). As pled, ACAS’s post-Transaction equity position is not entirely clear. The
Complaint alleges that, “[f]ollowing the Merger, the holders of the $73 million note, primarily
ACAS, held approximately 66% of the equity in Halt,” but does not state what percentage of the
equity of Halt that ACAS, alone, held. Id. (emphasis added).
96
Id. at ¶ 66(d).
16
replaced former director Lee.97 The Plaintiffs allege that ACAS received a

disproportionate benefit from the Transaction, representing an unfair price to

Plaintiffs in light of the substantial contributions made by the minority investors to

help keep Halt afloat during the preceding years.98 They allege that only after the

Transaction did the Defendants’ true motive emerge:99 ACAS sought to starve Halt,

ensuring the dilution of the Plaintiffs’ interests and the cancellation of their Series

BB Preferred stock, all in order to “squeeze” the minority investors out of the

Company.100 According to the Plaintiffs, ACAS—ignoring the fact that Halt was

“well-positioned for a sale” prior to the Transaction101—had no intention to sell Halt,

seeking instead to seize the value of the Company for itself.102

97
Id. at ¶ 68.
98
See id. at ¶ 138 (“American Capital received a disproportionate benefit from the [] Transaction
in the form of almost all of Halt’s value in comparison to the money that ACAS might advance to
Halt as part of the Transaction. On the other hand, the [Plaintiffs], whose Bridge Note and equity
investments provided significant support to Halt for many years, have seen their interests severely
diluted and will suffer further dilution in March 2015. The [] Transaction therefore was entirely
unfair in terms of price.”).
99
Id. at ¶ 16 (“The true facts only emerged post-Merger. Since March 2014, it has been made
clear that the purpose of the . . . Transaction was not to fund Halt, which has seen little benefit
from the [Transaction], but to squeeze out the minority investors and leave ACAS with
everything.”).
100
See id. at ¶ 133 (“American Capital instead has demonstrated an intent to (a) starve Halt by
cutting Halt’s budget to the bone; (b) prevent Halt from commercializing the Acessa™ System;
(c) block any possibility of a sale or full blown commercialization until at least 2016, thereby
making certain that the Minority Investors have no opportunity to prevent the further dilution and
subordination of their interests and the cancellation of the Series BB Preferred stock; and (d)
position Halt to miss its covenants in 2014, which will allow American Capital to take over”).
101
See, e.g., id. at ¶ 98 (“In 2013, the Center for Medicare and Medicaid Service (“CMS”)
announced it would cover the Accessa™ procedure at the highest reimbursement amount offered
for any gynecological procedure.”).
102
Id. at ¶ 18 (“American Capital and the Controlled Directors announced that there is no interest
in selling Halt, and that they will do little in respect to commercializing and marketing the
17
 C. Procedural History

The Plaintiffs filed their Verified Complaint on January 16, 2015 as a direct

action against ACAS and the Director Defendants. Count I, against ACAS, alleges

breach of fiduciary duty, owed as a controlling stockholder, to minority investors.103

Count II, against the Director Defendants, alleges breach of fiduciary duty by

approving the Transaction with terms dictated by ACAS and without adequate

review, and by attempting to conceal and avoid disclosure of the relevant details of

the Transaction by providing the Transaction Documents one day before they had to

be signed and returned.104 Count III, pled in the alternative against ACAS, alleges

aiding and abetting breaches of fiduciary duty owed by the Director Defendants.105

Finally, Count IV, against the Director Defendants, alleges violations of Sections

242(b)(1) and 228 of the DGCL.106 The Plaintiffs seek a judgment rescinding the

Transaction and restoring the rights and investment interests of the Plaintiffs,

damages, a judgment enjoining further violations of the Defendants’ fiduciary

duties, and costs of the action.107

Accessa™ System until after 2015, thereby furthering their scheme to seize the value of Halt for
ACAS, to the detriment of Halt’s” minority investors, the Plaintiffs here.).
103
Id. at ¶ 142. The Plaintiffs contend that ACAS, the purported controller of Halt, concocted a
scheme to substantially reduce the Plaintiffs’ interests in Halt and to take control of its valuable
intellectual property without fair price or process. Id. at ¶ 2.
104
Id. at ¶¶ 157–58.
105
Id. at ¶¶ 162–73.
106
Id. at ¶¶ 174–82.
107
Id. at 47.
18
 The Defendants filed a Motion to Dismiss on February 10, 2015 (the

“Motion”). After full briefing of the Motion, I heard oral argument on September

16, 2015, at which time I requested supplemental briefing relating to the

acquiescence and estoppel defenses raised by the Defendants.108 This Memorandum

Opinion denies in part and grants in part the Defendants’ Motion.

