IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CHESTER COUNTY EMPLOYEES’ )
RETIREMENT FUND, )
)
Plaintiff, )
)
v. ) C.A. No. 11058-VCMR
)
NEW RESIDENTIAL )
INVESTMENT CORP., WESLEY R. )
EDENS, MICHAEL NIERENBERG, )
ALAN L. TYSON, DAVID )
SALTZMAN, KEVIN J. FINNERTY, )
DOUGLAS L. JACOBS, FIG LLC, )
FORTRESS INVESTMENT GROUP )
LLC and FORTRESS OPERATING )
ENTITY I LP, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: July 7, 2017
Date Decided: October 6, 2017
Michael Hanrahan, Paul A. Fioravanti, Jr., Corinne Elise Amato, and Kevin H.
Davenport, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Marc
A. Topaz, Lee D. Rudy, Michael C. Wagner, and Stacey A. Greenspan, KESSLER
TOPAZ MELTZER & CHECK LLP, Radnor, Pennsylvania; Attorneys for Plaintiff.
Robert S. Saunders, Ronald N. Brown, III, Sarah R. Martin, and Elisa M.C. Klein,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware;
Scott D. Musoff, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New
York, New York; Attorneys for Defendants.
MONTGOMERY-REEVES, Vice Chancellor.
In this action, a stockholder of New Residential Corp. (“New Residential”)
purports to assert direct and derivative breach of fiduciary duty claims against the
members of the New Residential board of directors, New Residential’s manager FIG
LLC (“FIG”), FIG’s owner Fortress Operating Entity I LP (“FOE I”), and Fortress
Investment Group LLC (“Fortress”), which allegedly controls New Residential,
FIG, and FOE I. Plaintiff alleges that the Defendants caused New Residential to
overpay for the assets of Home Loan Servicing Solutions, Ltd. (“HLSS”) in order to
advantage other real estate assets of Fortress and to maximize management fees,
incentive compensation, and stock option awards to Fortress and its affiliates.
Plaintiff also seeks a declaratory judgment that a termination agreement between
HLSS and New Residential purporting to release all New Residential stockholder
claims against HLSS is not a valid defense in this action.
Defendants move to dismiss this complaint under Court of Chancery Rules
23.1 and 12(b)(6). Defendants argue that all of Plaintiff’s claims are derivative
claims for corporate overpayment. Defendants contend that a majority of the New
Residential board is disinterested and independent, and that even if a majority of the
board is beholden to Fortress, Fortress is not interested in the underlying
transactions. Defendants also argue that the complaint should be dismissed as to
Fortress, FOE I, and FIG because they are not controlling stockholders and do not
owe fiduciary duties to New Residential. As to the declaratory judgment claim,
2
Defendants contend that Plaintiff’s claim is not ripe because Defendants have not
raised the termination agreement as a defense.
In this Memorandum Opinion, I hold that the facts alleged give rise to a
derivative claim. Plaintiff, however, has not pled particularized facts sufficient to
raise a reasonable doubt that a majority of the directors on the New Residential board
could have exercised their independent and disinterested business judgment in
responding to a demand. As a result, demand is not excused as futile. Further, I
hold that Plaintiff’s declaratory judgment claim is not ripe for judicial review. As
such, I grant Defendants’ Motion to Dismiss.
I. BACKGROUND
This is Plaintiff’s third opportunity to challenge New Residential’s purchase
of the HLSS assets and related transactions. Plaintiff filed its original Complaint in
this case on May 22, 2015 and its First Amended Complaint on October 30, 2015. I
granted Defendants’ Motion to Dismiss the First Amended Complaint with leave to
amend on October 7, 2016 (the “First Opinion”).1 After I denied Plaintiff’s Motion
for Reargument on December 1, 2016 (the “Second Opinion”),2 Plaintiff filed the
Second Amended Verified Class Action and Derivative Complaint (the
1
Chester Cnty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004
(Del. Ch. Oct. 7, 2016).
2
Chester Cnty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 7011350
(Del. Ch. Dec. 1, 2016).
3
“Complaint”) on February 27, 2017. On March 30, 2017, Defendants moved to
dismiss the Complaint pursuant to Court of Chancery Rule 23.1 for failure to bring
pre-suit demand and Rule 12(b)(6) for failure to state a claim upon which relief can
be granted, and I heard oral argument on the Motion to Dismiss on July 7, 2017.
This Memorandum Opinion assumes familiarity with the facts outlined in the First
and Second Opinions and focuses on those facts pertinent to the resolution of the
pending Motion to Dismiss.3 “The reader is forewarned that this case involves a
maze of corporate entities and an alphabet soup of corporate names.”4
A. Parties and Significant Non-Parties
Chester County Employees’ Retirement Fund (the “Plaintiff”) is, and at all
relevant times has been, a holder of New Residential common stock.5
3
Unless otherwise noted, the additional facts in this opinion derive from Plaintiff’s
Complaint and the documents it incorporates by reference. At times, I rely upon
certain extraneous documents that are properly before the Court because they are
integral to Plaintiff’s claims and incorporated by reference into the Complaint. In
re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013)
(“To be incorporated by reference, the complaint must make a clear, definite and
substantial reference to the documents.”); see In re Santa Fe Pac. Corp. S’holder
Litig., 669 A.2d 59, 69-70 (Del. 1995).
