Timothy Larkin v. Pratik Shah

EFiled: Aug 25 2016 02:30PM EDT
Transaction ID 59469758
Case No. 10918-VCS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

TIMOTHY LARKIN and ELLEN HOKE, :
Individually and on Behalf of All Others :
Similarly Situated, :
:
Plaintiffs, :
:
v. : C.A. No. 10918-VCS
:
PRATIK SHAH, SAMUEL R. SAKS, :
R. SCOTT GREER, PHILIP M. :
SCHNEIDER, ALEX ZISSON, :
GERALD T. PROEHL, RODNEY A. :
FERGUSON, SEPEHR SARSHAR, and :
LYNN DORSEY BLEIL, :
:
Defendants. :

MEMORANDUM OPINION

Date Submitted: June 1, 2016
Date Decided: August 25, 2016

James R. Banko, Esquire and Derrick B. Farrell, Esquire of Faruqi & Faruqi, LLP,
Wilmington, Delaware and Juan E. Monteverde, Esquire and Miles D. Schreiner,
Esquire of Faruqi & Faruqi, LLP, New York, New York, Attorneys for Plaintiffs

William M. Lafferty, Esquire, D. McKinley Measley, Esquire and Richard Li,
Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Koji
Fukumura, Esquire, Peter Adams, Esquire and Blake Zollar, Esquire of Cooley
LLP, San Diego, California, Attorneys for Defendants

SLIGHTS, Vice Chancellor
 In May 2015, Teva Pharmaceuticals Industries, Inc. acquired Auspex

Pharmaceuticals, Inc. in a two-step, medium-form merger pursuant to

Section 251(h) of the Delaware General Corporation Law. No Auspex

stockholders sought to enjoin the transaction. Plaintiffs are former stockholders of

Auspex who brought this putative class action to challenge the propriety of the

merger and seek post-closing damages. They allege the members of Auspex’s

board of directors breached their fiduciary duties by permitting senior management

to conduct a flawed sales process that ultimately netted stockholders inadequate

consideration for their shares.

The Verified Amended Class Action Complaint (“Complaint”) presents a

familiar theme as the backdrop for Plaintiffs’ breach of fiduciary duty clams.

Several members of the Auspex board, including its President and CEO who led

the Auspex negotiation team, have ties to venture capital firms that are invested, to

varying degrees, in Auspex’s common stock. According to Plaintiffs, these

members of the board, motivated to monetize the investments of the venture capital

firms with which they were affiliated, caused Auspex to enter into the first all-cash

deal they could land without regard for other deal structures or superior

transactions that would have yielded better value for Auspex’s public shareholders.

The legal theories upon which Plaintiffs rest their claims have evolved

substantially since they initiated this litigation. It now appears their showcase

1
theory is that the Court must review the transaction for entire fairness because the

venture capital funds that owned stock in Auspex controlled the Auspex board and,

spurred by self-interest, caused the conflicted board to approve an ill-advised

transaction with Teva at the expense of Auspex’s other stockholders.

Alternatively, they allege that entire fairness applies because a majority of the

Auspex board labored under actual conflicts of interest throughout the process of

negotiating and approving this merger. According to Plaintiffs, under these

circumstances, even an overwhelming approval of the transaction by uncoerced,

fully informed, disinterested stockholders cannot relieve the Defendants of the

burden to prove that the transaction was entirely fair.

The directors have moved to dismiss Plaintiffs’ Complaint under

Rule 12(b)(6) on two grounds. First, they contend that the board is entitled to the

presumptions of the business judgment rule because Auspex stockholders voiced

their disinterested, fully informed, uncoerced approval of the transaction by

tendering a majority of outstanding Auspex shares to Teva. Second, they point to

the exculpatory clause in Auspex’s certificate of incorporation and argue that

Plaintiffs have failed to plead a non-exculpated breach of fiduciary.

For reasons that follow, I conclude that the motion to dismiss must be

granted. Even accepting Plaintiffs’ well-pled facts as true, I am satisfied that the

Defendants are entitled to invoke the irrebuttable business judgment rule.

2
Plaintiffs have not pled facts that would allow a reasonable inference that the

merger involved a controlling stockholder, much less that a controlling stockholder

pushed Auspex into a conflicted transaction in which the controller received non-

ratable benefits. They are left, then, to overcome the cleansing effect of

stockholder approval, which in this case was disinterested, uncoerced and fully

informed. In the absence of a controlling stockholder that extracted personal

benefits, the effect of disinterested stockholder approval of the merger is review

under the irrebuttable business judgment rule, even if the transaction might

otherwise have been subject to the entire fairness standard due to conflicts faced by

individual directors. Having reached this conclusion, I need not address Plaintiffs’

Revlon claim or Defendants’ argument that Plaintiffs have failed to plead non-

exculpated claims.1

I. BACKGROUND

Consistent with Court of Chancery Rule 12(b)(6), I have drawn the facts

from well-pled allegations in the Complaint, documents the Complaint

incorporated by reference, and judicially noticeable facts available in public SEC

filings.2 The Complaint referenced and relied upon Auspex’s Form 14D-9 dated

1
Plaintiffs have asserted a Revlon claim as a final fallback. See Revlon, Inc. v.
MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986).
2
See Solomon v. Armstrong, 747 A.2d 1098, 1126 n.72 (Del. Ch. 1999), aff’d, 746 A.2d
277 (Del. 2000); see also Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JB
3
April 7, 2015 (the “Recommendation Statement”) for substantive facts integral to

its challenges to the deal’s price and process.3 Accordingly, in addition to the facts

alleged in the Complaint, I have considered facts in the Recommendation

Statement in addressing this motion to dismiss.4

A. The Parties and Relevant Non-Parties

Plaintiffs Timothy Larkin and Ellen Hoke owned common stock in Auspex

at the time of the merger. The Defendants are Pratik Shah, Samuel R. Saks, R.

Scott Greer, Philip M. Schneider, Alex Zisson, Gerald T. Proehl, Rodney A.

Ferguson, Sepehr Sarshar, and Lynn Dorsey Bleil. Each served on Auspex’s board

of directors (the “Board”) during the events leading up to the challenged merger.

Shah has served as Auspex’s President and CEO since October 2013.

Throughout the negotiations and consummation of the merger, Shah was a partner

at Thomas, McNerney & Partners, a venture capital firm that owned approximately

15.2% of Auspex’s outstanding common stock at the time of the merger. Zisson

has been a partner at Thomas, McNerney since 2002 and has represented Thomas,

McNerney’s interests on the Auspex Board since October 2013.

Managers, Inc., 691 A.2d 609, 613 (Del. 1996) (noting that the Court may consider
documents “integral to a plaintiff’s claim and incorporated into the complaint” when
considering a motion to dismiss).
3
Compl. ¶¶ 15, 77, 109, 112, 114, 119, 124–29.
4
See Transmittal Aff. of Richard Li in Supp. of Defs.’ Opening Br. in Supp. of Their
Mot. to Dismiss (“Li Aff.”) Ex. A (Recommendation Statement).

4
 Ferguson, who served on Auspex’s board from January 2013 through the

merger’s consummation, is a managing director at Panorama Capital, L.P.,

a venture capital firm specializing in technology and life sciences investments.

Panorama owned approximately 7.9% of Auspex’s common stock at the time of

the merger. Thomas, McNerney and Panorama’s combined ownership interests

thus amounted to 23.1% of Auspex’s outstanding common stock before the

merger.5

Non-party Auspex is a Delaware corporation with its principal executive

offices in San Diego, California. Before the merger, it operated as a late-clinical

stage biopharmaceutical company developing medications for hyperkinetic

movement disorders and other rare diseases. Through the merger, it became

Teva’s wholly-owned subsidiary.

Non-party Teva is a global pharmaceutical company headquartered in Israel.

It is the world’s largest generic drug producer and has approximately 43,000

employees in 60 counties.

5
These two venture capital firms shall collectively be referred to as the
“VC Stockholders.” The Complaint contains allegations about a third venture capital
firm called Deerfield Management Co. Compl. ¶¶ 58–65. The punchline of these
allegations is that Greer, Schneider and Saks “were conflicted by virtue of their
relationships with . . . companies in which Deerfield maintains significant holdings.”
Id. ¶ 65. Plaintiffs waived this argument by omitting it entirely from their Brief in
Opposition to Defendants’ Motion to Dismiss (“Answering Brief” or “Answering Br.”),
and I do not discuss it further below. Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del.
1999) (“Issues not briefed are deemed waived.”).

5
 B. Auspex Sets Out to Address its Capital Needs

Before the challenged merger, Auspex was in the process of developing a

number of medications to treat movement disorders. Its marquee product, referred

to as “SD-809,” was under development to treat several conditions, including

chorea associated with Huntington’s disease, tardive dyskinesia, and tics associated

with Tourette syndrome. Auspex’s product pipeline included other drugs designed

to treat similar afflictions.

Developing drugs like SD-809 and shepherding them through regulatory

approvals processes is expensive. In need of cash to fund its clinical programs,

Auspex considered a number of strategic options in 2014. In February 2014,

Auspex alleviated some of its capital needs by completing a successful initial

public offering at a price of $12 per share. Thereafter, for the balance of 2014 and

into 2015, Auspex entertained strategic acquisition overtures from a number of

potential partners.

Plaintiffs allege that the Board, aware that four of its seven members were

conflicted, preemptively added new directors who might help sterilize any deal

ultimately secured. 6 With a potentially conflicted transaction in mind, the

Complaint alleges that, in the midst of acquisition talks, Auspex’s board “suddenly

6
Compl. ¶ 69.

6
and without explanation” 7 adopted a resolution to expand from seven to nine

members. Soon after, on May 6, 2014, Auspex announced that Bleil and Greer had

been appointed as new directors. Upon joining the Board, Bleil and Greer were

given the option to purchase 20,000 shares of Auspex stock at an exercise price of

$18.13. That offer was more generous than stock options offered to past incoming

directors, who had received options to buy up to 13,333 shares.