II. ANALYSIS

A. Standard of Review

In deciding a motion to dismiss under Rule 12(b)(6), the Court “must accept

as true all well-pled allegations of fact and draw reasonable inferences in the

plaintiff’s favor.”109 The Court will dismiss the complaint “only if it determines with

reasonable certainty that, under any set of facts that could be proven to support the

claims asserted, the plaintiff would not be entitled to relief.”110 However, the Court

need not accept “[m]ere conclusions of law or fact.”111

The Plaintiffs have made no attempt to argue that demand on the current

Board should be excused here, and presumably in light of the restriction of the

108
Specifically, I asked the parties to address whether “the actions and knowledge of Mr. Calesa
[can] be imputed to Plaintiffs, Calesa Associates, L.P. and Calesa Family Trust, July 6, 2000, upon
the record appropriate to consideration of the Motion to Dismiss?” Calesa Assoc., L.P. v. Am.
Capital, Ltd., C.A. 10557-VCG, at 1 (Del. Ch. Oct. 15, 2015) (LETTER).
109
Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine Partners 2006, L.P., 93 A.3d 1203,
1205 (Del. 2014) (citation omitted).
110
Berger v. Intelident Solutions, Inc., 911 A.2d 1164, 1168–69 (Del. Ch. 2006) (internal quotation
omitted).
111
Id. at 1169 (citation omitted).
19
Complaint to extraction-type Gentile112 direct claims, the Defendants have moved

under Rule 12(b)(6), and have argued for dismissal under the lenient notice standard

set out above. A few observations are in order, however.

Claims alleging dilution resulting from a breach of the duty of loyalty

benefiting an insider were recognized as both derivative and direct in Gentile v.

Rossette and Carsanaro. These decisions were in the post-merger context: the

derivative claims there were extinguished by the merger and, absent direct actions,

the breaches of loyalty alleged could never be remedied, an anathema to equity.

Here, by contrast, the fiduciary duty claims alleged—similarly dual in nature as were

those in Gentile and Carsanaro—could be pursued derivatively by the Plaintiffs,

who remain stockholders in Halt. That, however, would require a specific pleading

sufficient to show that demand, with reference to the current Board, would be futile.

In other words, the dual nature of the extraction claim in this context allows a

plaintiff to choose a form of action with either a lenient or a strict pleading standard.

The result is not hard to predict.

Such a situation is problematic. The negative aspects of derivative

litigation—including diversion of the board’s attention from the company’s

business, as well as the possibility of strike suits—gave rise to the pleading

requirements of Rule 23.1. The same negatives apply to the direct extraction claim.

112
Gentile v. Rossette, 906 A.2d 91 (Del. 2006).
20
This pleading anomaly and its potential for mischief was noted by the Court in the

recent In re El Paso Pipeline Partners, L.P. Derivative Litigation.113 In that case, a

cause of action that was in fact both direct and derivative was brought as a derivative

claim only. A merger subsumed the derivative claim. In addition to finding that the

cause of action survived the merger, the El Paso Court opined that

[t]he more appropriate way to view [such a] cause of action . . . is as a
dual-natured claim with aspects that are both derivative and direct. In
my view, Delaware law can and should treat a dual-natured claim as
derivative for purposes of Rule 23.1 and the doctrine of demand, but as
direct for purposes of determining whether sell-side investors can
continue to pursue the claim after a merger.114

In other words, El Paso suggests that a dual-natured claim should be addressed under

the particularized pleading standard of Rule 23.1.

If this rationale—which, to my mind, is self-evidently reasonable and

efficient—were applied here, it would require a pleading that the Plaintiffs have not

attempted to make, and a review under a particularized pleading standard that neither

party has argued is appropriate.115 Therefore, I analyze the Complaint under the

pleading requirements of Rule 12(b)(6).

