IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN CUMMING, derivatively on behalf of :
NEW SENIOR INVESTMENT GROUP, INC., :
:
Plaintiff, :
:
v. : C.A. No. 13007-VCS
:
WESLEY R. EDENS, SUSAN GIVENS, :
VIRGIS W. COLBERT, MICHAEL D. MALONE, :
STUART A. MCFARLAND, CASSIA VAN DER :
HOOF HOLSTEIN, FIG LLC, FORTRESS :
OPERATING ENTITY I LP, FIG :
CORPORATION, HOLIDAY ACQUISITION :
HOLDINGS LLC, and FORTRESS :
INVESTMENT GROUP LLC, :
:
Defendants, :
:
and :
:
NEW SENIOR INVESTMENT GROUP, INC., :
:
Nominal Defendant. :
MEMORANDUM OPINION
Date Submitted: November 21, 2017
Date Decided: February 20, 2018
Jeffrey Gorris, Esquire, Christopher Foulds, Esquire and Christopher Quinn, Esquire
of Friedlander & Gorris P.A., Wilmington, Delaware; David Wales, Esquire, David
MacIsaac, Esquire and John Vielandi, Esquire of Bernstein Litowitz Berger &
Grossmann LLP, New York, New York; Adam Warden, Esquire of Saxena
White P.A., Boca Raton, Florida; Steven B. Singer, Esquire and Joshua H. Saltzman,
Esquire of Saxena White P.A., White Plains, New York; J. Elazar Fruchter, Esquire
of Wohl & Fruchter LLP, New York, New York, Attorneys for Plaintiff.
Robert S. Saunders, Esquire, Ronald N. Brown, III, Esquire, Sarah R. Martin,
Esquire and Elisa M.C. Klein, Esquire of Skadden, Arps, Slate, Meagher & Flom
LLP, Wilmington, Delaware, Attorneys for Defendants.
SLIGHTS, Vice Chancellor
Plaintiff, John Cumming, is a stockholder of nominal defendant, New Senior
Investment Group, Inc. (“New Senior”). He initiated this action derivatively on
behalf of New Senior against members of the New Senior board of directors alleging
they breached their fiduciary duties in connection with their approval of a transaction
whereby New Senior acquired assets at an unfair price from an entity controlled by
Fortress Investment Group, LLC (“Fortress”). Cumming asserts that a majority of
the New Senior board was either interested in the transaction or disabled by conflicts
arising from various relationships with a principal of Fortress, Wesley Edens.
He further alleges that the transaction, comprised of three related and equally unfair
elements, must be subject to the entire fairness standard of review. For both of these
reasons, Cumming maintains that he is excused from demanding that the managers
of New Senior assert these claims directly under either or both “prongs” of Aronson.1
Defendants have moved to dismiss Cumming’s complaint under Court of
Chancery Rules 23.1 and 12(b)(6). They argue he has failed to plead particularized
facts to demonstrate demand excusal under Rule 23.1 and has failed to plead viable,
non-exculpated claims that can survive their challenge under Rule 12(b)(6).
I disagree. The complaint pleads sufficiently particularized facts to create a
1
Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) overruled on other grounds, Brehm v.
Eisner, 746 A.2d 244 (Del. 2000) (citing 8 Del. C. § 141(a)) (holding that demand on a
board is excused where a plaintiff alleges particularized facts creating a “reasonable doubt”
that either (1) a majority of the directors were disinterested and independent, or (2) the
challenged transaction was a valid exercise of business judgment).
1
reasonable doubt that a majority of the New Senior board was disinterested or
independent. It also pleads facts that support a reasonable inference that the
defendants breached their duty of loyalty by approving a conflicted, unfair
transaction, and thereby pleads a non-exculpated claim under 8 Del. C. § 102(b)(7).
Finally, the complaint pleads a reasonably conceivable claim of aiding and abetting
a breach of fiduciary duty against Fortress (and its affiliates) by alleging that
Fortress, as seller, knowingly exploited conflicts of interest among members of the
New Senior board in order to facilitate the transaction and thereby advance its own
interests (and those of the interested directors) at the expense of New Senior
stockholders. Accordingly, the motion to dismiss must be denied as to all counts of
the complaint.
I. BACKGROUND
The relevant facts are drawn from the complaint’s well-pled allegations, the
documents the complaint incorporates by reference and those matters I am permitted
to consider by stipulation of the parties.2 For purposes of this motion to dismiss, the
2
EMSI Acq., Inc. v. Contrarian Funds, LLC, 2017 WL 1732369, at *1 (Del. Ch. May 3,
2017). Plaintiff received certain documents from New Senior in response to a books and
records demand. The parties agreed that documents produced in response to that demand
would be deemed incorporated within the complaint whether or not referenced therein.
Transmittal Aff. of Elisa M.C. Klein in Supp. of Defs.’ Opening Br. in Supp. of their Mot.
to Dismiss Pl.’s Verified Am. Deriv. Compl. (“Klein Aff.”) Ex. 34 (Confidentiality
Agreement) ¶ 7; Quinn Letter dated Nov. 16, 2017, Ex. 2, at 2. Notwithstanding this
agreement, Plaintiff argues that Defendants have referred to materials outside of the
produced or incorporated documents in resisting his motion to dismiss. Accordingly, he
2
Court accepts as true the well-pled facts in the Complaint and draws all reasonable
inferences in Plaintiff’s favor.3
A. Parties and Relevant Non-Parties
Plaintiff, John Cumming, was a stockholder of New Senior at all relevant
times and remains a New Senior stockholder today.4 He purports to bring this action
derivatively on behalf of New Senior.
Nominal Defendant, New Senior, is a Delaware corporation with its principal
place of business in New York.5 It has no employees of its own.6 Rather, it is an
externally-managed, publicly-traded real estate investment trust (“REIT”) that owns
a portfolio of senior housing facilities totaling 154 properties across the United
urges me to convert this motion into a motion for summary judgment, and then allow him
to take discovery before addressing the motion. Pl.’s Answering Br. in Opp’n to Defs.’
Mot. to Dismiss (“Pl.’s Answering Br.”) 17 n.8; Transcript of Oral Argument on Defs.’
Mot. to Dismiss, Nov. 21, 2017, D.I. 33 (“Tr.”) 62:12–63:5. Consistent with this Court’s
practice, beyond the four corners of the Verified Amended Derivative Complaint
(“Complaint”), I have considered only those documents produced by New Senior in
response to the Section 220 demand or incorporated by Cumming in his Complaint. “[I]f a
document or the circumstances support more than one possible inference, and if the
inference that [P]laintiff seeks is reasonable, then [P]laintiff [has] receive[d] the inference.”
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 798 (Del. Ch. 2016). Thus, I decline
Plaintiff’s invitation to convert this motion into a motion for summary judgment.
3
Wayne Cty. Empls.’ Ret. Sys. v. Corti, 2009 WL 2219260, at *8 (Del. Ch. July 24, 2009).
4
Verified Am. Deriv. Compl. (“Compl.”) ¶ 21.
5
Compl. ¶ 22.
6
Compl. ¶ 29.
3
States.7 New Senior was originally formed as a subsidiary of Drive Shack, Inc.