Between April 2014 and March 2015, Auspex discussed the prospect of

undertaking a strategic transaction with no fewer than twenty-two different

companies. Both the Complaint and the Recommendation Statement describe

Auspex’s discussions with six of these companies—referred to as Companies A, B,

C, D, E and Teva.

C. Early Negotiations

The Recommendation Statement discloses that outside suitors contacted

Auspex as early as October 2013, when Company A approached Auspex about a

potential strategic partnership. 8 Between then and October 2014, Auspex held

discussions with Companies A, B, C, D, E and Teva to discuss potential

transactions. 9 The Auspex Board discussed these developments with Auspex’s

7
Id.
8
Recommendation Statement 17.
9
Id. 17–18. The Recommendation Statement reports that Auspex executed new
confidentiality agreements to facilitate the discussions with Companies A, B, E and Teva
7
senior management at a regularly-scheduled meeting on October 30, 2014.10 At

that meeting, the Board expressed its concern that a protracted exploratory process

could detract from SD-809’s regulatory approvals and testing prospects and

thereafter “directed management to get clarity on possible strategic interest by the

first quarter of 2015.”11

On December 16, 2014, Auspex announced that SD-809 earned positive

efficacy and safety results in recent “Phase 3” testing for the drug’s capacity to

treat Huntington’s chorea. Shortly after the announcement, Auspex’s stock price

doubled and Companies D and E reached out to Auspex to discuss an acquisition.

Shah informed Company E that the Board sought a finalized deal by the end of the

first quarter, 2015.

Early in 2015, the Board approved equity grants to Shah and Saks “[d]espite

knowing that . . . Shah was in the midst of leading a sale process and that any

potential buyer would have to pay a premium to acquire the Company.”12 Shah

received 200,000 stock options and 100,000 restricted stock units and Saks

and operated under an existing confidentiality agreement for its discussions with
Company C.
10
Id. 18.
11
Id.
12
Compl. ¶ 78.

8
received 30,000 stock options and 15,000 restricted units. These securities were to

vest either over a four year period or upon the completion of a merger.

Auspex’s senior management met with twenty-two pharmaceutical

companies, including Companies A–E and Teva, during the J.P. Morgan Global

Healthcare Conference in San Francisco between January 13 and 16, 2015.

J.P. Morgan Securities LLC, while “in consultation with Shah,” 13 independently

discussed potential acquisition strategies with Companies B, C, D, E and others.

At a January 14, 2015 meeting, Company B indicated to Auspex’s senior

management that it expected to complete its internal due diligence and make an

acquisition offer to Auspex by mid-February. Company D and Teva also

expressed interest.

Talks with Companies B, D and Teva continued through mid-February.

Shah and representatives of Auspex’s senior management team led these

discussions with minimal Board oversight. On February 5, Auspex and

Company D entered into a confidentiality agreement containing mutual standstill

provisions “and other customary terms.”14 Several days later, during an in-person

meeting with Teva in Israel, Shah conveyed the Board’s preference to receive

acquisition proposals by the end of the first quarter, 2015. On February 10,

13
Recommendation Statement 19.
14
Compl. ¶ 90; see Recommendation Statement 20.

9
Company B indicated that it needed more time to prepare and present its offer.

The next day, Company D made a stock-and-cash offer to acquire Auspex in a deal

valuing Auspex between $2.1 and $2.2 billion. Shah, acting without prior Board

approval, advised Company D that its offer would not be competitive unless it

included a more significant cash component.

D. The Field Narrows

Deal talks took on more focus after a Board meeting held on February 16

and 17, 2015. During that meeting, the Board received updates on the status of

negotiations and discussed Auspex’s strategic alternatives. It also agreed to retain

J.P. Morgan as Auspex’s financial advisor and assigned Shah, senior management,

and J.P. Morgan the task of selecting a pool of potential strategic acquirers. After

the meeting, Shah, senior management, and J.P. Morgan contacted Teva and eight

additional pharmaceutical companies, including Companies B, C, D, and E, to

gauge interest. Of those contacted, only Teva and Companies B, C, D, and E

chose to remain in the process. Companies B and E dropped out by mid-March.

On February 24, Teva submitted a proposal to acquire Auspex in an all-cash

transaction for between $85 and $95 per share, which implied an equity value of

between $3.0 to $3.3 billion. Representatives from both sides held a series of due

diligence meetings between March 11 and 13. On March 13, Shah instructed

J.P. Morgan to send Teva a form merger agreement and process letter requesting a

10
proposal by March 23. The form merger agreement, which no other contender

received, contemplated an all-cash, two-step merger with a termination fee totaling

2.5% of Auspex’s equity value.

On the same day J.P. Morgan sent that letter, Auspex representatives were

also in touch Companies C and D. Company D sent along two non-binding

proposals packaged as alternatives: the parties could pursue either (1) a stock-and-

cash buyout valuing Auspex at $3 billion and including “contingent value rights of

$500 million tied to future regulatory milestones”; or (2) an asset sale and spinoff

valued at $2.5 billion in which Company D would acquire two compounds

(including SD-809) and Auspex’s remaining “central nervous system assets”

would be spun off as a new public company. Around this same time, J.P. Morgan,

acting on Shah’s instruction, told Company C it would need to submit a proposal

by March 23 in order to remain in the process.

During a March 17 teleconference in which the Board, senior management,

and Auspex’s legal and financial advisors participated, Shah summarized the state

of negotiations, including Teva and Company D’s competing proposals, as well as

Company C’s purported interest in submitting an offer. The Board expressed

concerns over certain tax aspects of Company D’s spin-off proposal but

nonetheless instructed Shah and J.P. Morgan to inform Company D that Auspex

remained interested and that Company D’s proposal required revisions to remain

11
competitive. It is unclear whether anyone in fact followed up with Company D by

passing this guidance along; the Recommendation Statement is silent on the matter

and the Complaint merely speculates that no follow up occurred. 15 The Board

further directed that talks with Teva should continue and instructed Shah and J.P.

Morgan to press Company C to submit a proposal.

On March 20, Company C withdrew from the process. Plaintiffs allege that

Company C explained to an Auspex representative that Company C “required

additional time to conduct diligence that could not feasibly be concluded within the

timeframe demanded by Auspex” and that Shah was unwilling to extend

Company C’s time to prepare and submit a proposal.16 Teva likewise asked for

more time to revise its offer after March 23. Shah agreed to this extension on the

condition that Teva execute a merger agreement by the end of March. Thus, past

March 20, only Company D and Teva remained in the running.

E. Auspex’s Compensation Committee Approves Tax Reimbursements for
Certain Directors

During a March 26 meeting, Auspex’s Compensation Committee (consisting

of Ferguson, Greer, Proehl, and Zisson as chair), discussed a grant of cash

payments to Shah, Saks, and Sarshar as compensation for taxes they would owe in

15
Compl. ¶ 114.
16
Id. ¶¶ 111–12.

12
connection with the merger with Teva they now believed was imminent (the “Tax

Reimbursements”). The Committee ultimately recommended that the Board

approve a payment of $7.7 million to Shah and an aggregate payment of about

$2 million to Saks and Sarshar.

F. The Board Selects Teva and the Parties Complete a Merger

On March 27, Teva increased its all-cash offer to $101 per share,

representing an equity value of $3.5 billion. The Board convened with senior

management the next day and, after hearing presentations from its legal and

financial advisors, authorized management and its advisors to finalize a merger

agreement with Teva at the $101 per share price. On March 29, the Board met

again with senior management and legal and financial advisors and, after receiving

J.P. Morgan’s fairness opinion, voted unanimously in favor of both the Teva

merger and the grant of Tax Reimbursements to Shah, Saks and Sarshar.

Auspex and Teva structured the transaction as a two-step merger

contemplating a first-step tender offer and back-end merger as prescribed by 8 Del.

C. § 251(h). In a publicly filed Schedule 13D dated March 29, 2015, Auspex

disclosed that a tender agreement (the “Tender and Support Agreement”) had been

executed by Auspex stockholders owning about 27% of outstanding shares. The

participating stockholders, including Auspex’s directors, Thomas, McNerney,

13
Panorama and others, agreed to tender their stock in the upcoming tender offer and,

if necessary, vote in favor of the merger.17

Auspex filed the Recommendation Statement with the SEC on March 30. In

that filing, the Board urged stockholders to tender their shares and listed a number

of reasons in support of that recommendation, including that Teva’s all-cash offer

would provide stockholders with immediate value and liquidity; that the $101 per

share merger consideration represented a 42.4% premium to Auspex common

stock’s March 27 closing price; that arm’s length negotiations successfully pushed

Teva to offer the highest price it was willing to pay; and that the risks involved

with merging outweighed those of building the commercial infrastructure

necessary to launch and market SD-809 as a standalone company.18 Further, the

Recommendation Statement reported that management-generated projections the

Board used to evaluate the Company’s strategic alternatives assumed that SD-809

had a 90% chance of being successfully launched to treat Huntington’s chorea,

50% for tardive dyskinesia, and 30% for Tourette syndrome.19

17
Transmittal Aff. of James R. Banko in Supp. of Pls.’ Br. in Opp’n to Defs.’ Mot. to
Dismiss (“Banko Aff.”) Ex. C (Schedule 13D) sched. B. The Court takes judicial notice
of this document and its contents.
18
Recommendation Statement 25–26. This list is not exhaustive.
19
Id. 29.

14
 During the tender offer period that commenced on April 7, 2015 and closed

on May 5, 2015, stockholders owning 78% of Auspex’s outstanding common stock

tendered their shares to Teva in the first step of the two-step transaction. Thus,

roughly 70% of outstanding shares not contractually bound to support the

transaction tendered.20 Because more than 50% of Auspex’s outstanding shares

were tendered to Teva, the merger occurred by operation of Section 251(h) without

a stockholder vote.

On June 16, 2015, Teva announced that SD-809 had received positive test

results for the treatment of both Huntington’s disease and Tourette syndrome (the

“June Test Results”). After that information was released, market commentators

opined that Auspex had developed a product pipeline that would support “multiple

platforms for growth” and that Auspex was “expected to be accretive to non-

GAAP EPS beginning in 2017 and meaningfully accretive thereafter.”21 Plaintiffs

amended their first complaint, which had been filed April 16, 2015, just over a

month after the June Test Results surfaced.