B. Counts I and II: Breaches of Fiduciary Duties by ACAS and the Director
Defendants

113
2015 WL 7758609 (Del. Ch. Dec. 2, 2015).
114
Id. at *2.
115
The Defendants have argued that the Plaintiffs’ claims are derivative, not direct; they have not
argued that to the extent direct claims were pled, they were nonetheless subject to Rule 23.1.
21
 The “reasonable conceivability” pleading standard of Rule 12(b)(6) “asks

whether the allegations in the complaint could entitle a plaintiff to relief,” which in

turn “depends upon the level of scrutiny under which those allegations are

reviewed.”116 The business judgment rule establishes a presumption in favor of the

directors,117 which a plaintiff can overcome by adequately alleging facts to support

a reasonable inference that “(1) a controlling stockholder stands on both sides of a

transaction or (2) at least half of the directors who approved the transaction were not

disinterested or independent.”118 Where the business judgment rule is rebutted,

entire fairness is the applicable standard of review.119 Under the entire fairness

standard, the Court will inquire “into two interrelated concepts: fair dealing and fair

price.”120 Because I find below that the Plaintiffs have pled facts supporting a

116
Crimson Exploration, 2014 WL 5449419, at *8.
117
See id. at *9 (“Under 8 Del. C. § 141(a), the business and affairs of a corporation are managed
under the direction of the board of directors. The business judgment rule is a principle of prudence
and discretion that operates to preclude a court from imposing itself unreasonably on the business
and affairs of a corporation. The rule in effect provides that where a director is independent and
disinterested, there can be no liability for corporate loss, unless the facts are such that no person
could possibly authorize such a transaction if he or she were attempting in good faith to meet their
duty. The rule posits a powerful presumption in favor of actions taken by the directors in that a
decision made by a loyal and informed board will not be overturned by the courts unless it cannot
be attributed to any rational business purpose.”) (internal quotations omitted).
118
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 990 (Del. Ch. 2014) (citations
omitted).
119
E.g., New Jersey Carpenters Pension Fund v. info GROUP, Inc., 2011 WL 4825888, at *8 (Del.
Ch. Sept. 30, 2011).
120
Crimson Exploration, 2014 WL 5449419, at *9. See also id. (“[Fair dealing] embraces
questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed
to the directors, and how the approvals of the directors and stockholders were obtained. The [fair
price] aspect of fairness relates to the economic and financial considerations of the proposed
merger, including all relevant factors: assets, market value, earnings, future prospects, and any
22
reasonable inference that ACAS was a controlling stockholder standing on both

sides of the Transaction, entire fairness review is triggered.121

A stockholder is controlling, and owes fiduciary duties to the other

stockholders, “if it owns a majority interest in or exercises control over the business

affairs of the corporation.”122 Here, because ACAS owned only 26% of the

Company prior to the Transaction, the Plaintiffs must allege facts to demonstrate

that ACAS exercised “actual control” over the Board at the time of the Transaction.

The Plaintiffs allege in Count I that ACAS breached its fiduciary duties owed as a

controlling stockholder to the minority Plaintiff investors by “exercise[ing] control

over Halt’s business and affairs,”123 and by “promoting its own interests over the

interests” of the Plaintiffs.124 They allege further that “American Capital on its own

and through [the Director Defendants] on the Halt Board has repeatedly manipulated

Halt by promising, then withholding, funding, and acquiring the Broadband note

secured by Halt’s intellectual property in order to force the Halt board to make

other elements that affect the intrinsic or inherent value of a company's stock.” (quoting Emerald
Partners v. Berlin, 787 A.2d 85, 97 (Del. 2001))).
121
Orman v. Cullman, 794 A.2d 5, 21 (Del. Ch. 2002) (“One way for a plaintiff to overcome [the]
burden [of the business judgment rule], for example, is to allege facts demonstrating a squeeze out
merger or a merger between two corporations under the control of a controlling shareholder. If
facts of that nature are sufficiently alleged, the business judgment presumption is rebutted and
entire fairness is the standard of review.”).
122
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (emphasis in original).
123
Compl. ¶ 144.
124
Id. at ¶ 145.
23
decisions under duress that were to the detriment” of the Plaintiffs.125 The

Defendants counter that the “Plaintiffs’ theory appears to be that the contractual

rights held by ACAS allegedly gave it superior bargaining position with respect to

the Transaction and, therefore, ACAS had the ability to control the Halt Board by

virtue of that bargaining position,”126 contending that “[n]o other theory is pled.”127

They argue that, because a plaintiff cannot demonstrate control by merely alleging

facts demonstrating that a stockholder has exercised duly obtained contractual rights

to its benefit and to the detriment of the company,128 I should dismiss Count I for

failure to state a claim.