(“Drive Shack”), which is another publicly-traded REIT managed and dominated by
Fortress.8 New Senior was spun off from Drive Shack in November 2014.9
Defendant, Fortress, is a global asset and investment management firm.10
It was founded by, among others, Defendant, Wesley Edens (“Edens”), in 1998 and
went public in 2007.11
Defendant, Fig LLC (“FIG”), is New Senior’s manager and an indirect
subsidiary of Fortress.12 FIG is wholly owned and managed by Defendant, Fortress
Operating Entity I LP (“FOE I”).13 FOE I’s sole general partner is FIG Corporation
(“FIG Corp.”), a wholly-owned Fortress subsidiary.14 FIG Corp. and Fortress’ three
7
Compl. ¶ 22.
8
Compl. ¶ 23.
9
Compl. ¶ 23.
10
Compl. ¶ 24.
11
Compl. ¶ 24. “As of April 2, 2015, Fortress, Edens and other New Senior insiders owned
approximately 7.2% of New Senior’s outstanding stock.” Compl. ¶ 27.
12
Compl. ¶ 31. FIG also manages, inter alia, the Fortress funds that own Holiday, Drive
Shack and Fortress investment funds that own a majority of Nationstar Mortgage Holdings,
Inc. Id.
13
Compl. ¶ 32.
14
Compl. ¶ 33. I note that the Complaint collectively refers to Fortress, FIG, FOE I and
FIG Corp. as “Fortress.” Compl. ¶ 34. I have done my best to differentiate among the
entities, when necessary, with help of the parties’ briefing and the incorporated documents.
Otherwise, I adopt the convention utilized in the Complaint and refer to the Fortress entities
4
“principals” (including Edens) own 100% of FOE I’s limited partnership interests.15
“Fortress, FIG, FOE I, FIG Corp., Drive Shack, and New Senior all operate out of
the same offices.”16
Defendant, Holiday Acquisition Holdings LLC (”Holiday”),17 “is the second
largest private owner and operator of independent living communities for seniors in
the United States.”18 In 2007, Holiday was acquired by Fortress Holiday Investment
Fund (“FHIF”), a Fortress-managed private equity fund. Since then, it has been
“controlled and majority-owned by Fortress,” primarily through FHIF.19
At the time of the challenged transactions, New Senior’s board of directors
(the “Board” or the “New Senior Board”) had six members: Edens, Susan Givens,
collectively as “Fortress.” An organizational chart is attached as an appendix to this
Memorandum Opinion.
15
Compl. ¶ 33. Fortress’ “principals” are Defendant Edens and non-parties, Peter L.
Briger, Jr. and Randal A. Nardone. Id.
16
Compl. ¶ 35.
17
The portfolio of properties at issue here belonged to and was sold by Holiday Retirement,
which is alleged to be an affiliate of Holiday Acquisition Holdings LLC (the only named
“Holiday” defendant in this matter). Compl. ¶ 3 n.2. Because of the interrelationship of
the Holiday companies, the Complaint refers to “Holiday Retirement, with its affiliates,
including Harvest Facility Holdings LP, Holiday Facility Holdings, LP, Holiday
Acquisition Holdings LLC, and Holiday AL Holdings LP” collectively as “Holiday.” Id.
Once again, I will follow the Complaint and refer to the Holiday entities collectively as
“Holiday.”
18
Compl. ¶ 36.
19
Compl. ¶ 36.
5
Virgis Colbert, Michael Malone, Stuart McFarland and Cassia van der Hoof
Holstein, all of whom joined the Board by Fortress’ designation in October 2014.20
The committee of New Senior’s board of directors organized to negotiate and
consummate the transaction at issue here (the “Transaction Committee”) comprised
Malone, Van der Hoof Holstein, Colbert and McFarland.21 As of the filing of this
action, the Board consisted of seven members, the six members serving at the time
of the challenged transaction and Robert Savage.22 Savage is not a defendant in this
action.
Defendant, Edens, is Fortress’ founder and one of its “Principals.”23 He is
also Fortress’ largest stockholder24 and the co-chairman of its board of directors.25
At Fortress, “Edens is responsible for Fortress’ private equity and publicly traded
alternative investment businesses, which include both Holiday and New Senior.”26
20
Compl. ¶¶ 27, 37, 52, 60, 63, 134.
21
Compl. ¶¶ 14–17.
22
Compl. ¶ 134.
23
Compl. ¶¶ 23, 33. The Complaint alleges that the three-person control group of Fortress
together owns approximately 45% of Fortress’ voting stock. Compl. ¶ 37.
24
According to the Complaint, “[a]s of April 6, 2016, [Edens] owned approximately 22.6%
of Fortress’ Class A shares and about 27.2% of its Class B shares” making him Fortress’
largest stockholder. Compl. ¶ 37.
25
Compl. ¶¶ 24, 33, 37.
26
Compl. ¶ 38.
6
Edens has been the Chairman of the New Senior Board since October 2014.27
He also serves as a director of FIG Corp., as officer and general partner of the funds
that own Holiday, and as a director of non-party, A&K Global Health LLC
(“A&K”), which was founded by Fortress in 2011.28 Along with Givens, he was
designated as one of two members of the New Senior Board’s pricing committee
that determined the price of the equity offering used, in part, to fund the transaction
at issue (the “Pricing Committee”).29
Defendant, Givens, is New Senior’s CEO and a member of its Board.30
Givens also serves as managing director of Fortress’ private equity group31 and holds
interests in Holiday through Fortress’ private equity fund.32 She was New Senior’s
lead negotiator in the acquisition of the portfolio of properties challenged here and,
as noted, served on the two-person Pricing Committee alongside Edens.33
27
Compl. ¶ 37.
28
Compl. ¶¶ 33, 36, 39.
29
Compl. ¶ 6.
30
Compl. ¶ 41.
31
Compl. ¶ 41.
32
Compl. ¶¶ 41, 135. Givens did not disclose the amount of her ownership interest in
Holiday in her director questionnaire. Transmittal Aff. of Christopher P. Quinn (“Quinn
Aff.”) Ex. 2, at SNR00000108.
33
Compl. ¶ 41.
7
Defendant, Malone, served as Chairman of the Transaction Committee.34
From 2008 to 2012, Malone served as managing director of Fortress.35 He also sits
on the boards of directors of a Fortress-affiliated company, non-party Nationstar
Mortgage Holdings (“Nationstar”), and Walker & Dunlop, which provided financing
for the challenged transaction.36 Malone holds ownership interests in Fortress, New
Senior and Walker & Dunlop.37 At the time of the challenged transaction, Malone
had retired from his Senior Executive Banker and Managing Director positions at
Bank of America after 24 years of service and, thus, did not have full-time
employment.38 It is alleged he earned $1.7 million in director fees between 2012
and 2015 from Fortress-managed companies.39
Defendant, Van der Hoof Holstein, was added to the Transaction Committee
by written consent after its inception.40 In addition to her service on the New Senior
34
Compl. ¶ 42.
35
Compl. ¶¶ 43–44.
36
Compl. ¶¶ 45–49.
37
Compl. ¶¶ 44, 50.
38
Klein Aff. Ex. 4 (2015 Proxy Statement), at 7.
39
Compl. ¶ 51.