20
This percentage is the quotient that results from dividing 73%, the total percentage of
Auspex stock not contractually bound to tender, by 51%, the percentage of stock not
contractually bound that did in fact tender.
21
Compl. ¶ 14.

15
 II. PROCEDURAL STANDARD

Defendants’ motion challenges the Complaint for failing to state a claim

upon which relief can be granted under Rule 12(b)(6). “The pleading standards

governing the motion to dismiss stage of a proceeding in Delaware . . . are

minimal.”22 The operative standard is one of “reasonable conceivability.”23 Under

this standard, Delaware courts will

accept all well-pleaded factual allegations in the Complaint as true,
accept even vague allegations in the Complaint as “well-pleaded” 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 under any reasonably conceivable set of
circumstances susceptible of proof.24

The court must view well-pled facts in a light most favorable to the

nonmovant, but need not give weight to conclusory allegations lacking specific

factual bases. 25 The court may grant the motion only if, based on properly

reviewable facts, there is no “reasonable possibility that the plaintiff could

recover.”26

22
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
23
Id. at 537 (internal quotation marks omitted).
24
Id. at 536.
25
In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 256 (Del. Ch. 2006).
26
In re Answers Corp. S’holder Litig., 2012 WL 1253072, at *6 (Del. Ch. Apr. 11, 2012).

16
 III. ANALYSIS

Plaintiffs’ theory of the case has evolved. The Complaint seeks to invoke

entire fairness review by alleging that “[t]he merger was the result of an inadequate

sales process led by conflicted directors.”27 The term “controlling stockholder,” or

any derivation of the term, appears nowhere in the Complaint. The lead off

argument in Plaintiffs’ Answering Brief, however, is that entire fairness applies

because controlling stockholders derived “unique benefits from the Transaction.”28

The “conflicted directors” theory takes a back seat and consumes just three pages

of the Plaintiffs’ forty-page brief.29

Plaintiffs’ controlling stockholder argument focuses on the VC Stockholders

and their affiliated board members Shah, Zisson, and Saks (the “VC Directors”).

27
Compl. at 25.
28
Answering Br. 18. As noted, the operative Complaint in this action was filed on
July 27, 2015. Just over two months later, but before any briefs on this motion were
filed, the Delaware Supreme Court issued Corwin v. KKR Financial Holdings, LLC, 125
A.3d 304 (Del. 2015), a decision that, for reasons made clear below, has become central
to both sides’ positions.
29
Answering Br. 33–35. That this controlling stockholder theory first came into focus in
Plaintiffs’ Answering Brief is troubling. See Gerber v. EPE Hldgs., LLC, 2013
WL 209658, at *4 (Del. Ch. Jan. 18, 2013) (“An answering brief . . . is not the ideal
forum for expanding claims.”); cf. Zucker v. Andreesen, 2012 WL 2366448, at *2 (Del.
Ch. June 21, 2012) (identifying difficulties that arise, particularly by operation of
Rule 15(aaa) in the motion to dismiss context, when a plaintiff attempts to “supplement
the complaint through [his or her] brief” (internal quotation marks omitted) (quoting
MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *5 (Del. Ch. May 5, 2010)).
Nevertheless, Defendants have addressed the issue in their Reply Brief in Support of
Their Motion to Dismiss and, for the sake of completeness, I will address it here.

17
Specifically, they allege that the VC Stockholders leveraged their substantial

ownership stakes and Board representation in Auspex to manipulate negotiations

and secure a fast, all-cash transaction that satisfied their unique liquidity needs.

According to Plaintiffs, the VC Stockholders, working in conjunction with the

VC Directors, spearheaded a rushed sales process to ensure Auspex would find a

suitor willing to pay cash. The need for speed was driven, in large part, by

impending and likely positive SD-809 test results that would spike Auspex’s stock

price and thereby extinguish the possibility of a hurried, all-cash sale. This

fixation on speed and liquidity, Plaintiffs argue, motivated Shah to favor Teva as

the only all-cash bidder, a preference that ultimately hamstrung the Board into

accepting a deal that, although facially appealing, failed to maximize Auspex’s

value.

Plaintiffs’ fallback position is that a majority of directors who approved the

deal were unable to act in the stockholders’ best interests due to various disabling

conflicts of interest, including contemporaneous employment with the two venture

capital firms, post-merger employment offers with the surviving entity (Auspex),

and special compensation opportunities that were offered to ensure their loyalty to

Shah. These conflicts caused the majority of directors consciously to abdicate their

fiduciary duties by entrusting Shah, a director with known ties to Thomas,

McNerney, with de facto control over the bidding process and rubber-stamping a

18
deal that he engineered. 30 Plaintiffs also make veiled arguments that the

Defendants acted in bad faith, but only in passing.31

Defendants counter on all fronts, arguing that the business judgment rule

applies because there is no controller, the Board was not interested, the alleged

misconduct does not rise to the level of bad faith, and the Board was fully

informed. Defendants further urge the Court to defer to the Board’s business

judgment given the cleansing effect of the disinterested stockholders’ uncoerced,

fully informed decision to approve the transaction by tendering their shares.

By Defendants’ lights, the Supreme Court’s decisions in Corwin v. KKR Financial

30
At oral argument, Plaintiffs manufactured an argument that the Auspex board acted
without due care, both by failing to “sufficiently inform themselves of Auspex’s value”
and by allowing Shah to withhold information from them about key developments in the
bidding process. Oral Arg. Tr. (“Tr.”) 42. The argument was difficult to follow and, in
any event, any facts that might support it are not well-pled in the Complaint. Moreover,
given my conclusion regarding the effect of the stockholder approval of the transaction,
any breach of the duty of care has been cleansed. For this reason, I decline to address this
or Plaintiffs’ Revlon argument on the merits, beyond noting my skepticism that either
claim could survive Defendants’ argument that they are subject to the exculpatory clause
in Auspex’s certificate of incorporation. 8 Del. C. § 102(b)(7).
31
Answering Br. 3, 14, 37, 40 (asserting in conclusory fashion that the Board’s conduct
amounted to bad faith); id. 36 (arguing, in the span of two sentences, that the Board’s
conduct amounted to bad faith).

19
Holdings LLC32 and Singh v. Attenborough,33 as well as this court’s recent decision

in In re Volcano Corp. Stockholder Litigation,34 are on all fours and controlling.

This opinion resolves Defendants’ motion to dismiss in three parts. First, I

address the gating question that largely dictates the end result: what standard of

review applies to Auspex’s merger with Teva? I conclude that, by operation of

Corwin and related authority on the legal effects of stockholder approval, the

irrebuttable business judgment rule applies, a holding that extinguishes all

challenges to the merger except those predicated on waste. Second, I conclude that

the Complaint does not a state a claim for waste for the simple reason that

Plaintiffs have not pled it. Those two conclusions dispense with the Complaint in

its entirety. The third and final issue is whether Plaintiffs should be permitted to

resuscitate their Complaint by amendment. Applying Court of Chancery

Rule 15(aaa), I conclude that no further amendment should be granted.

A. The Standard of Review: Entire Fairness or Business Judgment Rule?

My analysis of the applicable standard of review follows three analytical

markers: (1) when disinterested, fully informed, uncoerced stockholders approve a

transaction absent a looming conflicted controller, the irrebuttable business

32
125 A.3d 304 (Del. 2015).
33
137 A.3d 151 (Del. 2016).
34
2016 WL 3626521 (Del. Ch. June 30, 2016).

20
judgment rule applies; (2) there was no looming conflicted controller in this case;

and (3) the challenged merger was properly approved by disinterested, uncoerced

Auspex stockholders. 35 Under the circumstances, the business judgment rule,

irrebuttable in this context, applies. While the analytical path could be inverted

and still lead to the same result, this order is appropriate here since the first of the

three propositions has been the subject of greatest debate among the parties.

Before addressing the merits of the motion, however, I begin with a brief review of

the competing standards of review proffered by the parties.

Section 141 of the Delaware General Corporation Law empowers the board

of directors of a Delaware corporation to manage the corporation’s business and

affairs. 36 In discharging that function, directors owe the corporation and its

stockholders unremitting fiduciary duties of loyalty and care.37 The standard of

review that guides the court’s determination of whether those duties have been

violated defaults to a deferential standard, the business judgment rule, which

directs the court to presume the board of directors “acted on an informed basis, in

good faith and in the honest belief that the action was taken in the best interests of

35
By “proper stockholder approval,” I refer hereafter to an uncoerced, fully informed
vote or tender of a majority of outstanding shares owned by disinterested stockholders.
36
8 Del. C. § 141(a).
37
Cede & Co. v. Technicolor, 634 A.2d 345, 360 (Del. 1993).

21
the company.” 38 In circumstances where the business judgment rule applies,

Delaware courts will not overturn a board’s decision unless that decision “cannot

be attributed to any rational business purpose.”39 This broadly permissive standard

reflects Delaware’s traditional reluctance to second-guess the business judgment of

disinterested fiduciaries absent some independent cause for doubt.40

The business judgment presumption is not irrebuttable; indeed, several

avenues exist to cause the court to employ a more searching review of the board’s

decision making.41 For instance, Delaware courts will apply the most stringent

level of review, entire fairness, in circumstances where: (1) properly reviewable

facts reveal that the propriety of a board decision is in doubt because the majority

of the directors who approved it were grossly negligent, acting in bad faith, or

tainted by conflicts of interest; 42 or (2) the plaintiff presents facts supporting a

38
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by
Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
39
Cede, 634 A.2d at 361 (internal quotation marks omitted) (quoting Sinclair Oil Corp. v.
Levien, 280 A.2d 717, 720 (Del. 1971)).
40
Cf., e.g., Corwin, 125 A.3d at 313–14 (“[T]he core rationale of the business judgment
rule . . . is that judges are poorly positioned to evaluate the wisdom of business decisions
and there is little utility to having them second-guess the determination of impartial
decision-makers with more information (in the case of directors) or an actual economic
stake in the outcome (in the case of informed, disinterested stockholders).”).
41
E.g., In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del. 2006); In re Crimson
Exploration Inc. S’holder Litig., 2014 WL 5449419, at *9 (Del. Ch. Oct. 24, 2014).
42
E.g., Disney, 906 A.2d at 52–53; Orman v. Cullman, 794 A.2d 5, 22 (Del. Ch. 2002).