4
Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217, at *2 (Del. Ch. Sept. 18, 2014).
5
Compl. ¶ 11.
4
Nominal defendant New Residential was spun-off to non-party Newcastle
Investment Corp.’s (“Newcastle”) stockholders on May 15, 2013.6 New Residential
is a Delaware publicly traded Real Estate Investment Trust (“REIT”) that primarily
invests in excess mortgage servicing rights (“Excess MSRs”), residential mortgage-
backed securities (“RMBS”), call rights for RMBS that are not backed by a
government agency, and a pool of consumer loans.7 New Residential is a permanent
capital vehicle in a web of Fortress entities.8 New Residential has no employees and
is “completely reliant on” FIG to manage its assets.9
Defendant FIG externally manages New Residential pursuant to a contractual
management agreement.10 Defendant FOE I “100% own[s]” FIG, is FIG’s sole
managing member, and holds New Residential stock options granted to FIG.11 Non-
6
Id. ¶ 12. Newcastle allegedly is controlled by Fortress. Id. Newcastle recently
changed its name to Drive Shack Inc., but I will refer to it as Newcastle to avoid
confusion. Id.
7
Id. ¶¶ 12, 107.
8
Id. ¶ 13.
9
Id. ¶¶ 13, 90.
10
Id. ¶ 13.
11
Id. ¶¶ 42, 44.
5
party FIG Corp. is the general partner of FOE I; FIG Corp. is a wholly owned
subsidiary of Fortress.12
Defendant Fortress is an asset-based investment management firm that was
founded in 1998 and went public in 2007.13 By the close of 2014, Fortress had $67.5
billion assets under management (“AUM”), and $70.5 billion AUM by the close of
2015.14 Fortress’s 2014 and 2015 financial disclosure documents reported 100% of
the income attributable to FIG and FOE I in Fortress’s income calculations.15
Fortress, its affiliates, and principals held a 7.4% and 5.5% interest in New
Residential’s common stock on a fully diluted basis by the close of 2014 and 2015,
respectively.16 Even with this minority equity stake, Plaintiff alleges Fortress
controls New Residential through (1) its control of FIG Corp, FOE I, and FIG; (2)
certain of New Residential bylaws; (3) certain articles of New Residential’s
certificate of incorporation; and (4) New Residential’s board composition.17
12
Id. ¶ 44.
13
Id. ¶¶ 46, 52.
14
Id. ¶ 46.
15
Id. ¶ 54.
16
Id. ¶ 58.
17
Id. ¶¶ 54-57.
6
Defendant Wesley R. Edens is a founder, principal, and co-chairman of
Fortress.18 Edens owns 22.6% of the Class A shares of Fortress and 37.2% of its
Class B shares.19 Fortress paid Edens compensation of $4,022,688 in 2014 and
$13,405,669 in 2015.20 Additionally, Edens is chairman of the Newcastle board and
former chairman of Nationstar Mortgage Holdings, Inc. (“Nationstar”).21 He is a
director of both FIG and FIG Corp., and he is a beneficial owner of FOE I.22 Edens
served as a director and chairman of New Residential from its inception in 2013 until
he resigned in May 2016.23 As of April 2, 2015, Edens owned 6.4% of New
Residential’s outstanding stock.24 As of April 1, 2016, he owned 3.3% of New
Residential’s outstanding stock.25
18
Id. ¶ 15.
19
Id.
20
Id.
21
Id. ¶ 18. Fortress and Fortress’s private-equity funds own 75% of Nationstar. Id. ¶
2.
22
Id. ¶¶ 16-17.
23
Id. ¶ 14.
24
Id. ¶ 17.
25
Id.
7
Defendant Michael Nierenberg has been a director and the Chief Executive
Officer of New Residential since November 2013.26 He replaced Edens as chairman
of the New Residential board in May 2016.27 He is also a managing director at
Fortress.28
Defendant Alan L. Tyson has been a director of New Residential since April
2013.29 He is chairman of the Compensation Committee and serves on the Audit
Committee, as well as the Nominating and Corporate Governance Committee.30
New Residential paid Tyson compensation of $125,009 in 2014 and $150,000 in
2015.31 He also serves on the Newcastle board, for which he received compensation
of $135,000 in 2014 and $125,000 in 2015.32 The Complaint alleges that Tyson is
retired and that his service on these two boards is his only source of employment.33
26
Id. ¶ 37.
27
Id.
28
Id. ¶ 38.
29
Id. ¶ 39.
30
Id.
31
Id.
32
Id. ¶ 40.
33
Id. ¶ 41.