While I agree with the Defendants that the Plaintiffs’ allegations regarding

ACAS’s exercise of contractual rights, alone, are not sufficient to demonstrate

control,129 that is not the only theory on which the Plaintiffs have relied in claiming

125
Id. at ¶ 146.
126
Defs’ Opening Br. 25.
127
Id.
128
See, e.g., Thermopylae Capital Partners v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch.
Jan. 29, 2016) (“[A] stockholder who—via majority stock ownership or through control of the
board—operates the decision-making machinery of the corporation, is a classic fiduciary; in
controlling the company he controls the property of others—he controls the property of the non-
controlling stockholders. Conversely, an individual who owns a contractual right, and who exploits
that right—even in a way that forces a reaction by a corporation—is simply exercising his own
property rights, not that of others, and is no fiduciary.”); Superior Vision Serv., Inc. v. ReliaStar
Life Ins. Co., 2006 WL 2521426 (Del. Ch. Aug. 25, 2006).
129
For instance, the Plaintiffs’ following allegation, alone, would be insufficient to demonstrate
control by ACAS:
ACAS . . . has used its blocking rights (a) to force the Halt board to accept funding
on increasingly egregious terms, including an above-market interest rate, exorbitant
fees, additional equity, and additional seats on the Halt board; (b) to prevent Halt
from financing with other institutional investors on a pari passu basis from ACAS;
24
that ACAS exercised control over the Halt “corporate machinery”;130 the Plaintiffs

have pled sufficient facts to demonstrate that a majority of the Board was under the

actual control and influence of ACAS.131

In In re Crimson Exploration Inc. Stockholders Litigation,132 after conducting

a survey of nine cases considering controller status for a minority stockholder, then-

Vice Chancellor Parsons found no correlation between the percentage of equity

owned and the determination of control status, holding that “[t]hese cases show that

a large blockholder will not be considered a controlling stockholder unless [it]

actually control[s] the board's decision about the challenged transaction.”133 In

conducting this survey, the Vice Chancellor determined that there is no magic

formula to find control; rather, it is a highly fact specific inquiry.134 For example, in

and (c) to preclude certain [Plaintiffs] from participating on a pari passu [sic] even
when the terms were better than those offered by ACAS.
Compl. ¶ 63.
130
See Harman v. Masoneilan Int’l., Inc., 442 A.2d 487, 499 (Del. 1982).
131
The facts before me here differ from those in ReliaStar and Thermopylae, where the plaintiffs
did not allege facts sufficient to demonstrate that a majority of the board was under the control of
the purported controller. In ReliaStar, any issuance of dividends by the company’s board of
directors was subject to a limitation in a series of stock purchase agreements requiring the “written
consent of at least two-thirds of the [securities] then owned by such [i]nvestors.” ReliaStar—a
44% equity-holder—thus wielded the contractual power to unilaterally block any issuance of
dividends approved by the company’s board. The action, alleging a breach of fiduciary duties by
ReliaStar through its refusal to provide written consent to a dividend issuance unanimously
approved by the board, was ultimately dismissed on the grounds that the exercise of a duly obtained
contractual right does not amount to control. Similarly, the complaint in Thermopylae was
dismissed, in part, because the allegation that the purported controller exercised its duly obtained
contractual rights to the detriment of the Company, alone, was insufficient to demonstrate control.
132
2014 WL 5449419 (Del. Ch. Oct. 24, 2014).
133
Crimson Exploration, 2014 WL 5449419, at *10.
134
Id. (“[T]he scatter-plot nature of the holdings highlights the importance and fact-intensive
nature of the actual control factor.”).
25
one of the examined cases, New Jersey Carpenters Pension Fund v. info GROUP,

Inc.,135 the Court “denied the defendants’ motion to dismiss merger-related duty of

loyalty claims on the grounds that the complaint adequately alleged that a majority

of the directors lacked independence from Gupta, a director and the alleged

controller, who the court found was interested in the transaction because of a unique

liquidity need.”136 Similarly, I find here that the Plaintiffs’ factual allegations are

sufficient, under the low “reasonable conceivability” standard of Rule 12(b)(6), to

infer that a majority of the Board was not independent or disinterested, but rather

was under the influence of, or shared a special interest with, ACAS in regard to the

Transaction, such that ACAS was a controlling stockholder at the time of the

Transaction. This determination, in turn, is sufficient to rebut the business judgment

rule with respect to actions of the Board.