22
reasonable inference that a transaction involved a controlling stockholder. 43

Importantly, the presence of a controlling stockholder does not per se trigger entire

fairness. Rather, exacting judicial review is warranted only where the controller

“engage[s] in a conflicted transaction.”44 Conflicted transactions include those in

which the controller stands on both sides of the deal (for example, when a parent

acquires its subsidiary),45 as well as those in which the controller stands on only

one side of the deal but “competes with the common stockholders for

consideration.” 46 In either circumstance, entire fairness review will apply ab

initio.47

As discussed in Kahn v. M&F Worldwide Corp., and its forerunners and

progeny, cases where the controller stands on both sides of the transaction present

a particularly compelling reason to apply entire fairness: both corporate decision-

43
Crimson, 2014 WL 5449419, at *9 (identifying and describing both scenarios).
44
See id. at *14.
45
E.g., Kahn v. M&F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014).
46
Crimson, 2014 WL 5449419, at *12; see also In re Primedia, Inc. S’holders Litig.,
67 A.3d 455, 486 (Del. Ch. 2013) (“When a corporation with a controlling stockholder is
sold to a third party, the entire fairness standard applies if the controlling stockholder
receives a benefit not shared with the minority.”); In re Synthes, Inc. S’holder Litig.,
50 A.3d 1022, 1034 (Del. Ch. 2012) (“[T]he plaintiffs must plead that [the alleged
controller] had a conflicting interest in the Merger in the sense that he derived a personal
financial benefit ‘to the exclusion of, and detriment to, the minority stockholders.’”
(quoting Sinclair, 280 A.2d at 720)).
47
Emerald P’rs v. Berlin, 787 A.2d 85, 93 (Del. 2001).

23
making bodies to which Delaware courts ardently defer—the board of directors

and disinterested voting stockholders—are considered compromised by the

controller’s influence.48 That is, the controller’s presence is said to exert “inherent

coercion” 49 on both constituencies such that neither can “freely exercise their

judgment” for reasons that vary among the constituencies in question.50 Directors,

on the one hand, might feel beholden to a controller who placed them on the board,

supported them during election season, or could fire them at any moment. 51

Stockholders, on the other hand, might generally hesitate to vote against a

controller’s known preferred outcome because they are resigned to the inevitability

48
M&F Worldwide, 88 A.3d at 644 (“[E]ntire fairness . . . is applied in the controller
merger context as a substitute for the dual statutory protections of disinterested board and
stockholder approval, because both protections are potentially undermined by the
influence of a controller.”); Crimson, 2014 WL 5449419, at *9 (same); see In re Cysive,
Inc. Shareholders Litig., 836 A.2d 531, 548 (Del. Ch. 2003) (“The rationale for [the
burden-shifting mechanism established in Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d
1110, 1117 (Del. 1994)] is that the potential power of the controlling stockholder to act in
ways that are detrimental to independent directors and unaffiliated stockholders is
supposedly so formidable that the law's prohibition of retributive action and unfair self-
dealing is insufficient to render either independent director or independent stockholder
approval a reliable guarantee of fairness.”); cf. In re Nine Sys. Corp. S’holders Litig.,
2014 WL 4383127, at *33 (Del. Ch. Sept. 4, 2014) (“Absent [the procedural protections
listed in M&F Worldwide], a minority stockholder’s challenge to a transaction in which a
controlling stockholder stands on both sides implicates the entire fairness standard of
review.”).
49
In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002).
50
In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18,
2006).
51
Pure Res., 808 A.2d at 436.

24
of that outcome or fear retribution in some form if they resist—for example, the

controller might withhold dividends or find other means to extract value from the

entity. 52 For these reasons, entire fairness applies to two-sided controller

transactions unless a comprehensive set of procedural protections—that the M&F

Worldwide court summarized as “disinterested board and stockholder approval”—

operate to restore the court’s confidence in both constituencies’ decisions.53 Use of

one protection or the other, however, only partially alleviates extant concerns, and

therefore merely shifts the burden of persuasion from the defendants to the

plaintiffs.54

Transactions where the controller is on only one side of the transaction also

face entire fairness scrutiny to assuage the risk that a controller who stands to earn

“different consideration or some unique benefit” will flex his control to secure that

52
Id.
53
See M&F Worldwide, 88 A.3d at 645 (listing the following six conditions that, if met,
reduce the standard of review in “controller buyout” contexts to business judgment:
“(i) the controller conditions the procession of the transaction on the approval of both a
Special Committee and a majority of the minority stockholders; (ii) the Special
Committee is independent; (iii) the Special Committee is empowered to freely select its
own advisors and to say no definitively; (iv) the Special Committee meets its duty of care
in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no
coercion of the minority”).
54
Id. at 646; Lynch, 638 A.2d at 1117.

25
self-interested deal to the detriment of minority stockholders. 55 The dual

procedural protections referenced in M&F Worldwide operate similarly in the one-

sided controller context.56

As noted, Plaintiffs argue that the business judgment rule does not apply

either because the Auspex merger is a one-sided controller transaction (triggering

entire fairness) or its presumptions have been rebutted by individual director self-

interest (also triggering entire fairness). Critically, Plaintiffs also argue that

55
Synthes, 50 A.3d at 1033 (Del. Ch. 2012) (“The argument in [the one-sided controller
transaction] context is that the controller used its power over the company to cause the
company to enter into a transaction that was not equal to all the stockholders, and unfair
to the minority because the controller unfairly diverted proceeds that should have been
shared ratably with all stockholders to itself.”); see Frank v. Elgamal, 2014 WL 957550,
at *28 (Del. Ch. Mar. 10, 2014) (“Under the reasoning articulated in In re John Q.
Hammons Hotels Inc. Shareholder Litigation, because a stockholder with a controlling
interest ‘could effectively veto any transaction,’ the Court should subject a transaction to
entire fairness review, even if the controlling stockholder does not stand on both sides,
where the controlling stockholder and the minority stockholders are ‘competing’ for the
consideration of the acquirer.” (quoting In re John Q. Hammons Hotels Inc. S’holder
Litig., 2009 WL 3165613, at *12 (Del. Ch. Oct. 2, 2009)).
56
See Frank, 2014 WL 957550, at *28 (“Both Lynch and Hammons teach that, if the
transaction was either recommended by a special committee or approved in a non-
waivable majority-of-all-the-minority vote, then the entire fairness standard of review
still applies but the burden shifts to the plaintiff to prove that the transaction was not
fair.”); Hammons, 2009 WL 3165613, at *12 & n.38 (clarifying that the one-sided
controller transaction at issue was “not governed by Lynch,” a case involving a two-sided
controller transaction, and holding that “business judgment would be the applicable
standard of review if the transaction [where the controller stands on only one side] were
(1) recommended by a disinterested and independent special committee, and
(2) approved by the stockholders in a non-waivable vote of the majority of all the
minority stockholders.”).

26
Auspex stockholders’ 78% tender has no effect on the applicable standard of

review under either scenario. I disagree.

1. When fully informed, disinterested, uncoerced stockholders approve
a transaction absent a looming conflicted controller, the irrebuttable
business judgment rule applies.

In Corwin, our Supreme Court affirmed this court’s adherence to the

“proposition that when a transaction not subject to the entire fairness standard is

approved by a fully informed, uncoerced vote of the disinterested stockholders, the

business judgment rule applies.”57 In this case, it is undisputed that stockholders

owning 78% of Auspex’s shares, including about 70% of shares not subject to the

Tender and Support Agreement, voiced their approval of the challenged merger by

tendering their shares. The parties dispute whether this show of support has the

cleansing effect referenced in Corwin. This dispute exists on several levels—

including, in descending order of logical primacy: (1) will stockholder approval

cleanse a transaction subject to entire fairness review, and if so, in all such

transactions or only some?; (2) if not all transactions reviewed for entire fairness

can be cleansed by majority stockholder approval, is this merger subject to

57
125 A.3d at 309 (emphasis supplied); see In re KKR Fin. Hldgs. LLC S’holder Litig.,
101 A.3d 980, 1001–03 (Del. Ch. 2014).

27
cleansing?; and (3) does the 78% tender qualify as a “fully-informed, uncoerced

vote of the disinterested stockholders?”58

The first inquiry, in practical terms, really asks: what did Corwin mean by “a

transaction not subject to the entire fairness standard”? 59 Plaintiffs sponsor a

rigorously literal reading of that text—that is, that all transactions subject to entire

fairness for any reason cannot be cleansed under Corwin. Defendants urge the

Court to consider contextual cues and the authority undergirding Corwin, both of

which strongly suggest that the only transactions that are subject to entire fairness

that cannot be cleansed by proper stockholder approval are those involving a

controlling stockholder. I agree with Defendants’ reading of Corwin for three

reasons.