8
Defendant David Saltzman has been a director of New Residential since April
2013, and he serves on its Compensation Committee.34 New Residential paid
Saltzman compensation of $125,004 in 2014 and $150,000 in 2015.35 He also has
been the Executive Director of the Robin Hood Foundation since 1989.36 Michael
Novogratz—who was a Fortress principal until January 2016—allegedly is “a
significant donor to th[at] foundation.”37 Before Saltzman joined the Robin Hood
Foundation, Saltzman worked for New York City’s Board of Education, Department
of Health, and Department of Social Services.38 Plaintiff contends that “his
employment background indicates he has not accumulated great wealth.”39
Defendant Kevin J. Finnerty has been has been a director of New Residential
since April 2013.40 He serves on its Audit Committee, the Compensation
Committee, and the Nominating and Corporate Governance Committee.41 New
34
Id. ¶ 34.
35
Id.
36
Id. ¶ 35.
37
Id.
38
Id. ¶ 36.
39
Id.
40
Id. ¶ 19.
41
Id.
9
Residential paid Finnerty compensation of $125,009 in 2014 and $150,000 in
2015.42 Finnerty also has been involved with Fortress for nearly twenty years.43
Finnerty has served on the board of Newcastle Investment Holdings LLC
(“Newcastle LLC”)—the predecessor of Newcastle—since its inception in 1998.44
At Newcastle, he has served on the board since 2005, and he has served on its Audit
Committee, Nominating and Corporate Governance Committee, and Compensation
Committee.45 Finnerty received $125,000 in compensation from Newcastle in both
2014 and 2015.46 In 2009, Finnerty received a $500,000 loan from Edens and a
$500,000 loan from Randal A. Nardone (another principal, director, and officer of
Fortress).47 Finnerty apparently repaid the two loans in 2015.48 Plaintiff alleges that
the loans were unsecured and interest-free.49
42
Id.
43
Id. ¶ 21.
44
Id. While the Complaint states that “Newcastle LLC was substantially liquidated in
June 2013, its funds were distributed and it was cancelled on June 29, 2015,” it is
unclear when Finnerty’s service on the Newcastle LLC board ended. Id.
45
Id. ¶ 20.
46
Id.
47
Id. ¶ 23.
48
Id. ¶ 24.
49
Id. ¶ 23.
10
Defendant Douglas L. Jacobs has been a director of New Residential since
June 2013.50 He currently serves as the chairman of the Audit Committee and a
member of the Nominating and Corporate Governance Committee. 51 New
Residential paid Jacobs compensation of $135,004 in 2014 and $160,000 in 2015.52
Jacobs has been a director of Fortress since February 2007, and he serves on
Fortress’s Audit Committee and Compensation Committee.53 He also is a director
of Springleaf Holdings, Inc. (“Springleaf”), chairman of its Audit Committee, and
member of its Compliance Committee.54 “Fortress and its funds” allegedly own a
majority equity stake in Springleaf, and Springleaf is managed by FIG.55 At the time
Plaintiff filed its Complaint, Jacobs held approximately 200,000 Class A shares of
Fortress stock, but fewer than 15,000 shares of New Residential stock.56
50
Id. ¶ 27.
51
Id.
52
Id.
53
Id. ¶ 29.
54
Id. ¶ 30.
55
Id. ¶¶ 43, 51.
56
Id. ¶ 29.
11
Non-party Robert J. McGinnis has been a director on the New Residential
board since December 2016.57 McGinnis serves on the Audit Committee, the
Nominating and Corporate Governance Committee, and the Compensation
Committee.58 He served on the HLSS board from October 2011 to October 2015,
and he served as its chairman from January to October 2015.59 While chairman of
HLSS, he explained in a letter to HLSS stockholders in September 2015 that the
HLSS board unanimously approved the HLSS/New Residential merger, and that it
was “fair to, and in the best interests of, HLSS and HLSS’s shareholders.”60
McGinnis also received a portion of the merger consideration in exchange for his
18,000 HLSS shares.61 Lastly, upon joining the New Residential board, he received
continuing rights to indemnification, advancement, and exculpation from liabilities
for conduct during his service on the HLSS board.62
57
Id. ¶ 170.
58
Id.
59
Id. ¶ 171.
60
Id. (emphasis omitted).
61
Id. ¶ 172.
62
Pl.’s Answering Br. 27.
12
Non-party Andrew Sloves has been a director on the New Residential board
since July 2016.63 He serves on the Audit Committee, the Nominating and Corporate
Governance Committee, and the Compensation Committee at New Residential.64
Sloves is alleged to be a “significant donor to and involved in the Samuel Waxman
Cancer Research Foundation, which Nierenberg chairs and in which both
Nierenberg and Edens are significant donors.”65
Non-party HLSS is a publicly traded Cayman Island exempted company that
invests in MSRs and Excess MSRs.66 HLSS appears to have no ties to Fortress or
anyone on the New Residential board other than McGinnis.
B. Pertinent Facts
On February 22, 2015, New Residential and HLSS entered into an Agreement
and Plan of Merger (the “Initial Merger Agreement”).67 Under the Initial Merger
Agreement, New Residential would acquire approximately 71 million outstanding
shares of HLSS stock for approximately $1.3 billion.68 But on March 18, NASDAQ
63
Compl. ¶ 178.
64
Id.
65
Id. ¶ 179.
66
Id. ¶ 108.
67
Id. ¶ 2.
68
Id. ¶ 127.