Directors are “self-interested” when they appear on “both sides of a

transaction” or expect to “derive any [material] personal financial benefit from it in

the sense of self-dealing.”137 They lack independence where they were “‘beholden’

to . . . or so under [the controller’s] influence that their discretion would be

sterilized.”138 The Plaintiffs allege that, at the time of the Transaction, five of the

135
2013 WL 610143 (Del. Ch. Feb. 13, 2013).
136
Crimson Exploration, 2014 WL 5449419, at *11.
137
Orman, 794 A.2d at 23 (internal quotation marks omitted).
138
Id. at 24 (alteration in original).
26
Halt Directors were under the “control and influence of ACAS”: Cohen, Hahl,

Janish, Lewis, and O’Brien.139 However, because there were seven directors on the

Board at the time of the Transaction,140 I need only make such a determination with

respect to four of the Director Defendants in order to deny the Motion.

ACAS appointed several of the Director Defendant to the Board of Halt. The

Defendants correctly argue that “[t]he fact that an allegedly controlling stockholder

appointed its associates to the board of directors . . . without more, does not establish

actual domination.”141 Whether these Defendants were controlled is an issue of fact

which must, at this stage, be determined from an examination of the well-pled facts

in the Complaint. I turn first to the allegations surrounding Director Defendants

O’Brien and Hahl. “[F]or purposes of this Motion,” the Defendants do not contest

that O’Brien—who negotiated the Transaction on ACAS’s behalf—lacked

independence.142 With respect to Hahl, the Plaintiffs allege that he, in addition to

serving on Halt’s Board, also served on the board of American Capital starting in

1996.143 Hahl is thus a classic dual fiduciary, with duties to both sides in the

139
Compl. ¶ 7.
140
Id. at ¶ 67.
141
In re Primedia Inc. Derivative Litig., 910 A.2d 248, 258 (Del. Ch. 2006) (citation omitted).
142
See Defs’ Opening Br. 35 (“The Complaint does not articulate a theory by which Mr. O’Brien
is interested in the Transaction. However, the Complaint alleges that Mr. O’Brien is an officer of
ACAS, who acted as the primary negotiator for ACAS in the Transaction. Although Defendants
do not concede that Mr. O’Brien lacked independence from ACAS, they do not contest that issue
for purposes of this Motion.”).
143
Compl. ¶ 48.
27
Transaction.144

I next turn to Director Defendant Janish. The Plaintiffs allege that at the time

of the Board action on the Transaction, Janish served as President and Chief

Executive Officer of Avalon Laboratories, an American Capital portfolio company

in which ACAS “had invested” over $66 million.145 The Defendants argue that this

is insufficient; they point out that the Complaint does not establish that Janish’s

position at Avalon Laboratories was in any way under the control of ACAS, or that

any compensation from Avalon Laboratories was material to him.146 For purposes

of this Motion, I need not resolve this issue, because Halt’s Information Statement

itself provides the following disclosure regarding Janish, as well as O’Brien and

Hahl:

In considering whether to approve the Merger, Halt Stockholders
should be aware that certain members of the Board of Directors have
interests that are in addition to or different than the interests of Halt’s
Stockholders generally.
The following directors are affiliated with parties that have
indicated their intention to participate in the Financing: Gordon
O’Brien (by virtue of his association with American Capital, Ltd.
and/or its affiliates), Neil Hahl (American Capital, Ltd. and/or its
affiliates), and Mike Janish (American Capital, Ltd. and/or its
affiliates).147

It is well-settled that a director “is considered interested when he will receive a

144
See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).
145
Compl. ¶ 74.
146
Defs’ Opening Br. 31–32.
147
Information Statement, at 8 (emphasis added).
28
personal financial benefit from a transaction that is not equally shared by the

stockholders.”148 Therefore, I find that this disclosure in the Information Statement,

along with the other factual allegations described above, is sufficient for Plaintiffs

to satisfy the low “reasonable conceivability” standard of pleading under a 12(b)(6)

motion with respect to these Director Defendants, including Janish.