First, a plain reading of Corwin itself, along with its supporting authority

and underlying context, undercuts Plaintiffs’ interpretation. In its introductory

passage, Corwin drew the precise distinction that Plaintiffs dismiss as immaterial:

For sound policy reasons, Delaware corporate law has long been
reluctant to second-guess the judgment of a disinterested stockholder
majority that determines that a transaction with a party other than a
controlling stockholder is in their best interests.60
58
Corwin, 125 A.3d at 309.
59
Id. at 312–13 (“Finally, when a transaction is not subject to the entire fairness standard,
the long-standing policy of our law has been to avoid the uncertainties and costs of
judicial second-guessing when the disinterested stockholders have had the free and
informed chance to decide on the economic merits of a transaction for themselves.”).
60
Id. at 306 (emphasis supplied).
28
In the same paragraph, the Supreme Court expressly affirmed the Chancellor’s

summary of his holding:61

For the foregoing reasons, I conclude that, even if the plaintiffs had
pled facts from which it was reasonably inferable that a majority
of . . . directors were not independent, the business judgment standard
of review still would apply to the merger because it was approved by
a majority of the shares held by disinterested stockholders . . . in a
vote that was fully informed.62

The remainder of Corwin is replete with citations to Delaware cases—many of

them relied upon by the Chancellor—that stand for the proposition that proper

stockholder approval restores business judgment rule review to transactions that

might otherwise be tainted by facts indicating that a majority of board members

breached their fiduciary duties, but not transactions involving a conflicted

controller, which remain subject to entire fairness review absent the robust suite of

procedural protections listed in M&F Worldwide.63 Indeed, our Supreme Court did

61
Id. at 305 & n.1.
62
KKR Fin. Hldgs., 101 A.3d at 1003.
63
An incomplete sampling of cases cited by the Supreme Court (appearing in footnotes
14 and 19 of Corwin) include: PNB, 2006 WL 2403999, at *14 (“[O]utside the Lynch
context, proof that an informed, non-coerced majority of the disinterested stockholders
approved an interested transaction has the effect of invoking business judgment rule
protection for the transaction and, as a practical matter, insulating the transaction from
revocation and its proponents from liability.”); Harbor Fin. P’rs v. Huizenga, 751 A.2d
879, 890–91, 900–03 (Del. Ch. 1999) (holding that the business judgment rule applied to
a transaction in which “a majority of [directors] could not disinterestedly or
independently evaluate the merger” because fully informed, disinterested, uncoerced
stockholders approved it); Wheelabrator, 663 A.2d at 1200 (holding that the effect of a
29
not purport to break new ground in this aspect of its Corwin decision; the court

instead reasoned that “the overwhelming weight of our state’s case law supports

the Chancellor’s decision below.”64

In short, accepting Plaintiffs’ interpretation would be tantamount to a

conclusion that the Corwin court intended to contradict its own holding, the

holding of the opinion it affirmed, and the holding in a number of the cases it cited.

And that it did so without explanation. Ironically, Corwin itself observed that our

Supreme Court will not tacitly reverse settled law.65

Second, Defendants’ reading of Corwin and Singh comports with more

recent guidance from this court. In Volcano, Vice Chancellor Montgomery-Reeves

interpreted Singh as confirming that “upon a fully informed vote by a majority of a

fully informed vote of a majority of disinterested stockholders was to “extinguish
plaintiffs’ due care claim” and, as for plaintiffs’ claim that the merger was an interested
transaction, “invoke the business judgment standard, which limit[ed] review to issues of
gift or waste”); Solomon, 747 A.2d at 1117, 1127 (holding that, in cases where plaintiffs
allege directors breached their duty of loyalty absent the presence of a controller, a fully
informed, non-coerced vote of disinterested shareholders would reinstate the business
judgment rule as the applicable standard of review); In re Gen. Motors Class H S’holders
Litig., 734 A.2d 611, 616–17 (Del. Ch. 1999) (holding that stockholder approval provided
an independent and sufficient reason to apply the business judgment rule to a transaction
challenged on grounds that directors breached their fiduciary duties of care and loyalty by
failing to adequately inform themselves, acting in bad faith, and succumbing to conflicts
of interest); see also Corwin, 125 A.3d at 311 n.24 (discussing the burden-shifting effect
of majority-of-the-minority votes in controlling stockholder going-private merger
contexts).
64
Corwin, 125 A.3d at 311 n.20.
65
See id. at 311 (“Had Gantler been intended to unsettle a long-standing body of case
law, the decision would likely have said so.”).

30
company’s disinterested, uncoerced stockholders, the business judgment rule

irrebuttably applies to a court’s review of the approved transaction.”66 Thus, as

confirmed by Singh, a stockholder challenge to a merger on the ground that the

business judgment rule’s presumptions have been rebutted with respect to a

majority of directors will fall flat in the wake of proper stockholder approval of the

transaction.67

Third and finally, dichotomous treatment of cases involving a controlling

stockholder transaction and those involving rebuttal of the business judgment rule

by virtue of board-level conflicts harmonizes Corwin with the policy rationales that

animate Delaware controlling stockholder jurisprudence. As our courts have

repeatedly held, in order for a stockholder vote to restore the court’s confidence in

an otherwise questionable transaction, the stockholders must not have been coerced

into voting “yes.” Coercion is deemed inherently present in controlling

stockholder transactions of both the one-sided and two-sided variety,68 but not in

66
2016 WL 3583704, at *11. Singh was issued after briefing on the motion concluded
and Volcano was issued after the parties submitted the present motion for decision. Both
cases, however, have been addressed by the parties in competing letter submissions.
67
Volcano, 2016 WL 3583704, at *8 & n.16, *9–11.
68
See Pure Res., 808 A.2d at 436; Wheelabrator, 663 A.2d at 1204 (“The participation of
the controlling interested stockholder is critical to the application of the entire fairness
standard because, as [Lynch] and [Stroud v. Grace, 606 A.2d 75 (Del. 1992)] recognize,
the potential for process manipulation by the controlling stockholder, and the concern
that the controlling stockholder’s continued presence might influence even a fully
informed shareholder vote, justify the need for exacting judicial scrutiny and procedural
31
transactions where the concerns justifying some form of heightened scrutiny derive

solely from board-level conflicts or lapses of due care.69 Accordingly, under the

current state of our law, stockholder approvals are afforded potency proportionate

to their situational legitimacy—burden shifting in the controlling stockholder

context,70 and a restoration of business judgment deference in other contexts that

would otherwise implicate entire fairness review.

protection afforded by the entire fairness form of review.”); Gen. Motors, 734 A.2d
at 617 (“‘[I]mplied coercion’ . . . has been found to exist where a controlling stockholder
dominates the corporation.”). I acknowledge that I have glossed over the significantly
different degrees to which coercion inheres in transactions where the controller is on both
sides of the transaction versus those conflicted transactions in which the controller stands
on only one side. I will not dwell on this distinction for two reasons. First, the fact
remains that disinterested stockholder approval achieves only burden-shifting in both
contexts. Second, this case does not provide a factual vantage point from which to
consider the issue because, for reasons that follow, the transaction at issue here does not
involve a conflicted controller.
69
See supra note 42 and accompanying text. This same reasoning applies to transactions
that trigger enhanced scrutiny. Delaware courts apply enhanced scrutiny, a middle-
ground situated between business judgment and entire fairness, in circumstances that
present a priori reasons to question board members’ motives that are comparatively less
concerning than circumstances warranting the imposition of entire fairness. See, e.g.,
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 597 (Del. Ch. 2010) (“Avoiding a crude
bifurcation of the world into two starkly divergent categories—business judgment rule
review reflecting a policy of maximal deference to disinterested board decisionmaking
and entire fairness review reflecting a policy of extreme skepticism toward self-dealing
decisions—the Delaware Supreme Court’s Unocal and Revlon decisions adopted a
middle ground.”). Classic Unocal and Revlon scenarios are said to subtly—and
categorically—risk corrupting the decisions of even disinterested directors. See, e.g., id.
Because enhanced scrutiny scenarios present only board-level conflicts, stockholders
remain equipped to cleanse the challenged transaction by voicing their fully informed,
uncoerced approval.
70
See supra notes 54 & 56 and accompanying text; see also J. Travis Laster, The Effect
of Stockholder Approval on Enhanced Scrutiny, 40 Wm. Mitchell L. Rev. 1443, 1461
32
 For all of these reasons, I reject Plaintiffs’ attempt to expand Corwin beyond

its clearly intended meaning by seizing upon a single passage that superficially

supports their position. Instead, I agree with Defendants’ more discriminating

interpretation, consistent with Singh and Volcano, that under Corwin and the

expansive supporting authority it cites, the business judgment rule irrebuttably

applies if a majority of disinterested, uncoerced stockholders approve a transaction

absent a looming conflicted controller.

2. There was no conflicted controller.

Plaintiffs contend that the challenged merger was a one-sided controller

transaction because: (1) some combination of five stockholders—Thomas,

McNerney, Panorama, and the Auspex directors with positions at those two firms

(Zisson, Shah, and Ferguson)—are, collectively, a control block; 71 and (2) the

controller, in whatever form it may take, competed with the other Auspex

stockholders for portions of the consideration Teva was willing to pay. Neither

premise has been well-pled in the Complaint.

(2014) (“Because the controller’s influence operates at both the board and stockholder
levels, neither a special committee nor a majority-of-the-minority vote, standing alone, is
sufficient to sterilize the controller’s influence and reestablish the presence of a qualified
decision maker.”).
71
Plaintiffs offer two alternative configurations of these stockholders as the potential
control group/controlling stockholder. First, they argue that Thomas, McNerney,
Panorama, and the VC Directors formed a control block. Alternatively, they argue that
Thomas, McNerney was a controlling stockholder alone.

33
 a. There was no controlling stockholder.

Under Delaware law, a stockholder owning less than half of a company’s

outstanding shares may nonetheless be deemed a controller where “the stockholder

can exercise actual control over the corporation’s board.”72 This “actual control”

test requires the court to undertake an analysis of whether, despite owning a

minority of shares, the alleged controller wields “such formidable voting and

managerial power that, as a practical matter, [it is] no differently situated than if

[it] had majority voting control.”73 Making this showing is no easy task, as the

minority blockholder’s power must be so potent that it triggers the traditional

Lynch concern that independent directors’ free exercise of judgment has been

compromised.74 A controlling stockholder can exist as a sole actor or a control

72
KKR Fin. Hldgs., 101 A.3d at 995; see also Crimson, 2014 WL 5449419, at *12
(“[A] large blockholder will not be considered a controlling stockholder unless they
actually control the board’s decisions about the challenged transaction.”).
73
In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 665 (Del. Ch. 2013)
(quoting PNB, 2006 WL 2403999, at *9).
74
PNB, 2006 WL 2403999, at *9 (“[The actual control test] is not an easy one to satisfy
and stockholders with very potent clout have been deemed, in thoughtful decisions, to fall
short of the mark.”); Morton’s, 74 A.3d at 665 (“[T]he minority blockholder’s power
must be ‘so potent that independent directors . . . cannot freely exercise their judgment,
fearing retribution’ from the controlling minority blockholder.” (quoting PNB, 2006 WL
2403999, at *9)); see also KKR Fin. Hldgs., 101 A.3d at 994 (finding that a minority
blockholder was not a controlling stockholder where there were “no well-pled facts from
which it is reasonable to infer that [the alleged controller] could prevent [the board] from
freely exercising its independent judgment in considering the proposed merger or, put
differently, that [the alleged controller] had the power to exact retribution by removing
the [directors] from their offices if they did not bend to [the alleged controller’s] will in
their consideration of the proposed merger”).
34
block of “shareholders, each of whom individually cannot exert control over the

corporation . . . [but who] are connected in some legally significant way—e.g., by

contract, common ownership agreement, or other arrangement—to work together

toward a shared goal.”75

More than once this court has invoked the facts of In re Cysive, Inc.