13
notified HLSS that it was non-compliant with NASDAQ listing requirements for its
failure to timely file its 10-K.69 On April 6, HLSS formally notified New Residential
that HLSS was likely to receive a going-concern qualification unless it entered into
an alternative transaction with New Residential.70 As such, New Residential and
HLSS entered into an agreement to terminate the Initial Merger Agreement (the
“Termination Agreement”).71 The Termination Agreement also contained a
provision whereby New Residential and HLSS mutually released all claims of their
stockholders related to the Initial Merger Agreement and the transactions
contemplated thereby.72
Also on April 6, 2015, New Residential and HLSS entered into the Share and
Asset Purchase Agreement (the “Acquisition Agreement”), whereby New
Residential purchased “all of the assets of HLSS (except cash) and assumed all
liabilities of HLSS except its term loan which was paid off and up to $50 million in
Post-Closing Liabilities.”73 New Residential paid HLSS $1,007,156,145.57 in cash
and 28,286,980 newly issued shares of New Residential common stock as
69
Id. ¶ 121.
70
Id. ¶ 122.
71
Id. ¶ 4.
72
Id. ¶¶ 4, 116.
73
Id. ¶ 123.
14
consideration for New Residential’s purchase of the assets of HLSS.74 HLSS
planned to sell the New Residential stock received as consideration in a public
offering “as soon as practicable” after the asset purchase.75 HLSS would then merge
into a New Residential subsidiary, and New Residential would pay an additional $50
million in cash to HLSS stockholders in the merger.76 By the end of this series of
transactions, the total purchase price for the HLSS assets was approximately
$1,441,200,000.77
Plaintiff alleges that in connection with New Residential’s purchase of the
assets of HLSS, Fortress and its affiliates received “large financial benefits,”
including increased management fees, increased incentive fees, millions of options
in New Residential stock, and advantages to the real estate assets of other Fortress-
related entities.78
II. ANALYSIS
Plaintiff alleges that Defendants have harmed New Residential and its
stockholders by forcing New Residential to overpay for the assets of HLSS in order
74
Id. ¶ 123.
75
Id. ¶ 124.
76
Id. ¶ 126.
77
Id. ¶ 127.
78
Id. ¶¶ 6, 129-31.
15
to provide Fortress and its affiliates with significant benefits. Defendants move to
dismiss Plaintiff’s derivative claims for failure to make a pre-suit demand.79
A. Rule 23.1 Standard of Review
“A cardinal precept of the General Corporation Law of the State of Delaware
is that directors, rather than shareholders, manage the business and affairs of the
corporation.”80 “Directors of Delaware corporations derive their managerial
decision making power, which encompasses decisions whether to initiate, or refrain
from entering, litigation, from 8 Del. C. § 141(a).”81 In order for a stockholder to
pursue a derivative action and deprive the board of its decision-making authority
regarding the company’s litigation assets, Court of Chancery Rule 23.1 requires
stockholders to “allege with particularity the efforts, if any, made by the plaintiff to
obtain the action the plaintiff desires from the directors or comparable authority and
the reasons for the plaintiff’s failure to obtain the action or for not making the
79
Plaintiff purports to bring a direct breach of fiduciary duty claim in Count I. In my
First Opinion, I concluded that Count I asserts a derivative claim under Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). Plaintiff
raises no additional facts to change my analysis. Chester Cnty. Emps.’ Ret. Fund,
2016 WL 5865004, at *6. Nor does the Delaware Supreme Court’s holding in El
Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016) change
my analysis. I thus conclude that Counts I and II are duplicative because they
challenge the same underlying behavior and an identical remedy would flow to the
corporation. As such, I dismiss Count I, but I consider any alleged misbehavior
nominally listed under Count I as derivative under Count II.
80
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (subsequent history omitted).
81
Zapata Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981).
16
effort.”82 Where, as here, the plaintiff has failed to make a pre-suit demand on the
board,83 the court must dismiss the complaint “unless it alleges particularized facts
showing that demand would have been futile.”84
The Supreme Court of Delaware articulated the test to analyze demand futility
in two seminal cases. Under Rales v. Blasband, a derivative plaintiff must allege
particularized facts raising a reasonable doubt that “the board of directors could have
properly exercised its independent and disinterested business judgment in
responding to a demand.”85 The Rales test has been said to apply “when a plaintiff
does not challenge ‘a decision of the board in place at the time the complaint is
filed.’”86 Under Aronson v. Lewis, demand is futile if the plaintiff alleges
particularized facts to raise a reasonable doubt that: “(1) the directors are
disinterested and independent [or] (2) the challenged transaction was otherwise the
product of a valid exercise of business judgment.”87 Aronson applies when the
82
Ct. Ch. R. 23.1.
83
Compl. ¶ 167.
84
Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128
A.3d 991 (Del. 2015).
85
634 A.2d 927, 934 (Del. 1993).
86
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 65 (Del. Ch.
2015) (quoting Ryan v. Gifford, 918 A.2d 341, 352 (Del. Ch. 2007)).