I turn next to the allegations surrounding Cohen, the Halt CEO. The Plaintiffs

suggest that Cohen was subject to a classic Morton’s Fork:149 approve the transaction

despite what the Plaintiffs allege is the detriment to the unaffiliated stockholders, or

see the Company—the source of his income—driven into ruin. Thus, in the

Plaintiffs’ view, Cohen was unable to exercise his independent business judgement

on behalf of the Company. Specifically, the Plaintiffs allege that Cohen became

beholden to ACAS when ACAS “became empowered to decide whether Mr. Cohen

would continue to receive material benefits in the form of salary and incentives,”150

and that Cohen, “[w]hile recognizing that ACAS’s conduct was

detrimental, . . . supported ACAS through his votes as a director because he knew

that his job as Halt’s Chief Executive Officer and his income depended upon

ACAS’s support.”151 I find that these factual allegations are sufficient to

148
Orman, 794 A.2d at 29 (emphasis in original) (citation omitted).
149
Not to be confused with the less-problematic Morton’s Toe.
150
Compl. ¶ 69.
151
Id. at ¶ 108.
29
demonstrate that Cohen was not independent from ACAS. Given that Cohen faced

a decision between supporting the Transaction, on terms highly favorable to ACAS,

and rejecting the Transaction, which was tantamount (on the facts alleged) to voting

for the collapse of the Company and losing his employment, it is reasonably

conceivable that Cohen was “beholden” to ACAS.152

I therefore find that the Plaintiffs have pled sufficient facts to support a

reasonable inference that a majority of the Board was not disinterested or lacked

independence from ACAS,153 such that ACAS was a controlling stockholder at the

time of the Transaction. Accordingly, the Defendants’ Motion is denied with respect

to Count I.154 Count II alleges that the Director Defendant acted in pursuit of self-

interest in breach of the duty of loyalty. For the reasons stated above, explaining

that the Complaint has sufficiently pled that ACAS controlled the Board, it has

similarly sufficiently pled that the majority of the directors were interested in this

transaction, and the Motion is denied with respect to Count II as well.

C. Count III: Aiding and Abetting a Breach of Fiduciary Duty

Count III asserts a claim against ACAS for aiding and abetting the Director

152
Carsanaro, 65 A.3d at 639 (citing Rales v. Blasband, 634 A.2d 927, 937 (Del. 1993); Orman,
794 A.2d at 25 n.50).
153
Because I have already determined that sufficient allegations of lack of independence or
disinterestedness were made with respect to four of the seven Directors, I need not address the
allegations surrounding Director Defendant Lewis.
154
See Orman, 794 A.2d at 20 n.36 (holding that, once triggered, entire fairness “normally will
preclude dismissal of a complaint on a Rule 12(b)(6) motion to dismiss.”).
30
Defendants’ breaches of fiduciary duty. To state a claim for aiding and abetting, a

plaintiff must allege “(1) the existence of a fiduciary relationship; (2) the fiduciary

breached its duty; (3) a defendant, who is not a fiduciary, knowingly participated in

a breach; and (4) damages to the plaintiff resulted from the concerted action of the

fiduciary and the nonfiduciary.”155

Should I ultimately determine that ACAS was a controlling stockholder at the

time of the Transaction, then this claim will fail for lack of a “defendant, who is not

a fiduciary,” participating in the breach. However, if I ultimately find that ACAS

was not a controlling stockholder, but that a majority of the Board nonetheless lacked

independence or was not disinterested, it is conceivable that ACAS was a

non-fiduciary aider and abettor of the disloyal Board; thus, the Complaint states a

justiciable claim.156 Of course, this is an alternative pleading, and the Plaintiffs must

recover under one theory or the other. That can await a developed record.

Accordingly, I reserve this determination for a later stage of the proceedings, and

the Defendants’ Motion with respect to Count III is denied.