40
Compl. ¶ 52.
8
Board, she also serves on the board of directors of A&K together with Edens.41
Van der Hoof Holstein’s full-time employment is with Partners in Health (“PIH”), a
nonprofit medical organization, where she has served as Chief Partnership
Integration Officer since 2010.42 It is alleged that Edens’ wife serves on the board
of directors of PIH and that the Edens family is a “trusted partner” of the
organization, donating money and otherwise providing significant support for PIH’s
worldwide relief efforts.43
Van der Hoof Holstein has also served as Associate Director of the Global
Health Delivery Partnership (“GHDP”) for the Department of Global Health and
Social Medicine at Harvard Medical School since 2011.44 According to the
Complaint, GHDP has received continued substantial support from Edens over many
years.45
Defendant, Colbert, was also a member of the Transaction Committee.46
In addition to his service on the New Senior Board, Colbert “has served in a variety
41
Klein Aff. Ex. 4 (2015 Proxy Statement), at 8; Compl. ¶ 39.
42
Compl. ¶ 53.
43
Compl. ¶¶ 54–56.
44
Compl. ¶¶ 57–58.
45
Compl. ¶ 15.
46
Compl. ¶ 60.
9
of key leadership positions with Miller Brewing Company since 1979,” and
“continues to serve as Senior Advisor to MillerCoors LLC.”47 He previously served
on the boards of directors for several other companies.48 It is alleged that around the
time Colbert became a member of the Board, Edens (as controlling owner) invited
Colbert to join him as a co-owner of the Milwaukee Bucks (the NBA team), through
Partners for Community Impact, LLC, and that Colbert accepted the invitation.
Colbert now enjoys the unique opportunity of being a co-owner of an NBA
franchise, along with approximately 24 others in the Bucks’ ownership group.49
Defendant, McFarland, was the final member of the Transaction Committee.50
McFarland also serves as a Fortress-designated director of Drive Shack, which, as
mentioned, is managed by Fortress and was New Senior’s parent prior to the spin-
off in November 2014.51 McFarland receives 60% of his publicly declared income
47
Klein Aff. Ex. 4 (2015 Proxy Statement), at 6.
48
Klein Aff. Ex. 4 (2015 Proxy Statement), at 6.
49
Compl. ¶¶ 60, 62.
50
Compl. ¶ 63.
51
Compl. ¶¶ 23, 63.
10
from his various board fees.52 He lists his address with the SEC for investment
purposes (for non-Fortress investments) as “C/O Fortress Investment Group.”53
B. New Senior’s Spin-Off
New Senior was spun off from Drive Shack in 2014 (the “Spin-Off”).54 Prior
to the Spin-Off, “Drive Shack was dominated by Fortress, as most of Drive Shack’s
board and management were affiliated with Fortress.”55 Edens served as the
chairman of Drive Shack’s board from 2002 until May 2016 and as its CEO from
2002 until 2007.56 As part of the Spin-Off, Fortress “appointed all of New Senior’s
directors, classified the Board with staggered terms, and severely curtailed the filling
of director vacancies and the removal of directors.”57 It also “installed Fortress-
affiliated personnel as the senior management of New Senior.”58
52
Compl. ¶ 63.
53
Compl. ¶ 63.
54
Compl. ¶ 3.
55
Compl. ¶ 26.
56
Compl. ¶ 26.
57
Compl. ¶ 27.
58
Compl. ¶ 28.
11
C. The FIG-New Senior Management Agreement
“In conjunction with the Spin-Off, New Senior entered into a management
agreement [] with Fortress’ subsidiary FIG[], pursuant to which FIG[] manages New
Senior’s day-to-day operations.”59 Thus, all of New Senior’s management is
employed by FIG. Under the management agreement, FIG receives compensation
in the form of an annual management fee of 1.5% of New Senior’s gross equity as
well as incentive compensation of 25% on New Senior’s returns above a certain
threshold.60 The management agreement further provides that FIG is to receive 10%
of the number of shares sold in any stock offering at the offering’s exercise price.61
According to New Senior’s public disclosures, New Senior is “completely
reliant on [FIG].”62 Thus, New Senior is “subject to the risk that [FIG] will terminate
59
Compl. ¶ 28. At the time of the challenged transaction, New Senior’s management team
consisted of: (i) Givens, New Senior’s CEO and Fortress’ private equity group’s managing
director; (ii) Justine Cheng, New Senior’s CFO, Treasurer and COO and also a managing
director of Fortress’ private equity group, employed by Fortress since 2004; (iii) Julien P.
Hontang, New Senior’s Chief Accounting Officer and managing partner of Fortress’
private equity fund; and (iv) Cameron MacDougall, New Senior’s secretary and a
managing partner and general counsel of Fortress’ private equity fund, employed by
Fortress since 2007. Compl. ¶ 29.
60
Klein Aff. Ex. 1 (FIG Management Agreement), at 9. “Gross Equity” is defined as “for
any period [] (A) the sum of (i) the ‘Total Equity,’ plus (ii) the value of contributions made
by partners other than [New Senior], from time to time, to the capital of any subsidiary . . .
less (B) any capital dividends or capital distributions . . . .” Id.
61
Klein Aff. Ex. 1 (FIG Management Agreement), at 10.
62
Klein Aff. Ex. 25 (Preliminary Prospectus Supplement June 22, 2015), at S-22.
12
the Management Agreement and that [New Senior] will not be able to find a suitable
replacement for [its] [m]anager in a timely manner, at a reasonable cost or at all.”63
The public disclosures confirm that the management agreement was “not negotiated
at arm’s length, and its terms, including fee payable, may not be as favorable to [New
Senior] as if it had been negotiated with an unaffiliated party.”64
D. The Challenged Transaction
The transaction at issue here is more accurately described as three separate
(but inextricably intertwined) transactions, each of which Plaintiff alleges was
detrimental to New Senior. First, the overarching transaction was New Senior’s
acquisition of a portfolio of properties (the “Holiday Portfolio”) from Defendant
Holiday (the “Acquisition”) at an allegedly unfair price. Second, New Senior
financed the Acquisition (in part) through an equity offering that allegedly favored
Fortress to the detriment of New Senior. And third, New Senior entered into a
property management agreement with Holiday to manage the Holiday Portfolio at
allegedly higher-than-market rates (collectively the “Challenged Transactions”).65
63
Klein Aff. Ex. 25 (Preliminary Prospectus Supplement June 22, 2015), at S-22.
64
Klein Aff. Ex. 25 (Preliminary Prospectus Supplement June 22, 2015), at S-22.
65
New Senior and Holiday Acquisitions Holdings, LLC were the parties to the
management agreement. Klein Aff. Ex. 35 (2016 Proxy Statement), at 26.