87
473 A.2d at 814.
17
plaintiff challenges an action taken by the board that would consider demand.88
Fundamentally, however, Aronson and Rales both “address the same question of
whether the board can exercise its business judgment on the corporate behalf.”89 The
“[d]emand futility analysis is conducted on a claim-by-claim basis.”90 The Court
must accept Plaintiff’s particularized allegations of fact as true and draw all
reasonable inferences that logically flow from such allegations in Plaintiff’s favor.91
The Parties’ briefings focus on the Aronson test, and I do the same for the
purpose of my analysis. Under the first prong of Aronson, a director is interested if
he or she appears “on both sides of a transaction” or expects “to derive any personal
financial benefit from it in the sense of self-dealing, as opposed to a benefit which
devolves upon the corporation or all stockholders generally.”92
It should be noted, however, that in the absence of self-
dealing, it is not enough to establish the interest of a
director by alleging that he [or she] received any benefit
not equally shared by the stockholders. Such benefit must
88
Rales, 634 A.2d at 933-34.
89
In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *14 (Del. Ch. Aug.
31, 2016); see In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514,
at *16 (Del. Ch. May 21, 2013) (explaining the Aronson and Rales tests are
“complementary versions of the same inquiry”); see also Brett Kandell v. Dror Niv,
et al., 2017 WL 4334149, at *11 (Del. Ch. Sept. 29, 2017).
90
Beam v. Stewart, 833 A.2d 961, 977 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del.
2003).
91
White v. Panic, 783 A.2d 543, 549 (Del. 2000).
92
Aronson, 473 A.2d at 812.
18
be alleged to be material to that director. Materiality
means that the alleged benefit was significant enough “in
the context of the director’s economic circumstances, as to
have made it improbable that the director could perform
her fiduciary duties to the . . . shareholders without being
influenced by her overriding personal interest.”93
“Independence means that a director’s decision is based on the corporate merits of
the subject before the board rather than extraneous considerations or influences.”94
A lack of independence may be proven by alleging facts that create “a reasonable
doubt that a director is so beholden to an interested director that his or her discretion
would be sterilized.”95
Demonstrating demand futility under the second Aronson prong—that the
challenged transaction was not the exercise of valid business judgment—requires a
showing that the situation is one of the “rare cases [in which] a transaction may be
so egregious on its face that board approval cannot meet the test of business
93
Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002) (quoting In re Gen. Motors Class
H S’holder Litig., 734 A.2d 611, 617 (Del. Ch. 1999)); see Cambridge Ret. Sys. v.
Bosnjak, 2014 WL 2930869, at *5 (Del. Ch. June 26, 2014) (“[A] ‘plaintiff’s burden
of proof of a director’s self-interest in an arms-length third-party transaction should
be greater than in a classic self-dealing transaction where a director or directors
stand on both sides of a transaction.’”) (quoting Cede & Co. v. Technicolor, Inc.,
634 A.2d 345, 362 (Del. 1993)).
94
Aronson, 473 A.2d at 816.
95
Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006).
19
judgment, and a substantial likelihood of director liability exists.”96 The second
Aronson prong applies when the particularized facts are such that it is “difficult to
conceive” that a director could have satisfied his or her fiduciary duties.97
With respect to the second prong of Aronson, “the threat of liability that
directors face can be influenced in a substantial way if the corporate charter contains
an exculpatory charter provision authorized by 8 Del. C. § 102(b)(7).”98 Where, as
here,99 the company’s charter “insulates the directors from liability for breaches of
the duty of care, then a serious threat of liability may only be found to exist if the
plaintiff pleads a non-exculpated claim against the directors”100 such as a breach of
the duty of loyalty.101
96
Aronson, 473 A.3d at 815.
97
See Gifford, 918 A.2d at 355.
98
Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003).
99
Compl. ¶ 84; Brown Aff. Ex. 16, at 8 (“No director shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or limitation
thereof is not permitted under the [Delaware General Corporation Law] as the same
exists or may hereafter be amended.”).
100
Guttman, 823 A.2d at 501.
101
In re Lear Corp. S’holder Litig., 967 A.2d 640, 648 (Del. Ch. 2008).
20
B. Demand Is Not Excused Under Aronson’s First Prong
Plaintiff argues that demand is excused as futile because a majority of the New
Residential board members are interested or lack independence.102 At the time
Plaintiff filed its Complaint, the following seven directors served on the New
Residential board: Kevin J. Finnerty, Douglas L. Jacobs, Robert J. McGinnis,
Michael Nierenberg, David Saltzman, Andrew Sloves, and Alan L. Tyson.103 As
explained below, I find that Plaintiff failed to allege particularized facts sufficient to
create a reasonable doubt as to the independence of McGinnis, Saltzman, Sloves,
and Tyson, which constitutes a majority of the board.
1. McGinnis
Plaintiff argues that McGinnis lacks the independence and disinterest
necessary to consider a demand because (1) the HLSS acquisition was “critical for
HLSS,” and thus he “would decline to pursue any corrective action that could
diminish the benefits he previously secured for HLSS” as the former chairman of
the HLSS board; (2) he would not want to undermine the “significant reputational
benefits among his peers in the mortgage industry and among HLSS’s investors” he
102
Compl. ¶ 167.