155
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 WL 6632681, at *18 (Del. Ch. Dec.
20, 2012).
156
Carsanaro, 65 A.3d at 658 (“In my view, the Delaware Supreme Court's decisions preserve
stockholder standing to pursue individual challenges to self-interested stock issuances when the
facts alleged support an actionable claim for breach of the duty of loyalty. Standing will exist if a
controlling stockholder stood on both sides of the transaction. Standing will also exist if the board
that effectuated the transaction lacked a disinterested and independent majority. Standing will not
exist if there is no reason to infer disloyal expropriation, such as when stock is issued to an
unaffiliated third party, as part of an employee compensation plan, or when a majority of
disinterested and independent directors approves the terms.”).
31
 D. Count IV: Violation of DGCL Sections 242(b)(1) and 242

Count IV asserts a violation of DGCL Sections 242(b)(1)157 and 228158 against

the Director Defendants. Specifically, the Plaintiffs allege that “[b]y giving the

[Plaintiffs] only one day to review the 297-page [Transaction] Documents and

demanding that they execute the stockholder consent and other agreements related

to the [Transaction] under duress, the [Directors Defendants] violated the purpose

of the Delaware law, which is to make certain that shareholders make informed

judgments.”159 Additionally, the Plaintiffs allege that “several of the [Transaction]

Documents that [the Plaintiffs] were asked to sign were incomplete, had missing

attachments, or were in draft form.”160 In reply, the Defendants argue that neither

section sets a minimum time for considering and executing a written consent 161 and

that, “[a]t best, Plaintiffs’ allegations suggest some sort of breach of fiduciary duty

157
Under Section 242(b)(1), when an amendment to a certificate of incorporation effects a change
in stock or stockholder rights, the board of directors “shall adopt a resolution setting forth the
amendment proposed, declaring its advisability, and either calling a special meeting of the
stockholders entitled to vote in respect thereof for the consideration of such amendment or
directing that the amendment proposed be considered at the next annual meeting of the
stockholders.” 8 Del. C. § 242(b)(1) (emphasis added).
158
Section 228 provides, in part, that “[u]nless otherwise provided in the certificate of
incorporation,” the stockholders may act “without a meeting, without prior notice and without a
vote, if a consent or consents in writing” are “signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present and voted . . . .” 8 Del.
C. § 228(a) (emphasis added).
159
Compl. ¶ 178 (emphasis added).
160
Id. at ¶ 179.
161
Defs’ Reply Br. 29.
32
regarding disclosure.”162

The Plaintiffs fail to state a claim with respect to Section 242. The Plaintiffs

allege that they were given the directive to “review, execute, and return the

stockholder consent and other agreements within one day,” 163 and that this quick

timeframe forced them to “act without a complete understanding of what was

contained in the documents or what changes the Halt board intended with respect to

Halt ownership,”164 which constituted a failure to “strictly comply with Delaware

law in form or substance.”165 The Plaintiffs do not specifically tie any of these

allegations to Section 242(b)(1). As I understand this argument, it is that the time

for consideration of the action by consent must be as full as would be the case where

the action was considered at a Section 242 meeting. However, as a threshold matter,

I find that Section 242 is not relevant to the facts at hand; the Board availed itself of

the exception to the general rule set forth in Section 242(b)(1)—Section 228—in

obtaining stockholder approval by written consent. If that section was complied

with, the statutory scheme is satisfied.

However, the Plaintiffs do allege sufficient facts to state a claim under Section

162
Id. at 30. The Defendants continue to argue that, even if such a disclosure claim were made in
the Complaint, it would nonetheless fail, because the Plaintiffs have failed to allege “that the
purported disclosure deficiencies were material to their decision to vote in favor of the
transaction.” Id. (emphasis in original).
163
Compl. ¶ 180.
164
Id.
165
Id. at ¶ 181.
33
228. They allege that “several of the [Transaction] Documents that [the Plaintiffs]

were asked to sign were incomplete, had missing attachments, or were in draft

form.”166 Parts of the Transaction Documents, the 297-page series of documents

sent to the Plaintiffs for review, were named as exhibits to the stockholder written

consent. I agree with this Court’s reasoning in Carsanaro, pointing out that,

“[b]ecause Section 228 permits immediate action without prior notice to minority

stockholders,” actions under Section 228 require strict compliance to avoid mischief

and disorder in corporate actions.167 The Carsanaro Court held that, “[w]hen a

consent specifically refers to exhibits and incorporates their terms, the plain

language of Section 228(a) requires that a stockholder have the exhibits to execute

a valid consent.”168 Though Carsanaro involved more clear-cut facts—in that

several of the referenced exhibits were missing in their entirety—the Plaintiffs’