13
1. The Acquisition
The Board was first made aware of the possibility of acquiring the Holiday
Portfolio at a meeting on May 5, 2015.66 At that meeting, “Givens informed three
members of the Board that Holiday had solicited bids for the sale of the Holiday
Portfolio” and that she “expected to submit a bid” on New Senior’s behalf.67
She also “indicated the expected price range for the portfolio.”68 In her presentation,
Givens advised the Board that the Acquisition would be part of New Senior’s “key
initiative” to “build pipeline and close on new acquisitions.”69 In response to
Givens’ announced intentions, the Board discussed its plan to form a transaction
committee “if [New Senior] were invited to proceed to the second round of
bidding.”70
When the Board next met to discuss the possible acquisition, on May 15, 2015,
Givens reported that she had already made an opening non-binding bid of
66
This meeting was attended by “Fortress-affiliated members of New Senior’s
management team.” Compl. ¶ 73 n.8. None of the Fortress-affiliated employees recused
themselves from the meeting. Compl. ¶ 75. Neither Van der Hoof Holstein nor Edens
were present. Compl. ¶ 73 n.8; Klein Aff. Ex. 5 (May 5, 2015 Board Minutes).
67
Compl. ¶ 73.
68
Klein Aff. Ex. 5 (May 5, 2015 Board Minutes).
69
Klein Aff. Ex. 6 (Board Presentation May 5, 2015), at SNR00000230-231.
70
Klein Aff. Ex. 5 (May 5, 2015 Board Minutes).
14
$660 million for the Holiday Portfolio.71 She then outlined the specifics of the bid,
including that “Fortress and its affiliates would manage the Holiday Portfolio post-
acquisition,”72 that “management had begun speaking to lenders about potential
financing” and that, “in the event the Company won the auction, she would
recommend conducting an equity offering in order to fund a portion of the purchase
price.”73 Givens explained that Holiday was motivated to sell “because the funds
that own a majority of Holiday [were] seeking to monetize their investments in order
to return capital to [their] investors in the near term.”74 She closed by emphasizing
that she expected the sales process to be “very competitive.”75
Following Givens’ presentation and the Board’s discussion of the proposed
acquisition, Cameron MacDougall, the Board’s Secretary and a managing director
and general counsel of Fortress, outlined the process by which the Board should
evaluate the proposed acquisition and answered Board member questions regarding
71
Compl. ¶¶ 73, 77; Klein Aff. Ex. 7 (May 15, 2015 Board Minutes). Plaintiff alleges that
“Givens never explained how she calculated the $660 million bid amount.”
Pl.’s Answering Br. 15. Indeed, the May 15 Board Minutes are silent as to how the bid
was calculated. Klein Aff. Ex. 7.
72
Compl. ¶¶ 78–80, Klein Aff. Ex. 7 (May 15, 2015 Board Minutes), at 2.
73
Klein Aff. Ex. 7 (May 15, 2015 Board Minutes).
74
Klein Aff. Ex. 7 (May 15, 2015 Board Minutes), at 2.
75
Compl. ¶ 77.
15
applicable legal standards.76 The Board did not seek out or receive independent legal
or financial advice at this time.77 Based on the information provided, the Board
agreed to form the Transaction Committee at this meeting but did not actually do so
until later.78 Edens recused himself from this May 15 meeting and declared that he
would continue to recuse himself from meetings where the Board intended to discuss
a potential acquisition of the Holiday Portfolio due to his affiliation with Fortress.79
The Board met again on May 18, 2015, and again Givens requested that
MacDougall advise the Board on its actions in evaluating the potential acquisition.80
The Board decided that the Transaction Committee would comprise Malone, Colbert
and McFarland. It was determined that Van der Hoof Holstein could not join the
Transaction Committee at that time given her other commitments.81 While its
members were selected, the Board, again, elected not to form the Transaction
Committee at this meeting. The Board did, however, interview candidates to serve
76
Compl. ¶ 79; Klein Aff. Ex. 4 (2015 Proxy Statement), at 16; Klein Aff. Ex. 7 (May 15,
2015 Board Minutes), at 2.
77
Compl. ¶ 79.
78
Compl. ¶ 79; Klein Aff. Ex. 7 (May 15, 2015 Board Minutes), at 2.
79
Compl. ¶ 74; Klein Aff. Ex. 7 (May 15, 2015 Board Minutes).
80
Compl. ¶ 81.
81
Compl. ¶ 81.
16
as independent counsel for the Transaction Committee, and ultimately decided to
retain Davis, Polk & Wardwell (“Davis Polk”).82
The next day, the Board finally resolved to form the Transaction Committee
(comprising Malone, Colbert and McFarland, with Malone as Chairman) and
delegated to this committee the full authority to consider and accept or reject the
potential acquisition.83 During this meeting, the Board was informed, for the first
time, of Givens’ interest in the transaction due to her indirect ownership interest in
Holiday.84 Notwithstanding this revelation, it does not appear that the Board pressed
for specifics regarding the extent of Givens’ interest in Holiday or the extent to
which she would or should remain involved in the negotiations.85 While Givens
recused herself from the meeting, she continued thereafter to function as New
Senior’s lead negotiator.86
On May 29, 2015, Givens learned that the two other bidders for the Holiday
Portfolio had dropped out of the bidding process.87 Without input from
82
Compl. ¶ 81.
83
Klein Aff. Ex. 10 (May 19, 2015 Board Minutes), at SNR00000238; Compl. ¶ 82.
84
Compl. ¶ 82.
85
Compl. ¶ 82.
86
Compl. ¶ 82.
87
Compl. ¶ 83; Klein Aff. Ex. 11 (May 19, 2015 Committee Minutes). Plaintiff alleges
that the documents produced in response to his books and records demand did not disclose
any final bids from other potential bidders. Compl. ¶ 76; Pl.’s Answering Br. 17 n.8.
17
(or knowledge of) the Transaction Committee or the Board, Givens reduced New
Senior’s bid by $20 million (to $640 million).88 The Transaction Committee was
not informed of the revised bid until its first meeting on June 1, 2015, when Givens
(who was in attendance along with three other Fortress-affiliated individuals)
advised that the remaining bidders had dropped out, announced that she had
unilaterally lowered the bid and declared that final bids were due on June 5, 2015,
only four days later.89 Davis Polk was not in attendance at this meeting.90
Givens explained that her reduced $640 million bid was “derived by applying
the capitalization rate implied by the purchase price for the last portfolio marketed
Having found nothing in the documents that contradicts this allegation, for purposes of this
motion, I accept the allegation as true.
88
Compl. ¶ 83.
89
Compl. ¶¶ 85–86. Plaintiff and Defendants disagree whether the bids due on June 5 were
still to be non-binding. Defendants assert that the bids were to remain non-binding, that
the Transaction Committee was free to walk away from the Acquisition and that there is
“no support in the Yahoo record that the company was committed to anything. It made a
nonbinding proposal.” Tr. 11:6–8; Defs.’ Opening Br. in Supp. of the Mot. to Dismiss
Pl.’s Verified Am. Deriv. Compl. (“Defs.’ Opening Br.”) 12–13. Plaintiff, on the other
hand, asserts that none of the so-called Yahoo documents support the contention that the
offer was “non-binding” and, therefore, I must either ignore Defendants’ assertion to the
contrary or convert this motion into a motion for summary judgment. Pl.’s Answering
Br. 17 n.9. At this stage, because the documents incorporated in the Complaint do not
speak to the character of the bid provided to Holiday as of June 5, I will accept as true
Plaintiff’s allegation that the bid was binding upon New Senior.
90
Compl. ¶ 98.