103
For purposes of this Motion to Dismiss, Plaintiff and Defendants briefed the demand
analysis based on the seven-member board in place at the time Plaintiff filed its
Complaint under Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006).
Notwithstanding this assumption, Plaintiff reserves its right to challenge this issue
on appeal. Pl.’s Answering Br. 21.
21
received from bestowing “a significant benefit upon stockholders who invested in a
deeply troubled and failing business;” (3) he received continuing rights to
indemnification, advancement and exculpation from liabilities for conduct during
his service on the HLSS board; (4) he had a business relationship with Fortress in
2004; and (5) he received a portion of the merger consideration because he held
18,000 HLSS shares.104
Plaintiff’s allegations fail to raise a reasonable doubt that McGinnis could not
exercise his independent and disinterested business judgment in considering a
demand for multiple reasons. First, the Complaint does not plead with particularity
how McGinnis would suffer reputational harm by bringing demand on behalf of New
Residential after he previously concluded that the transaction benefitted HLSS. Nor
does Plaintiff explain how his receipt of a portion of the merger consideration would
impugn his ability to consider demand. For example, there are no allegations that
McGinnis would be at risk of losing such merger consideration.
With respect to Plaintiff’s argument regarding McGinnis’s receipt of
indemnification and exculpation rights, this Court has held that “the receipt of
indemnification is not [normally] deemed to taint related director actions with a
presumption of self-interest. That is because indemnification has become
104
Compl. ¶¶ 172-75.
22
commonplace in corporate affairs, and because indemnification does not increase a
director’s wealth.”105
Additionally, Plaintiff’s assertion that McGinnis “shared a significant
business relationship with Fortress”106 because he oversaw the securitization of a
mortgage loan for Fortress in 2004—over twelve years ago—while working for
Greenwich Capital Markets similarly fails to plead with particularity how McGinnis
would not be able to use his independent business judgment to consider a demand.
Nor does Plaintiff explain how the prior business relationship was “significant.”
Such vague allegations do not raise a reasonable doubt that McGinnis is disinterested
and independent.
2. Sloves
Plaintiff alleges that Sloves lacks the requisite independence and disinterest
because he (1) is a “significant donor to and involved in the Samuel Waxman Cancer
Research Foundation, which Nierenberg chairs and in which both Nierenberg and
Edens are significant donors” and (2) has “several years of social connections” with
Nierenberg and Edens.107 But Plaintiff fails to plead any particularized facts
105
In re Sea-Land Corp. S’holders Litig., 642 A.2d 792, 804 (Del. Ch. 1993), aff’d sub
nom. Sea-Land Corp. S’holder Litig. v. Abely, 633 A.2d 371 (Del. 1993).
106
Compl. ¶ 177; Pl.’s Answering Br. 27.
107
Compl. ¶ 179.
23
regarding these “several years of social connections” to infer that Sloves had a long-
standing, close “personal friendship”108 with either Nierenberg or Edens that would
impugn his independence.
Similarly, Plaintiff fails to plead any particularized facts to indicate how or
why Nierenberg’s and Eden’s involvement in the Samuel Waxman Cancer Research
Foundation had any influence on Sloves during the relevant time period. For
example, Plaintiff vaguely asserts that Sloves, Nierenberg, and Edens are
“significant donors,” but Plaintiff does not provide details regarding their
contributions to the charity that might illuminate Plaintiff’s understanding of the
term “significant.”109 Because the Complaint lacks any particularized details that
might suggest this is something more than a “thin social-circle friendship,”110
Plaintiff fails to create a reasonable doubt as to Sloves’s independence.111
108
Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1021-22 (Del. 2015).
109
Compl. ¶ 179.
110
Sanchez, 124 A.3d at 1022.
111
Compare In re Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL 4826104, at *9
(Del. Ch. Oct. 12, 2011) (“Crucially, the Plaintiffs fail to provide any information
on how the amounts given influenced Bryan’s decision-making process. Because
the complaint lacks such particularized details, the Plaintiffs have failed to create a
reasonable doubt as to [director] Bryan’s independence.”), with Off v. Ross, 2008
WL 5053448, at *11 (Del. Ch. Nov. 26, 2008) (“Ross’s substantial donation [of
$100 million] raises considerable doubt as to the independence of Dolan. . . . [T]he
donation of such a prodigious sum coupled with the fact that Ross became the
eponym of the benefiting institution calls into question the independence of
Defendant Dolan.”).
24
3. Saltzman
Plaintiff alleges that Saltzman lacks the requisite independence and disinterest
because he has been the Executive Director of the Robin Hood Foundation, a
charitable organization to which Novogratz (a retired Fortress principal) is a
“significant donor.”112 I reject this argument for the same reason I rejected such
allegations Plaintiff made with respect to Sloves.