allegation here that several of the exhibits were in draft form or were missing

attachments is nonetheless sufficient to state a claim at this stage of the

proceedings.169

E. Acquiescence, Estoppel, and Laches

166
Id. at ¶ 179.
167
Carsanaro, 65 A.3d at 641 (quoting Empire of Carolina, Inc. v. Deltona Corp., 501 A.2d 1252,
1255–56 (Del. Ch. 1985), aff’d, 505 A.2d 452 (Del. 1985)).
168
Carsanaro, 65 A.3d at 641.
169
Because I find sufficient the Plaintiffs’ allegations regarding incomplete documents attached as
exhibits to the stockholder written consent, I do not reach the Plaintiffs’ allegations that the
stockholder written consents were signed under duress.
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 The Defendants urge me to, in the alternative, dismiss the Complaint under

the doctrines of acquiescence, estoppel, and laches. They argue that the factual

allegations of the Complaint make clear that the Plaintiffs “acquiesced in the

transaction and cannot now attack it,” and that the Plaintiffs unreasonably delayed

in raising their challenges to the Transaction by waiting ten months to file their

Complaint.170 The Plaintiffs, in turn, contend that the Defendants’ acquiescence and

estoppel defenses must fail for two reasons: first, the Defendants rely upon authority

that does not apply in transactions governed by entire fairness; and second, the

Defendants ignore case law applying to situations, such as the Plaintiffs allege is the

case here, where the plaintiffs lacked informed consent or acted under duress.171

With respect to the laches defense, the Plaintiffs argue that a ten-month delay was

not unreasonable given their need to carefully examine the Transaction Documents,

secure representation, and draft the Complaint.172

Whether or not the acquiescence and estoppel defenses apply is a highly fact-

specific inquiry, and one that I cannot conduct on the record before me now. The

Defendants, for instance, urge me to impute the actions of Halt’s co-founder and

former Director, Calesa, to the Calesa Entities that are named Plaintiffs in this action.

170
Defs’ Opening Br. 12 (quoting Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 848 (Del.
1987)).
171
Pls’ Answering Br. 40.
172
Id. at 47.
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They argue that because Calesa negotiated the Transaction, urged the Plaintiffs to

vote for it, and then did personally vote for it, he—and the entities on behalf of which

he signed—should be barred from now challenging the Transaction. After reviewing

the Complaint and the supplemental briefing with respect to this issue, however, I

do not find that the record is sufficient, at this stage of the proceedings, to impute

the actions of Calesa to the Calesa Entities. Moreover, even if the acquiescence and

estoppel doctrines could apply to the facts of this case, which assumption I note the

parties vigorously debate,173 the application of these defenses would not bar every

named Plaintiff from pursuing this action. Of the 23 named Plaintiffs, the

Defendants have identified only 17 that executed written stockholder consents to the

Transaction.174 Given this fact—that the application of these defenses would not

require dismissal of the entire Complaint—it makes little sense from the perspective

of judicial economy to address these arguments now, without the aid of a developed

record. Similarly, I consider the fact-intensive laches analysis—in light of the fact

that that the analogous statute of limitations had not run at the filing of the

173
The Plaintiffs have vigorously argued that the doctrines of estoppel and acquiescence cannot
be applied to transactions warranting entire fairness review, in light of this Court’s opinions in
Gesoff v. IIC Industries, Inc., 902 A.2d 1130 (Del. Ch. 2006); In re JCC Holding Co., Inc., 843
A.2d 713 (Del. Ch. 2003); and In re Best Lock Corp. S’holder Litig., 845 A.2d 1057 (Del. Ch.
2001). See Oral Arg. Tr. 63:16–64:9. Conversely, the Defendants have pointed to the opinions in
Bershad, 535 A.2d 840, and Kahn v. Household Acquisition Corp., 591 A.2d 166 (Del. 1991), to
demonstrate that, historically, the Delaware Supreme Court has allowed the application of these
doctrines in cases triggering entire fairness review. See Oral Arg. Tr. 21:10–22:1.
174
See Pls’ Answering Br. 45 n.13.
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Complaint—to be better deferred to a time when the record is more developed.

III. CONCLUSION

For the foregoing reasons, the Defendants’ Motion to Dismiss is granted with

respect to the portion of Count IV alleging non-compliance with DGCL Section

242(b)(1), and is otherwise denied. The parties should supply an appropriate form

of order.

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