18
by Holiday and sold to Northstar Realty Finance Corporation [], which was 6.1%.”91
In presenting this justification for the revised bid, Givens failed to “disclose whether
Northstar was the only bidder for its asset purchase from Holiday” and wrongfully
compared the Northstar deal occupancy rate, which was 90%, to the 87.6% rate
purportedly implicated by the Holiday Portfolio.92 These flaws, according to
Plaintiff, rendered the Northstar deal inapposite. Moreover, none of the values used
by Givens to support her lowered bid were or could be independently verified.93
As of this first meeting of the Transaction Committee, even though only New
Senior remained in the process, Citigroup, the broker for the proposed acquisition,
still had not declared New Senior as the winning bidder. Nevertheless, Givens
advised the Transaction Committee that she expected that announcement to occur
91
Compl. ¶ 89.
92
Compl. ¶¶ 90, 92.
93
Compl. ¶ 91. Plaintiff alleges that “the minutes of the June 1, 2015 Transaction
Committee meeting reflect no discussion or debate concerning whether New Senior’s
enhanced bargaining position warranted a substantially larger reduction than a mere
$20 million in New Senior’s initial $660 million bid.” Compl. ¶ 87. The minutes from
that meeting state that “[t]he Transaction Committee engaged in a robust discussion
regarding the information conveyed by Ms. Givens. They asked a variety of questions
regarding the expected risks and benefits of the acquisition, the proposed capitalization
rate, and the terms of the purchase agreement, and each question was answered to the
Transaction Committee’s satisfaction.” Klein Aff. Ex. 11 (June 1, 2015 Committee
Minutes), at 2. At this stage, drawing all reasonable inferences in Plaintiff’s favor, I find
that the particularized facts pled support Plaintiff’s allegation that Givens was not pressed
to justify her decision to reduce the bid by only $20 million.
19
soon.94 With the end of the process in sight, Givens suggested that the Transaction
Committee select a financial advisor to assess the fairness of the proposed price and
assured the Committee that, in the meantime, she would negotiate further favorable
price adjustments.95 Givens ultimately negotiated an additional $5 million in capital
expenditure adjustments.96
At its June 2 meeting, the Transaction Committee retained Greenhill & Co.
(“Greenhill”) as its financial advisor.97 The following day, Givens made a
presentation to Greenhill in which she outlined the specific terms of the Acquisition
and explained that the draft agreement did not contain a financing contingency
because “New Senior had determined that agency financing was preferable.”98
On June 16, 2015, the entire Board met to consider the Acquisition and to hear
from Givens and Edens regarding their views in support of the transaction.99
94
Klein Aff. Ex. 11 (June 1, 2015 Committee Minutes), at 2.
95
Compl. ¶¶ 98–99.
96
Compl. ¶ 99.
97
Compl. ¶ 101; Klein Aff. Ex. 14 (June 2, 2015 Committee Minutes). Notably, Greenhill
was not retained until after Givens had already submitted the final bid of $640 million.
Compl. ¶ 101.
98
Compl. ¶ 102. Plaintiff is highly critical of the fact that no reason was given for failing
to include a financing contingency in the final bid for New Senior’s protection, especially
given its leverage as the sole bidder for the assets. Id. Defs.’ Reply Br. in Further Supp.
of Their Mot. to Dismiss Pl.’s Verified Am. Deriv. Compl. (“Defs.’ Reply Br.”) 18–19.
99
Klein Aff. Ex. 18 (June 16, 2015 Board Minutes).
20
Immediately following this Board meeting, the Transaction Committee met and,
after a briefing by Givens, management left the meeting. 100 With management out
of the room, Malone requested that Greenhill provide an overview of the
transactional structure including an analysis of the conflicts of interest.101 Greenhill
complied and then reviewed its preliminary analysis of the “fairness, from a financial
point of view, to [New Senior] of the [c]onsideration to be paid.”102 This analysis
included comparable transactions (although Greenhill noted that the senior living
market made this “analysis relatively less meaningful”), a discounted cash flow
analysis and the view of certain Wall Street research analysts.103 The meeting lasted
about two hours.104
On June 21, 2015, the meeting of the Transaction Committee once again
began with a presentation from lead negotiator Givens, this time focused on the
proposed financing plan and other more granular aspects of the Acquisition.105 After
100
Klein Aff. Ex. 19 (June 16, 2015 Committee Minutes). Van der Hoof Holstein began
attending Transaction Committee meetings on June 10, 2015, although she was not
designated as a member of the Committee until June 19. Compl. ¶ 103.
101
Klein Aff. Ex. 19 (June 16, 2015 Committee Minutes).
102
Compl. ¶¶ 102, 104; Quinn Aff. Ex. 5 (Greenhill Fairness Opinion), at 4; Klein Aff.
Ex. 19 (June 16, 2015 Committee Minutes), at SNR00000248.
103
Klein Aff. Ex. 19 (June 16, 2015 Committee Minutes), at SNR00000249.
104
Compl. ¶¶ 102, 104; Quinn Aff. Ex. 5 (Greenhill Fairness Opinion), at 4.
105
Klein Aff. Ex. 22 (June 21, 2015 Committee Minutes).
21
management left the meeting, the Committee received Greenhill’s final fairness
presentation and unanimously determined to recommend that the Board authorize
the Acquisition.106 Immediately thereafter, the Board convened a meeting and
approved the Acquisition with both Edens and Givens recusing.107 No stockholder
vote was requested.108
2. The Secondary Offering
The Acquisition was financed in part by a secondary public offering of New
Senior common stock (the “Secondary Offering”).109 The Board delegated the task
of determining the terms of the Secondary Offering to Edens and Givens by
resolution dated June 21, 2015, appointing them as the sole members of the Pricing
Committee.110 On June 23, 2015, the Pricing Committee met for the first time and
resolved to offer $266,973,360111 in equity at a price of $13.75 per share.112 Only a
106
Compl. ¶¶ 106–07; Klein Aff. Ex. 22 (June 21, 2015 Committee Minutes).
107
Klein Aff. Ex. 24 (June 21, 2015 Board Minutes), at SNR00000260–61.
108
Compl. ¶ 19.
109
Klein Aff. Ex. 24 (June 21, 2015 Board Minutes), at SNR00000266; Compl. ¶ 109.
110
Compl. ¶ 109; Klein Aff. Ex. 24 (June 21, 2015 Board Minutes), at SNR00000266.
111
Compl. ¶ 110.
112
Compl. ¶ 120. New Senior’s stock closed at $15.25 one day prior to the Secondary
Offering. Id. Neither the Board, the Transaction Committee nor the Pricing Committee
ever questioned this discount. Compl. ¶ 113.
22
portion of the money raised through the equity offering was used to finance the
Acquisition.113
Edens and Givens received shares in the Secondary Offering totaling
72,727,114 and FIG was granted a ten-year option to acquire 2,011,409 New Senior
shares for the $13.75 offering price pursuant to its management agreement with New
Senior.115 Greenhill did not assess the Secondary Offering as part of its fairness
opinion and the Board was not apprised of either the number of shares to be offered
or the offering price prior to approving the Acquisition.116 New Senior announced
113
Compl. ¶ 110. As discussed below, Plaintiff alleges Edens and Givens caused New
Senior to offer more equity than was needed to complete the Acquisition out of self-
interest. Compl. ¶ 111.