Additionally, Plaintiff contends that the compensation Saltzman receives as a
New Residential director is material to him because he worked for New York City’s
Board of Education, Department of Health, and Department of Social Services
before joining the Robin Hood Foundation, and thus “his employment background
indicates he has not accumulated great wealth.”113 But as this Court explained in In
re Walt Disney, to find that a director lacks independence because he or she is not
wealthy would “discourage the membership on corporate boards of people of less-
than extraordinary means. Such ‘regular folks’ would face allegations of being
dominated by other board members, merely because of the relatively substantial
compensation provided by the board membership compared to their outside
112
Compl. ¶ 35.
113
Id. ¶ 36.
25
salaries.”114 And “I am especially unwilling to facilitate such a result.” 115 As such,
Plaintiff’s allegations are insufficient to raise a reasonable doubt that Saltzman is
interested or lacks independence.
4. Tyson
Plaintiff alleges that Tyson lacks independence because he received $125,009
in 2014 and $150,000 in 2015 for his service on the New Residential board, and
$135,000 in 2014 and $125,000 in 2015 for his service on the Newcastle board.116
But Tyson’s compensation from these two boards is insufficient to challenge
independence because “[u]nder Aronson, receiving reasonable compensation for
serving as a director for one other company related to an interested director, without
more, will usually not be enough to create a reasonable doubt as to director
independence.”117
Plaintiff argues that it has satisfied the requisite “more” because Tyson is
retired, and “the compensation from those board seats is a material part of his
income.”118 But Plaintiff has not articulated any reason why this Court should
114
In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 360 (Del. Ch. 1998), aff’d in part
and rev’d in part sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
115
Id.
116
Compl. ¶¶ 39-40.
117
Kahn v. Portnoy, 2008 WL 5197164, at *13 (Del. Ch. Dec. 11, 2008).
118
Compl. ¶ 41.
26
assume the materiality of this income to Tyson other than the fact that he is retired.
A ruling in Plaintiff’s favor with respect to Tyson essentially would be a blanket
determination that all retired board members lack independence; I decline to adopt
such a rule. As the Delaware Supreme Court has held, “allegations of payment of
director’s fees, without more, do not establish any financial interest.”119
Lastly, Plaintiff seeks to cast doubt on Tyson’s independence by arguing that
Tyson is reliant upon a Fortress-controlled Nominating and Corporate Governance
Committee for his nomination to the New Residential board.120 I disagree. The
Nominating and Corporate Governance Committee is comprised on Finnerty,
Jacobs, McGinnis, Sloves, and Tyson; I have already determined that McGinnis,
Sloves, and Tyson are independent, which constitutes a majority of Nominating and
Corporate Governance Committee.
In conclusion, Plaintiff fails to raise a reasonable doubt that a majority of the
board is independent or disinterested for purposes of demand futility under Rule
23.1; I now turn to the second prong of Aronson.
119
In re Walt Disney Co. Deriv. Litig., 731 A.2d at 360 (citing Grobow v. Perot, 539
A.2d 180, 188 (Del. 1988)).
120
Pl.’s Answering Br. 25.
27
C. Demand Is Not Excused Under Aronson’s Second Prong
Plaintiff articulates two bases to establish that demand is excused as futile
under the second prong of Aronson. First, Plaintiff asserts that demand would be
futile because the entire fairness standard of review applies to the challenged
transactions since Fortress allegedly is a controlling stockholder of New
Residential.121 But even if I were to determine that Fortress is a controlling
stockholder and is interested in the challenged transactions—which I need not
determine—the potential resulting application of the entire fairness standard of
review does not automatically render demand futile. To hold otherwise would mean
that demand is futile “as a matter of law whenever a transaction between a
corporation and its putative controlling stockholder implicates the entire fairness
standard.”122 And while this argument has some “superficial appeal, it is inconsistent
with controlling authority” in this jurisdiction.123 As this Court explained in Baiera,
121
Compl. ¶ 182; Pl.’s Answering Br. 37.
122
Baiera, 119 A.3d at 65.
123
Id. at n.121 (“Given that the second prong of Aronson asks simply whether ‘the
challenged transaction was otherwise the product of a valid exercise of business
judgment,’ Aronson, 473 A.2d at 814, it is understandable how one might find that
test to be satisfied whenever entire fairness review might be triggered, irrespective
of the circumstances triggering such review or the nature of the claims to which
such review might apply. The sole authority on which Plaintiff relies consists of a
transcript ruling that appears to endorse this approach. I decline to follow this ruling
because it is inconsistent in my opinion with controlling Supreme Court precedent
. . . .”).
28
the potential that the entire fairness standard may govern
Plaintiff’s breach of fiduciary duty claim against [] an
alleged controlling stockholder [] does not remove that
claim, or any of the other derivative claims [], from the
purview of the Demand Board to decide for themselves
under 8 Del. C. § 141(a) whether to exercise the
Company’s right to bring such a claim. The focus instead,
as explained in Aronson and repeated in Beam, is on
whether Plaintiff’s allegations raise a reasonable doubt as
to the impartially of a majority of the Demand Board to
have considered such a demand.124
Here, I have already determined that a majority of the board is independent and
disinterested; thus, Plaintiff fails to raise a reasonable doubt as to the impartiality of
a majority of the board to have considered such a demand.