Shareholders Litigation76 as a benchmark for the minimum degree of managerial

clout needed to meet the actual control test where the alleged controller’s holdings

are well below 50% of a company’s outstanding shares. 77 There, the alleged

controller, Nelson Carbonell, was the company’s founder, Chairman and CEO, and

owned 35% of the company’s outstanding stock with an option to buy more.78

Notwithstanding his less-than-majority stake, the court found that Carbonell

wielded Lynch-like coercive influence over two close family members whom he

hired as executives,79 as well as another director, such that he actually controlled

75
Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009).
76
836 A.2d 531 (Del. Ch. 2003).
77
Morton’s, 74 A.3d at 665 (“In In re Cysive, this court made, perhaps, its most
aggressive finding that a minority blockholder was a controlling stockholder.”); KKR Fin.
Hldgs., 101 A.3d at 991 (quoting Morton’s for the same proposition); cf. Crimson, 2014
WL 5449419, at *11 (using Cysive’s facts to illustrate the sort of “extreme showing”
needed to earn the title of controller); PNB, 2006 WL 2403999, at *10 (same).
78
Cysive, 836 A.2d at 533–35.
79
Id. at 552 (“Given this voting power, the threat of ‘inherent coercion’ that Carbonell
presents to the independent directors and public stockholders of Cysive cannot be
rationally distinguished from that found to exist in Lynch, or cases of its kind. If
35
roughly 40% of the company’s stock.80 The court ultimately held that Carbonell

was a controlling stockholder despite his minority holdings because his “day-to-

day managerial supremacy” and large de facto ownership stake gave him the

practical ability to control the corporate decision making process—a fact that

“rational independent directors, public stockholders, and other market participants”

would have perceived.81

No possible permutation of the VC Stockholders and VC Directors amounts

to a controlling stockholder in this case because no well-pled allegations permit

even a reasonable inference that any such controller or control block could

“exercise actual control over [Auspex’s] board.”82 Allegations to that effect in the

Complaint are slim to nonexistent. The VC Stockholders’ combined holdings sum

up to 23.1% of Auspex’s outstanding shares, a small block in controller contexts,83

and no facts suggest that Thomas, McNerney, Panorama, or any VC Director

compromised or otherwise influenced other directors’ free exercise of judgment.

This is unsurprising given that the Complaint, which does not once mention the

Carbonell becomes dissatisfied with the independent directors, his voting power positions
him well to elect a new slate more to his liking without having to attract much, if any,
support from public stockholders.” (footnote omitted)).
80
Id. at 535.
81
Id. at 552–53.
82
KKR Fin. Hldgs., 101 A.3d at 995.
83
See Crimson, 2014 WL 5449419, at *10 n.50 (collecting cases).

36
word “controller” or any derivation of that concept, focuses instead on attempting

to plead facts that would rebut the business judgment rule’s presumptions for a

majority of directors by illustrating that they were oblivious to the shopping

process that Shah unilaterally ran 84 and labored under disabling conflicts of

interest. These allegations, more evocative of interestedness, bad faith dereliction

of duty, or lack of due care, 85 do not, as the actual control inquiry requires,

substantiate the notion that any VC Stockholder-based control group had practical

and perceived authority to “control the corporation, [if] it so wish[ed].”86

Plaintiffs’ reliance upon New Jersey Carpenters Pension Fund v.

infoGROUP87 and Calesa Associates, L.P. v. American Capital, Ltd.88 as support

for their controlling stockholder argument is misplaced. In infoGROUP, entire

84
The Complaint contains over a dozen allegations that actions taken during the
negotiation process occurred “without Board oversight,” or words to that effect. Compl.
at 34; id. ¶¶ 79–83, 86–89, 93, 103–04. The notion that Shah kept the board in the dark is
at odds with the idea that Shah, as an arm of Thomas, McNerney, was a controller. Were
Shah a controller with the same de facto authority and coercive influence as a majority
stockholder, he would have power over corporate decision making by controlling or
dominating the Board. The fact that he hid things from the Board suggests precisely the
opposite—that the only way he could get his way was by strategic misdirection.
85
Nothing in this opinion is intended as a holding that Plaintiffs have adequately pled
that any of the directors were, in fact, interested, acted in bad faith, or acted with gross
negligence.
86
Morton’s, 74 A.3d at 666 (quoting Cysive, 836 A.2d at 553).
87
2011 WL 4825888 (Del. Ch. Sept. 30, 2011).
88
2016 WL 770251 (Del. Ch. Feb. 29, 2016).

37
fairness applied under relatively extreme allegations that a director drove fellow

board members to accept a sale of the company through intimidation tactics that

included blackmail and threats to sue. 89 And in Calesa, the court found that

plaintiffs stated a claim that a controlling stockholder existed because “a majority

of the board was not disinterested or lacked independence from” the alleged

controller.90

Here, by contrast, there are no allegations of either overt or even subtle

bullying or that a majority of Auspex’s directors were aligned with Thomas,

McNerney and Panorama. Assuming arguendo that the three VC Directors were

controlled, Plaintiffs fail adequately to plead that at least two of the remaining six

directors owed any allegiance to the VC Stockholders. The connections alleged—

that a four-member committee comprised of two VC Directors recommended (but

89
infoGROUP, 2011 WL 4825888, at *11. The court in In re Crimson Exploration Inc.
S’holder Litig. noted that “it is unclear if the [infoGROUP] court determined whether
[defendant-director] was a controlling stockholder.” 2014 WL 5449419, at *11 n.60 (Del.
Ch. Oct. 24, 2014). This apparent confusion seems to arise from the fact that the
infoGROUP court, in holding that plaintiffs’ complaint supported a reasonably
conceivable inference that entire fairness would apply, concluded both that one forceful
director, Gupta, “dominated [a majority of other directors] through a pattern of threats”
and that “a majority of the Board was interested or lacked independence.” infoGROUP,
2011 WL 4825888, at *11. A distinction between those two conclusions, to the extent
one exists, might have important implications in the context of Corwin cleansing.
Nonetheless, I need not address that issue in this case because infoGROUP is
distinguishable on its facts.
90
Calesa, 2016 WL 770251, at *12.

38
did not grant) Tax Reimbursements to Saks and Sarshar91 and that Bleil and Greer

(the directors added to the Board when it expanded from seven to nine) “were

handpicked by conflicted directors” and given generous stock options92—are too

tenuous to evidence domination and control as a matter of law, particularly given

the complete absence of allegations that these connections aligned each director

not only with the VC Directors, but also with the firms they worked for.

b. There was no conflict.

Plaintiffs’ failure adequately to allege the presence of a controlling

stockholder is an independent and sufficient reason to dispense with Plaintiffs’

related attempt to invoke entire fairness review. Even if Plaintiffs had properly

alleged the presence of a controller, though, Plaintiffs would remain unable to

invoke entire fairness on a controlling stockholder theory since they also failed to

plead that trigger’s second factual requisite: that the controller engaged in a

conflicted transaction.93

Plaintiffs argue in substance that the venture capital firms’ desire quickly to

monetize their position in Auspex led them to conduct, through Shah, a rushed,

stilted sales process that failed to maximize Auspex’s value. Thus, according to

91
Compl. ¶ 116.
92
Id. ¶ 72.
93
See Crimson, 2014 WL 5449419, at *9 (“[T]riggering entire fairness review requires
the controller or control group to engage in a conflicted transaction.”).

39
Plaintiffs, although it appears on the surface that the VC Stockholders’ interests

were perfectly aligned with those of minority stockholders—after all, they agreed

to receive the same consideration for their stock in an arm’s length third party

transaction—Plaintiffs have pled that the venture capital firms in fact used their

power over Auspex to extract for themselves comparatively more value from the

transaction in a way that hurt the minority. Again, I disagree.