114
Compl. ¶ 122. The Complaint alleges that Edens, through a side agreement, was entitled
directly to purchase 72,727 shares at the offering price and that an additional 102,917
shares were allocated to certain employees and officers (also at the offering price) with
14,545 shares allocated to Givens. Id.
115
Compl. ¶ 121. The management agreement entitled FIG to 10% of the shares sold in an
equity offering. Klein Aff. Ex. 1 (FIG Management Agreement).
116
Compl. ¶ 112; Quinn Aff. Ex. 5 (Greenhill Fairness Opinion), at 3. The June 21 Board
Minutes state that MacDougall (not Davis Polk) “reviewed the terms of the equity offering”
with the Board. Klein Aff. Ex. 24 (June 21, 2015 Board Minutes), at SNR00000261. Aside
from that mention, the documents incorporated in the Complaint, contrary to Defendants’
assertion, lead to the reasonable inference that the Board was not aware of the pricing of
the shares to be sold in the equity offering prior to the creation of the Pricing Committee.
See, e.g., Klein Aff. Ex. 24 (June 21, 2015 Board Minutes), at SNR00000267:
RESOLVED, that the Board hereby approves the Offering and the sale and
issuance of the Shares for a maximum aggregate offering price not to exceed
$300 million (plus a 15% overallotment option) and on such other terms to
be determined by the Pricing Committee . . .
23
the Secondary Offering on June 25, 2015.117 The market reacted poorly; New Senior
stock closed at $14.14 on June 23 and dropped to $13.65 on June 26.118
3. The Holiday Management Agreement
As part of the Acquisition, Holiday and New Senior entered into a no-bid
management agreement (the “Holiday Management Agreement”) under which
Holiday would continue to manage the Holiday Portfolio.119 The Holiday
Management Agreement provided that Holiday would be compensated with 5% of
New Senior’s revenues as well as an incentive fee of 20% above a designated
threshold.120 These fees were significantly above market.121
117
Compl. ¶ 18. New Senior retained Citigroup as one of the underwriters and joint-book-
running managers of the Secondary Offering even though Citigroup had represented
Holiday and Fortress during the sale process leading up to the Acquisition. Compl. ¶¶ 114–
15.
118
Compl. ¶ 18. Defendants contend that “[o]ver 60 potential investors submitted
indications of interest in the Secondary Offering. Of those 60, nearly one-third placed a
limit at or below $13.75 [per share]. Only 11 placed a limit above $13.75, and they only
did so for an indication totaling less than $40 million, a woefully insufficient figure.”
Defs.’ Opening Br. 20 (internal citation omitted).
119
Compl. ¶ 95.
120
Compl. ¶ 95; Klein Aff. Ex. 35 (2016 Proxy Statement), at 26.
121
Compl. ¶ 95 (“[C]ertain other managers charge a fixed amount of only 3% of revenues
and certain other managers receive no incentive fee. As Givens conceded in her September
2015 Interview, there are only ‘some cases’ where property managers are paid an incentive
fee based on performance. Indeed, Holiday charges no incentive fee to New Senior for the
‘Hawthorn’ property portfolio that New Senior purchased from Holiday.”) (internal
quotation omitted).
24
A Greenhill presentation made to the Transaction Committee indicates that
the terms of the Holiday Management Agreement were first disclosed to the
Committee during a June 2015 meeting.122 As with the Secondary Offering,
Greenhill did not opine on the fairness of the Holiday Management Agreement.123
Nor is there any indication that the Transaction Committee looked into or
interviewed other managers for the Holiday Portfolio or even attempted to negotiate
more favorable terms.124
E. Fortress’ Alleged Interest in the Transactions
Plaintiff alleges that Edens and Givens caused New Senior to enter into the
Challenged Transactions to advance certain of Fortress’ own interests, including:
(1) Fortress’ planned shift of assets to publicly-traded companies; (2) the
approaching maturity date of FHIF (through which Fortress held its interests in
Holiday); (3) the increase in FIG’s management fees resulting from the Secondary
Offering; and (4) the increase in fees received through the Holiday Management
Agreement as outlined previously. I discuss each briefly below.
122
Klein Aff. Ex. 12 (Transaction Committee Presentation: Holiday 28 Portfolio), at
SNR0000038–39. The Complaint alleges that the Transaction Committee did not consider
the Holiday Management Agreement and was not even apprised of its exact terms until
after approval of the Acquisition. Compl. ¶¶ 96–97.
123
Quinn Aff. Ex. 5 (Greenhill Fairness Opinion), at 2.
124
Compl. ¶ 96.
25
1. The Planned Shift of Assets
At the time of the Acquisition, Fortress was in the midst of a plan to shift its
assets under management from private equity funds, like the funds that own Holiday,
to its Permanent Capital Vehicles (“PCVs”), like New Senior.125 This shift would
yield a greater return to Fortress because Fortress could “charge higher fees on the
gross equity and operating results [of PCVs] . . . over a longer time period.”126
Fortress disclosed this plan in a 2013 presentation where it outlined the “economic
benefits of its ‘New Model.’”127 Presentations in 2014 and 2015 evidence Fortress’
execution of the plan.128
The sale of the Holiday Portfolio to New Senior was executed in furtherance
of the New Model, as revealed in a statement made by Givens in an interview with
Seniors Housing Business published in September 2015:
New Senior has been, and we expect it will continue to be, Fortress’
dedicated vehicle for investing in the seniors housing industry. While
the private equity funds have a finite life to them, New Senior is one of
the permanent capital vehicles at Fortress, given it is a public company
with no time period upon which the equity has to be returned to
investors.129
125
Compl. ¶ 72.
126
Compl. ¶¶ 9, 67, 70.
127
Compl. ¶ 67.
128
Compl. ¶¶ 70–71; Quinn Aff. Ex. 1 (Fortress Presentation), at 8–9.
129
Compl. ¶¶ 29, 66.
26
2. The Looming Maturity of FHIF
Prior to the close of the Acquisition, Fortress was in need of liquidity because
its fund, FHIF, through which it held its majority interest in Holiday, had a maturity
date of January 2017, at which time FHIF was to return capital to its investors.130
By selling the Holiday Portfolio to New Senior at an inflated price, Holiday seized
an opportunity to facilitate the delivery of promised returns.131
3. Increase of New Senior’s Gross Equity
Plaintiff alleges that Fortress, Edens and Givens received unfair benefits from
the $266 million Secondary Offering (of which only $175.3 million was used for the
Acquisition) at the expense of New Senior in two ways: (1) the stock was offered at
a “deep discount to the market price” and the offering included an award of options
to Fortress, Edens and Givens at that discounted price; and (2) the Secondary
Offering increased New Senior’s gross equity resulting in higher management fees
to FIG (under pre-existing agreements) and a depressed New Senior share price, all
compounded by the fact that Edens and Givens saw to it that more equity was issued
than was needed to fund the Acquisition.132 Indeed, the increase of gross equity from
130
Compl. ¶ 4.
131
Compl. ¶ 4.
132
Compl. ¶¶ 6–8, 110–111, 115. The Secondary Offering caused New Senior’s market
capitalization to drop by $100 million. Compl. ¶ 102.