Second, Plaintiff alleges that the decision of the New Residential board to
terminate the Initial Merger Agreement and enter into the Acquisition Agreement
and related transactions is not protected by the business judgment presumption
because the “terms of the revised HLSS acquisition are ‘so egregious on [their] face’
that there is ‘a substantial likelihood of director liability.’” 125 “A simple allegation
of potential directorial liability is insufficient to excuse demand, else the demand
requirement itself would be rendered toothless, and directorial control over corporate
litigation would be lost.”126 “Where, as here, the corporation’s charter includes an
124
Baiera, 119 A.3d at 68.
125
Pl.’s Answering Br. 52 (citing Aronson, 473 A.2d at 815).
126
Baiera, 119 A.3d at 62 (citing Goldman Sachs Gp., 2011 WL 4826104, at *18).
29
exculpatory provision pursuant to 8 Del. C. § 102(b)(7), a substantial likelihood of
liability ‘may only be found to exist if the plaintiff pleads a non-exculpated claim
against the directors based on particularized facts.’”127 Plaintiff’s theory to
challenge the board’s decisions appears to be one of bad faith.
Plaintiff asserts that the board acted irrationally because it “should have
extracted a much better price and improved terms compared to the Initial Merger
Agreement.”128 This “is precisely the type of ‘Monday morning quarterbacking’ that
this Court routinely rejects as insufficient to establish demand futility.”129 “In the
absence of well pleaded allegations of director interest or self-dealing, failure to
inform themselves, or lack of good faith, the business decisions of the board are not
subject to challenge because in hindsight other choices might have been made
instead.”130
Additionally, Plaintiff focuses on what it believes to be an overpayment of at
least $100 million131 under the subsequent Acquisition Agreement compared to what
127
Id. (quoting Wood v. Baum, 953 A.2d 136, 141 (Del. 2008)).
128
Compl. ¶ 127; Pl.’s Answering Br. 51, 53.
129
Baiera, 119 A.3d at 65.
130
In re Affiliated Computer Servs., Inc. S’holder Litig., 2009 WL 296078, at *10 (Del.
Ch. Feb. 6, 2009).
131
The amount Plaintiff alleges that New Residential overpaid differs in various filings.
Compare Compl. ¶ 127 (alleging it was “nearly $200 million more”), with Pl.’s
Answering Br. 38 (arguing it was “$100 million more”).
30
was contemplated initially under the Initial Merger Agreement for assets that had
become less valuable. Plaintiff tries to plead overpayment by comparing apples to
oranges. The Initial Merger Agreement contemplated a payment of $18.25 per share
for the approximately 71 million outstanding HLSS shares,132 totaling roughly $1.3
billion in cash, plus the “assum[ption] [of] all the . . . debts and liabilities” of
HLSS.133 This would include the assumption of HLSS’s $344 million term loan.
The threat of a going concern qualification threw a wrench into the process, which
would have “result[ed] in a default by HLSS on its term loan and its mortgage loan
repurchase and advance financing facilities.”134 The Parties then altered the deal
structure into a stock and asset purchase, under which HLSS would first “repay[] . .
. in full . . . [the $344 million] Term Loan,”135 only after which New Residential
would transfer roughly $1 billion in cash and 28.3 million New Residential shares136
and assume a number of specified liabilities.137 This $1 billion in cash includes
roughly $385 million for “HLSS Seller Financing,” which appears to correlate with
132
Brown Aff. Ex. 17, at Recitals.
133
Id. § 1.04.
134
Compl. ¶ 121.
135
Amato Aff. Ex. A, at § 2.01.
136
Id. § 2.02.
137
Id. § 1.04.
31
the value of HLSS’s term loan repayment and any associated prepayment
penalties.138 The total consideration paid for HLSS—which no longer had a term
loan for New Residential to assume—was $1.49 billion.139 Plaintiff seeks to
compare the equity purchase price in the initial scenario with the total consideration
actually paid for the entire HLSS enterprise, which now lacked a $344 million
liability in its term loan; these are inapposite. Thus, I am not convinced this decision
was “so far beyond the bounds of reasonable judgment that it seems essentially
inexplicable on any ground other than bad faith.”140
For both of the aforementioned reasons, I do not find the board’s decision to
purchase the assets of HLSS to be of the “rare cases [in which] a transaction may be
so egregious on its face that board approval cannot meet the test of business
judgment, and a substantial likelihood of director liability therefore exists.”141 Thus,
demand is not futile under Aronson’s second prong.
138
Brown Aff. Ex. 14, at 11.
139
Compl. ¶ 127.
140
Baiera, 119 A.3d at 63.
141
Aronson, 473 A.2d at 815.
32
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is granted. 142
IT IS SO ORDERED.
142
In Count III, Plaintiff seeks a declaratory judgment “that the Termination
Agreement could not and did not release the claims of” New Residential
stockholders against HLSS. Compl. ¶ 199. In my First Opinion, I dismissed this
same count as unripe because I dismissed Counts I and II without prejudice. Chester
Cnty. Emps.’ Ret. Fund, 2016 WL 5865004, at *13. Plaintiff provides no additional
facts or arguments that change my analysis in the First Opinion; thus, Count III is
dismissed.
33