This court has, in the past, evaluated liquidity theories of this sort with

marked skepticism, characterizing them as “unusual,” “counterintuitive,” and

“aggressive.”94 These characterizations are often well-justified. By asserting this

theory, Plaintiffs ask the Court to make an extraordinary inference: that rational

economic actors have chosen to short-change themselves. 95 With this internal

conflict in mind, this court has been reluctant to find a liquidity-based conflict

absent the presence of additional circumstantial indicators of conflict that elevate

this fundamentally implausible idea to the level of reasonably conceivable:96

94
Synthes, 50 A.3d at 1034–35.
95
Morton’s, 74 A.3d at 666–67 (“[T]he presumption is that a large blockholder, who
decides to take the same price as everyone else, believes that the sale is attractive, and
thus is a strong indication of fairness and that judicial deference is due. In most
situations, the controlling stockholder has interests identical to other stockholders: to
maximize the value of its shares.” (footnotes omitted)).
96
The Synthes court also justified its skepticism of liquidity-based conflict theories by
calling out the risk that a contrary rule would create perverse incentives. Chief Justice
Strine, then writing as Chancellor, observed that controlling stockholders ought to be
encouraged, where possible, to seek pro rata premia because controllers often have the
40
 It may be that there are very narrow circumstances in which a
controlling stockholder’s immediate need for liquidity could
constitute a disabling conflict of interest irrespective of pro rata
treatment. Those circumstances would have to involve a crisis, fire
sale where the controller, in order to satisfy an exigent need (such as a
margin call or default in a larger investment) agreed to a sale of the
corporation without any effort to make logical buyers aware of the
chance to sell, give them a chance to do due diligence, and to raise the
financing necessary to make a bid that would reflect the genuine fair
market value of the corporation.97

For instance, in infoGROUP, a viable disabling liquidity need was found in

the presence of well-pled allegations that the interested stockholder owed

$12 million in settlement payments and $13 million in loans, had no sources of

cash inflow, had recently paid out $4.4 million, and planned to start a new

expensive business venture.98 Similarly specific allegations justified a finding of a

unique liquidity need in In re Answers Corp. Shareholder Litigation.99 There, the

complaint described why the allegedly interested entity (Redpoint) had a liquidity

need that was unique, why a cash sale was necessary for monetization, why an

most skin in the game and therefore the strongest incentive to maximize the sale price.
Thus, “[a]s a general matter . . . if one wishes to protect minority stockholders, there is a
good deal of utility to making sure that when controlling stockholders afford the minority
pro rata treatment, they know that they have docked within the safe harbor created by the
business judgment rule.” Otherwise, the court reasoned, controllers “might as well seek
to obtain a differential premium for themselves or just to sell their control bloc, and leave
the minority stuck-in.” Synthes, 50 A.3d at 1035–36.
97
Id. at 1036.
98
infoGROUP, 2011 WL 482588, at *9.
99
2012 WL 1253072, at *7 (Del. Ch. Apr. 11, 2012).

41
immediate sale was necessary, and that Redpoint in fact sought a fast sale.100 In

particular, plaintiffs alleged that although smaller blockholders could sell their

shares in the open market, Redpoint’s 30% position in Answers Corp. was illiquid

because the company’s stock was thinly traded. 101 It was further alleged that

Redpoint sought a cash sale because that was its only viable liquidity option, a

preference it made known by threatening to fire Answers Corp.’s entire

management team unless a sale was completed in short order. 102 Finally,

Redpoint’s board designees, aware of internal projections showing that Answers

Corp.’s value was rising, sought to secure a fast sale before having to disclose

improved projections.103

Unlike the complaints in infoGROUP and Answers, the Complaint is devoid

of non-conclusory allegations that would support a reasonable inference that the

VC Stockholders faced a unique liquidity need, a specific need for cash or an

exigency that would prompt them to seek a fire sale. The Auspex public

disclosures describe a robust shopping period that ultimately secured stockholders

100
Id. at *1–2, *7.
101
Id. at *1, *7 n.46.
102
Id. at *1–2.
103
Id. at *2–3, *7 n.46. In particular, the complaint alleged that Answers Corp.’s
financial advisor “told the Board that ‘time is not a friend to this deal with continued out
performance and a looming q4 earnings call,’ and that, in response, the Board sped up the
sales process.” Id. at *3.

42
the highest available offer for their Auspex stock. And far from pleading a unique

liquidity problem, the Complaint simply asserts, without any specific factual

support, that the VC Stockholders’ holdings were “illiquid.”104 Even if I deemed

that allegation nonconclusory,105 the Complaint offers no facts from which to infer

that this predicament was unique to the VC Stockholders such that they were

incented to seek a sale on terms the other Auspex stockholders did not want.

By contrast, in Answers, the plaintiffs alleged that Answers Corp.’s thinly-traded

stock could be sold by small blockholders, but not Redpoint.106 Here, Plaintiffs ask

that I infer that same state of disparate liquidity despite no well-pled allegations to

that effect. Thus, I could just as easily infer that Auspex stock was categorically

illiquid and the Board discharged its fiduciary duties by securing a merger that

satisfied liquidity needs shared by all.

Nor have Plaintiffs adequately pled the existence of a cash need. Unlike

infoGROUP, the Complaint makes no allegation that Thomas, McNerney and

Panorama needed fast cash to pay debts or fund new business ventures or

104
Compl. ¶¶ 2, 50, 121.
105
Allegations in the Complaint make it difficult to give the Plaintiffs the benefit of this
supposition. For instance, the Complaint describes instances in which the market reacted
quickly and, at times, drastically to various indices of Auspex’s growth prospects.
Compl. ¶¶ 40, 42. The logical inference to be drawn from these allegations, if any, is that
a bona fide market existed for Auspex stock.
106
Answers, 2012 WL 1253072, at *1, *7 n.46.

43
investments. 107 Instead, Plaintiffs rely on sweeping characterizations of the

venture capital industry writ large to support their conclusory allegations of

conflict. In particular, the Complaint alleges that venture funds typically nurture

investments in portfolio companies for 1-10 years before entering a “harvesting

period” during which funds urgently seek cash deals allowing them to pay

investors or start new funds. 108 Even if the Complaint contained particular

allegations ascribing these generalized needs to Thomas, McNerney and Panorama,

which it does not, the allegations would not support a conclusion that the

VC Stockholders drove the Auspex board to approve a conflicted transaction.

This court rejected a very similar argument resting on stronger facts in In re

Morton’s Restaurant Group, Inc. Shareholders Litigation. 109 There, plaintiffs

alleged, inter alia, that a private equity fund had an urgent need to monetize its

position in Morton’s in order to raise a new fund and free up investors to

participate in that new fund.110 The court declined to hold that this liquidity theory

raised even a pleadings-stage inference that the private equity fund was conflicted,

reasoning that the relatively common desire to raise a new fund was “not some

107
infoGROUP, 2011 WL 482588, at *9.
108
Compl. ¶¶ 53–55.
109
74 A.3d at 667–69.
110
Id. at 667.

44
unusual crisis, requiring a fire sale,” that an immediate sale addressed no

identifiable liquidity concern of the fund given that proceeds of the liquidation

would likely flow to the fund’s investors, and that private equity funds are

naturally disincentivized hastily to seek below-market merger consideration to

avoid alienating past investors.111

Each conceptual difficulty identified in Morton’s applies, in some form,

here. Plaintiffs allege generally that venture capital firms cyclically raise and

liquidate funds on a predicable schedule that would strongly suggest that

monetization is hardly an “unusual crisis” in the venture capital space. Plaintiffs

also fail to clarify to what extent, if at all, Thomas, McNerney and Panorama

would absorb the merger proceeds they are alleged to so desperately need. Further,

venture capital funds, like private equity funds, are naturally incentivized to pursue

maximally profitable deals for their investors. Such deals may, in some

circumstances, take the form of a payout consisting of both cash and stock in a

company like Auspex that, according to Plaintiffs, had strong upside that

materialized immediately after the merger with the arrival of the June Test

Results.112 In short, Plaintiffs offer no logical reason why the VC Stockholders’

need for cash was so great that they would be willing to leave meaningful value on

111
Id. at 668.
112
Compl. ¶ 14; id. ¶¶ 38–43 (describing Auspex’s “strong growth prospects”).

45
the table. Thus, I conclude that the Complaint fails to sustain a reasonably

conceivable inference that the VC Stockholders subordinated minority interests to

their own by masterminding a hurried, inadequate sale process to extract a unique

benefit.

Moreover, Plaintiffs failed to allege that any existing need for cash on the

part of the VC Stockholders was exigent. Plaintiffs’ sole exigency theory is a

mirror image of the exigency theory asserted in Answers—that the venture capital

firms and their board designees “rush[ed] to conclude the process by the end of the

first quarter, before the announcement of significant new positive results on SD-

809” in June 2015 that would scuttle the proposals of existing bidders, including

Teva. 113 The problem with that theory is, unlike in Answers, the Complaint

contains no well-pled allegations either that the supposedly conflicted fiduciaries

knew the forthcoming public announcements would be positive or even that the

conflicted controller was the one who set the operative deadlines.

The Complaint alleges that Shah informed potential bidders of the Board’s

preference, not his preference, to conclude the process by the end of the first

quarter of 2015. 114 These allegations are consistent with the Recommendation

Statement’s description of the October 30, 2014 meeting at which the Board

113
Answering Br. 29.
114
Compl. ¶¶ 76, 91.

46
instructed Auspex’s senior management team to “get clarity on possible strategic

interest by the first quarter of 2015” in order to avoid a distracting, protracted sales

process that might detract from Auspex’s other operations.115

The more fundamental problem with Plaintiffs’ exigency theory, however, is

that no well-pled facts allow an inference that the alleged controller had reason to

think the June Test Results would cause Auspex’s stock price to spike. Because

Auspex publicly reported that SD-809 had a 90% chance of success for its

Huntington’s chorea indication, the market (including Teva) presumably had

already priced in the alleged controller’s optimism with respect to the efficacy of

the drug for that treatment.116 As for SD-809’s tardive dyskinesia and Tourette’s

syndrome indications, no allegations support a reasonable inference that the

VC Stockholders’ internal assessment of success probabilities differed from those

reported in the Recommendation Statement—which were 50% and 30%,

respectively. 117 Thus, unlike the alleged conflicted fiduciaries in Answers, who

had their hands on encouraging internal projections that would hit the market

115
Recommendation Statement 18.
116
See id. 29.
117
Id.

47
shortly, the VC Stockholders had no similar non-public knowledge of an imminent

accretive disclosure requiring a preemptive fire sale.118

Finally, Plaintiffs’ characterization of the sales process as rushed and tilted

towards Teva conflicts with their own allegations. The Complaint alleges that

Auspex and its representatives planned to undertake a three-month sales process

beginning in December 2014 and adhered to that schedule by agreeing to merge

with Teva in late-March.119 During the intervening three months, Auspex and its

representatives held talks with 22 companies, affirmatively solicited interest

from 9, entered into confidentiality agreements with 6, and ultimately chose the bid

that outpriced all others by $500 million. A bird’s-eye view of the sales process

does not suggest the VC Stockholders or VC Directors were conducting an unfair

fire sale.