27
the Secondary Offering led to an increase in FIG’s management fees from
$8.5 million in 2014 to $14.3 million in 2015.133 Because the acquisition agreement
did not contain a financing contingency, New Senior was locked into the Secondary
Offering even if the market responded poorly to news of the Acquisition (which it
did).134
4. Holiday Benefits
As noted, Givens arranged for Holiday to earn substantial fees through the
Holiday Management Agreement. These fees benefited FHIF and ultimately
Fortress.
F. Procedural Posture
Plaintiff filed his Verified Derivative Complaint on December 27, 2016.
Defendants filed their first motion to dismiss on March 16, 2017. Plaintiff responded
by filing his Verified Amended Derivative Complaint on June 8, 2017.135
The Complaint has three counts: Count I asserts a breach of fiduciary duty claim
against all of the directors of New Senior (excluding Robert Savage); Count II asserts
a breach of fiduciary duty claim against Givens as an officer of New Senior; and
133
Compl. ¶ 119.
134
Compl. ¶ 113.
135
D.I. 12. See Del. Ct. Ch. R. 15(aaa).
28
Count III asserts an aiding and abetting breaches of fiduciary duty claim against
Fortress, Holiday, FIG, FOE I and FIG Corp.
Defendants now move to dismiss the Complaint for failure adequately to plead
demand futility under Court of Chancery Rule 23.1 and failure to state a viable claim
under Rule 12(b)(6). According to Defendants, Plaintiff cannot plead demand
futility because a majority of the Board was disinterested and independent and the
Challenged Transactions were products of valid exercises of the Board’s business
judgment.136
In riposte, Plaintiff argues that demand is excused as futile because there is
reason to doubt (1) the disinterestedness and independence of a majority of the Board
at the time of the filing of this action and (2) that the Challenged Transactions were
otherwise the proper exercise of business judgment.137 Thus, Plaintiff argues he has
satisfied both prongs of Aronson.138 As for the Rule 12(b)(6) motion, Plaintiff argues
that he has pled sufficient facts to state claims for both breach of the duty of care and
breach of the duty of loyalty. He also argues that entire fairness is the standard of
review and that the pled facts support a reasonable inference of an unfair price and
136
Defs.’ Opening Br. 2–4.
137
In his first complaint, Plaintiff alleged that Fortress was a controlling stockholder of
New Senior. The now-operative Complaint no longer makes that claim.
138
Aronson, 473 A.2d 805; Pl.’s Answering Br. 41.
29
unfair process with respect to the Challenged Transactions.139 These same pled facts,
according to Plaintiff, overcome Defendants’ Section 102(b)(7) defense.
II. ANALYSIS
There is no question that Cumming’s claims challenging the Board’s
determination to acquire assets are derivative claims that ultimately belong to New
Senior. It is appropriate, therefore, first to take up the threshold question of whether
Cumming may bring these claims on behalf of New Senior. Because I find that
Cumming has pled particularized facts that support a finding of demand futility such
that he may bring this action derivatively, I must also consider whether he has stated
viable claims to survive Defendants’ motion under Rule 12(b)(6). For the reasons
that follow, I conclude that he has.
A. Plaintiff Has Adequately Pled Demand Futility
“[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.”140 As noted, Plaintiff’s claims here allege harm suffered by New
Senior. The claims, therefore, belong to the Company and the decision whether or
Pl.’s Answering Br. 62 (arguing that Defendants “cannot establish entire fairness on a
139
motion to dismiss”).
140
Aronson, 473 A.2d at 811.
30
not to pursue them typically would rest with the Board.141 A board of directors does
not stand alone, however, in its authority to initiate litigation on behalf of the
corporation. In certain circumstances, stockholders may pursue litigation
derivatively on behalf of the corporation as a matter of equity to “redress the conduct
of a torpid or unfaithful management . . . where those in control of the company
refused to assert a claim belonging to it.”142
Because the derivative plaintiff who elects not to make a demand “seeks to
displace the board’s authority,” it is appropriate to require that he plead
particularized facts that “create a reasonable doubt” as to whether the board is fit to
consider the demand.143 When the complaint challenges a business decision of the
board, Aronson instructs that the derivative plaintiff meets his burden to plead
demand futility by pleading particularized facts that create either (1) a reasonable
doubt that the board of directors that would respond to the demand was disinterested
and independent or (2) a reasonable doubt that “the challenged transaction was
141
White v. Panic, 783 A.2d 543, 550 (Del. 2001) (stating that “[i]n most situations, the
board of directors has sole authority to initiate or to refrain from initiating legal actions
asserting rights held by the corporation”).
142
Aronson, 473 A.2d at 811.
La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 351 (Del. Ch. 2012) (citation
143
omitted), rev’d on other grounds, Pyott v. La. Mun. Police Empls.’ Ret. Sys., 74 A.3d 612
(Del. 2013).
31
otherwise the product of a valid exercise of business judgment.”144 The “reasonable
doubt” standard articulated in Aronson is not the same as the burden of proof
imposed upon the prosecution in a criminal case.145 It is, instead, a more literal
distillation of the phrase meaning simply “that there is reason to doubt.”146
Rule 23.1 places a heightened pleading burden on the plaintiff to meet
“stringent requirements of factual particularity that differ substantially from the
permissive notice pleadings” embodied in Court of Chancery Rule 8 and that
animate Court of Chancery Rule 12(b)(6).147 Even so, the court is still “bound to
draw all reasonable inferences from those particularized facts in favor of the
plaintiff, not the defendant, when dismissal of a derivative complaint is sought.”148
144
Aronson, 473 A.2d at 814.
145
Grimes v. Donald, 673 A.2d 1207, 1217 (Del. 1996).
146
Id. Grimes explains that another way to construe Aronson’s “reasonable doubt”
standard is to inquire whether the stockholder has articulated “a ‘reasonable belief’
(objectively) that the board lacks independence or that the transaction was not protected by
the business judgment rule.” Id. The standard is “sufficiently flexible and workable to
provide the stockholder with the ‘keys to the courthouse’ in an appropriate case where the
claim is not based on mere suspicions or stated solely in conclusory terms.” Id.
147
Brehm, 746 A.2d at 254.
148
Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015); Pyott, 46 A.3d
at 351 (explaining that the “requirement of factual particularity does not entitle a court to
discredit or weigh the persuasiveness of well-pled allegations” and that Plaintiff must only
plead specific facts and is not required to plead evidence or “facts sufficient to sustain a
‘judicial finding.’”).
32
Plaintiff did not make a demand on the Board. Therefore, as he must, he has
endeavored to plead demand futility. While he need only do so under either of
Aronson’s prongs, Plaintiff contends that he has pled demand futility under both.
Because I find that the Complaint pleads futility under the first prong, I need not and
decline to reach Plaintiff’s arguments that he has satisfied the second prong as well.
In order to plead futility under Aronson’s first prong, the complaint must raise
a reasonable doubt that a majority of the directors could have evaluated a demand
independently and without self-interest.149 When determining whether the
complaint pleads director interest or lack of independence, the court does not
consider the pled facts in isolation but instead considers them in totality.150
The court will deem a director “interested” for purposes of this analysis when
he stood on both sides of the transaction at issue or stood to receive a material benefit
that was not to be received by others.151 A material benefit is one that is “significant
enough in the context of the director’s economic circumstances, as to have made it
149
Brehm, 746 A.2d at 256–57.