A closer look at the process is no more revealing of a conflict. Plaintiffs’

ground for asserting that the process evidences a conflicted transaction is that Shah

118
At Oral Argument, counsel for Plaintiffs conceded that the Board had no internal
information suggesting the June Trial Results would be positive, but that this Court can
draw the inference that Shah did. Tr. 42–43. Plaintiffs’ theory on how Shah came upon
this knowledge is not entirely clear, but seems to be based on the premise that the
December 2014 Phase 3 results contained embedded hints as to how the June trials would
unfold, and that Shah alone knew of those hints and either hid them from the Board or did
not share them with the Board. Id. I will not dwell on the sufficiency of this theory
because it is without any well-pled factual support.
119
Compl. ¶ 76 (indicating that as of December 18, 2014, Shah understood the Board’s
deadline to be the end of the first quarter in 2015).

48
snubbed bidders other than Teva, whose bid was all cash. Plaintiffs support this

general claim with two allegations: that Shah gave Teva a time extension it was

unwilling to give to Company C and that Shah ignored a Board instruction to

solicit a renewed bid from Company D. These theories miss the mark because

neither reflects an urgent desire for fast cash.

Although it is reasonably conceivable that Shah “was unwilling to

accommodate a [time extension] request from Company C,” 120 this decision does

not betray a desire for fast cash because Company C could have, in theory, come

back with a cash offer. It is illogical to infer that a controller seeking fast cash

would deny itself the chance to consider an inbound topping bid that might be all

cash. Instead, the logical inference from well-pled facts is that Company C, who

had not yet submitted a bid as of its late-stage expression that it needed more time,

was unable to submit a bid within the Board’s deadline because it could not even

conclude due diligence “within the timeframe demanded by Auspex,” much less

finalize a deal.121 Teva, by contrast, was given an extension on the condition that a

merger agreement would be executed by the end of March.

Plaintiffs’ suggestion that Shah ignored the Board’s instruction to follow-up

with Company D is also not well-pled. Indeed, the Complaint nowhere expressly

120
Id. ¶ 112.
121
Id.

49
makes this allegation. Instead, Plaintiffs allege that “it remains unclear if Shah

ever followed the Board’s instruction” and notes that the Recommendation

Statement is silent on whether he did.122 Thus, I am asked to infer that Shah in fact

ignored the Board’s instruction based on the fact that he wanted to avoid giving

Company D a chance to submit a topping bid that might have a stock component.

For reasons already discussed, however, I am satisfied that the Complaint’s other

well-pled facts (that is, allegations aside from the alleged snubbing of Company D)

fail to support a logical inference that Shah desperately sought a cash deal. When

the supposed motivation for Shah’s rush to close the Teva deal is stripped away as

a backdrop, the suggestion that Shah ignored the Board’s instruction with respect

to Company D is not reasonably conceivable.

Plaintiffs have argued that the alleged controllers’ natural profit motive was

temporarily overpowered by their desire for a “unique benefit”—immediate

liquidity—not shared by other stockholders. For reasons discussed above,
123
Plaintiffs have failed to substantiate that theory with well-pled facts.

122
Id. ¶ 114.
123
To be sure, there are cases in which venture capital harvesting can give rise to
disabling transactional conflicts. For example, in In re Trados Inc. S’holder Litig., 2009
WL 2225958, at *2 & n.2, *7 (Del. Ch. July 24, 2009) this court concluded that a
liquidity desire created a disabling conflict at the motion to dismiss stage given well-pled
allegations of both disparate consideration and email communications evidencing an
intent to sell quickly. The Trados plaintiffs, however, did more than make conclusory
allegations about the life cycle of venture capital funds. They pled facts supporting a
reasonable inference that the particular venture capital firm at issue, along with its board
50
Accordingly, I conclude that the alleged controllers in this case were not conflicted

as a matter of law.

Given the absence of a looming conflicted controller, the business judgment

rule irrebuttably applies to the challenged merger so long as the transaction

received proper stockholder approval. I turn next to whether that requisite

approval occurred.

3. The merger was approved by fully informed, disinterested, and
uncoerced stockholders

Stockholders owning roughly 78% of Auspex’s outstanding stock expressed

their view that the merger with Teva was a good deal. By tendering, they all

agreed to convert their shares into the right to receive $101 per share and let

Auspex become Teva’s wholly-owned subsidiary. Among that “yes”-block were

stockholders owning 27.4% of Auspex’s shares who contractually agreed to tender

under the Tender and Support Agreement. Excluding them, stockholders owning

roughly 70% of the outstanding shares not contractually bound to tender agreed to

the merger.

Not all stockholder approvals of a transaction have a cleansing effect.

Rather, “the [Corwin] doctrine applies only to fully informed, uncoerced

stockholder votes, and if troubling facts regarding director behavior were not

designees, had a short-term motivation to harvest at the expense of other stockholders.
No similar allegations appear in Plaintiffs’ Complaint.
51
disclosed that would have been material to a voting stockholder, then the business
124
judgment rule is not invoked.” Further, only disinterested stockholder

expressions of approval are considered.125

Plaintiffs have not expressly argued that the disinterested stockholders’

decision to tender was coerced. To the extent their eleventh-hour controlling

stockholder argument was intended to suggest a coerced tender, that argument has

been rejected. And although Plaintiffs’ Complaint challenges the

Recommendation Statement as containing materially misleading disclosures,

Plaintiffs have withdrawn those claims in the course of briefing this motion.126

This amounts to a concession, at least by these Plaintiffs, that the tender of shares

was fully informed.127

124
Corwin, 125 A.3d at 312.
125
See id. at 311–13.
126
Answering Br. 3 n.6. Plaintiffs did not argue that stockholders were not fully
informed in their Answering Brief, but did during Oral Argument. See Tr. 45–46.
Because it was not briefed, I consider this argument waived and do not address it here.
Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed are deemed waived.”).
127
See Harbor Finance, 751 A.2d at 890 (holding that the fate of a claim alleging
breaches of the duty of loyalty depended upon the sufficiency of a disclosure claim
“because the effect of untainted stockholder approval of the Merger is to invoke the
protection of the business judgment rule and to insulate the Merger from all attacks other
than on grounds of waste”); Wheelabrator, 663 A.2d at 1200 (“In rejecting the disclosure
claim, the Court necessarily has determined that the merger was approved by a fully
informed vote of a majority of WTI’s disinterested stockholders.”); Gen. Motors, 734
A.2d at 615 (“To a large extent, the disposition of this motion . . . turns on whether
plaintiffs have stated a claim that the GMH stockholder approval of the Hughes
52
 Plaintiffs’ sole challenge to the sufficiency of the Auspex stockholders’ 78%

tender is that a first-step tender offer completed according to Section 251(h) does

not qualify as a “stockholder vote”128 under Corwin. This precise argument was

considered and rejected by Vice Chancellor Montgomery-Reeves in her recent

Volcano opinion.129 I agree with Volcano’s well-reasoned holding and apply it

now to dispense with Plaintiffs’ last attempt to avoid business judgment review.

B. Plaintiffs Have Not Stated a Claim for Waste

Having determined that Plaintiffs have not adequately pled that the

transaction involved a controlling stockholder, and that a proper stockholder

approval of the transaction would cleanse any well-pled allegations that the

transaction was the product of board-level conflicts that might trigger entire

fairness review, the only claim that Plaintiffs could state that would overcome the

otherwise irrebuttable application of the business judgment rule is a claim for

Transactions was tainted by either improper coercion or false and misleading disclosures.
If not, then all three counts of plaintiffs’ complaint are susceptible to dismissal.”).
128
Corwin, 125 A.3d at 312 (emphasis supplied).
129
2016 WL 3583704, at *14 (“I conclude that the acceptance of a first-step tender offer
by fully informed, disinterested, uncoerced stockholders representing a majority of a
corporation’s outstanding shares in a two-step merger under Section 251(h) has the same
cleansing effect under Corwin as a vote in favor of a merger by a fully informed,
disinterested, uncoerced stockholder majority.”).

53
waste. 130 They have not even attempted to make such a claim. Consequently, the

Complaint must be dismissed in its entirety.131

C. Plaintiffs May Not Amend Their Complaint Under Rule 15(aaa)

Plaintiffs’ Answering Brief concludes with the following request: “[I]n the

event the Court grants Defendants’ motion, Plaintiffs respectfully request leave to

amend their Complaint, which may be granted even after the filing of Plaintiffs’

opposition brief.” 132 This request finds no support in Court of Chancery

Rule 15(aaa), which provides:

Notwithstanding subsection (a) of this Rule, a party that wishes to
respond to a motion to dismiss under Rules 12(b)(6) or 23.1 by
amending its pleading must file an amended complaint, or a motion to
amend in conformity with this Rule, no later than the time such party's
answering brief in response to either of the foregoing motions is due
to be filed. In the event a party fails to timely file an amended
complaint or motion to amend under this subsection (aaa) and the
Court thereafter concludes that the complaint should be dismissed
under Rule 12(b)(6) or 23.1, such dismissal shall be with prejudice
(and in the case of complaints brought pursuant to Rules 23 or 23.1
with prejudice to the named plaintiffs only) unless the Court, for
good cause shown, shall find that dismissal with prejudice would
not be just under all the circumstances.133

130
Volcano, 2016 WL 3583704, at *17 (quoting Cede, 634 A.2d at 361).
131
See Singh, 137 A.3d at 151–52 (“When the business judgment rule standard of review
is invoked because of a vote, dismissal is typically the result.”).
132
Answering Br. 40.
133
Ct. Ch. R. 15(aaa) (emphasis supplied).

54
Plaintiffs’ conditional request to amend is not a procedurally proper motion to

amend. More importantly, Plaintiffs have not shown, or even attempted to show,

good cause as to why dismissal with prejudice would be unjust. Accordingly, their

request to amend is denied, and dismissal shall be with prejudice.

IV. CONCLUSION

For the foregoing reasons, the Complaint fails to state a claim upon which

relief can be granted under Court of Chancery Rule 12(b)(6). Defendants’ motion

to dismiss is GRANTED with prejudice.

IT IS SO ORDERED.

/s/ Joseph R. Slights III
Vice Chancellor

55