150
See Sanchez, 124 A.3d at 1019 (“it is important that the trial court consider all the
particularized facts pled by the plaintiffs about the relationships between the director and
the interested party in their totality and not in isolation from each other, and draw all
reasonable inferences from the totality of those facts in favor of the plaintiffs”).
151
Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004, at *9
(Del. Ch. Oct. 7, 2016); Robotti & Co. v. Liddell, 2010 WL 157474, at *12 (Del. Ch.
Jan. 14, 2010).
33
improbable that the director could perform her fiduciary duties.”152 A pleading of
materiality, however, is only required “in the absence of self-dealing.”153
The inquiry for director independence is contextual and asks whether a
director’s decision was “based on the merits of the subject before the board rather
than on extraneous considerations or influences.”154 “To show lack of independence,
the plaintiff must allege that a director is so beholden to an interested director that
his or her discretion would be sterilized.”155 Specifically, the relationship between
the challenged director and the interested director must be “so close that one could
infer that the non-interested director would be more willing to risk his or her
reputation than risk the relationship with the interested director.”156
The parties agree that the members of the New Senior Board that would have
considered Plaintiff’s demand (if he had made one) comprised directors Savage,
Edens, Givens, Malone, Van der Hoof Holstein, Colbert and McFarland. The
152
Robotti, 2010 WL 157474, at *12; Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134,
1151 (Del. Ch. 1994) (“not every financial interest in a transaction that is not shared with
shareholders [is] sufficient”).
153
Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *5 (Del. Ch. June 26, 2014)
(internal quotation omitted).
154
Chester Cty., 2016 WL 5865004, at *9; Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del.
Ch. 2002).
155
Chester Cty., 2016 WL 5865004, at *9.
156
Robotti, 2010 WL 157474, at *12.
34
Court’s function now is to “count heads.”157 By requesting books and records from
New Senior prior to filing his Complaint, Cumming has done what our courts have
long counseled plaintiffs to do: he has utilized the tools provided by our law to gain
access to documents that allowed him to plead specific facts that support his
allegations of interest and lack of independence.158
1. Savage
Plaintiff does not challenge the independence or disinterestedness of Savage
who joined the Board after the Challenged Transactions. In this regard, Savage
stands alone.
2. Edens
Plaintiff contends that Edens is interested in the Challenged Transactions and
lacks independence from Fortress. Defendants do not seriously dispute Edens’
157
In re Ezcorp, Inc. Consulting Agmt. Deriv. Litig., 2016 WL 301245, at *34 (Del. Ch.
Jan. 25, 2016); id. (“If the board of directors lacks a majority comprising independent and
disinterested directors, then demand is futile.”).
158
See, e.g., Sandys v. Pincus, 152 A.3d 124, 128–29 (Del. 2016) (“For many years, this
Court and the Court of Chancery have advised derivative plaintiffs to take seriously their
obligations to plead particularized facts justifying demand excusal. This case presents the
unusual situation where a plaintiff who sought books and records to plead his complaint
somehow only asked for records relating to the transaction he sought to redress and did not
seek any books and records bearing on the independence of the board. . . . As a result of
the plaintiff’s failure, he made the task of the Court of Chancery more difficult than was
necessary and hazarded an adverse result for those he seeks to represent.”); Brehm, 746
A.2d at 266–67 (describing the “tools at hand” available to a stockholder to assist in
pleading particular facts to demonstrate demand futility).
35
conflicts, nor could they. Edens is Fortress’ founder, one of its principals and the
co-chairman of its board of directors.159 He is Fortress’ largest stockholder and is
responsible for Fortress’ private equity and publicly traded alternative investment
businesses (including Holiday and New Senior).160 Additionally, while it appears
that Edens recused himself from voting on the Acquisition, he was one of two
members on the Pricing Committee that set the terms and pricing for the Secondary
Offering used to finance the Acquisition and under which both FIG and Edens
himself received share options. Thus, Plaintiff has adequately pled facts raising a
reasonable doubt that Edens could have independently considered a demand
challenging these transactions.
3. Givens
Here again, Defendants do not earnestly dispute Givens’ lack of independence
and disinterest for purposes of the Rule 23.1 analysis.161 Givens was the second
member of the Pricing Committee setting the terms for the Secondary Offering and
she also received options under the Secondary Offering. Moreover, she was
employed by Fortress and yet was New Senior’s lead negotiator for the
159
Compl. ¶ 37.
160
Compl. ¶¶ 37–38; Defs.’ Opening Br. 24 n.10.
161
Tr. 44:9–14.
36
Acquisition.162 Because she stood on both sides of the Challenged Transactions, it
is reasonable to infer on that basis alone that she was interested in the Challenged
Transactions. Accordingly, Plaintiff has satisfied his burden to raise a reasonable
doubt regarding Givens’ ability objectively to consider a demand.
4. Malone
Plaintiff challenges Malone’s fitness to consider a demand on both interest
and independence grounds. Malone is alleged to be interested in the Challenged
Transactions because, as a director of both Walker & Dunlop, which stood to lend
$464.7 million to New Senior to help fund the Acquisition, and the borrower, New
Senior, Malone also stood on both sides of the transaction.163 The Complaint alleges
that Walker & Dunlop has provided financing to New Senior in the past and that
New Senior’s loans “constituted approximately 17.4% of [Walker & Dunlop’s]
Freddie Mac loan origination volume in 2015.”164 It goes on to allege that, in April
2015, Walker & Dunlop “closed on the largest deal in its 77 year history—
originating $670 million in loans to New Senior.”165 Finally, the Complaint alleges
162
It is also alleged that Givens was further motivated to favor the Challenged Transactions
because she holds stock in the Fortress funds that own Holiday. Compl. ¶ 41.
163
Compl. ¶ 50; Pl.’s Answering Br. 26.
164
Compl. ¶ 49.
165
Compl. ¶ 48.
37
that Walker & Dunlop expected to enjoy a continuing relationship with New Senior
that would lead to further lucrative investments.166 Viewing these pled facts
together, it is reasonably conceivable that Walker & Dunlop had a material interest
in providing the $464.7 million loan to finance the Acquisition.167 Thus, Plaintiff
has raised a reasonable doubt as to whether Malone, as a director of Walker &
Dunlop, was disinterested in the Challenged Transactions. Malone was a dual
fiduciary here and the interests of the beneficiaries he served (lender vs. borrower)
were not aligned.168 Accordingly, Plaintiff has adequately pled that Malone was
“interested” for demand futility purposes.169
166
Compl. ¶¶ 48–49.
167
Plaintiff also points to other conflicts affecting Malone that relate principally to his prior
service on the Fortress board of directors and as a managing director for Fortress, his
current ownership of substantial Fortress stock and the substantial, material director fees
he earns from Fortress board placements. Compl. ¶¶ 44, 50; Pl.’s Answering Br. 30.
Although I need not take up these alleged conflicts given my findings relating to Malone’s
service on the Walker & Dunlop board, I do note that, in totality, the weight of the pled
facts regarding these conflicts is substantial.
168
See Chester Cty., 2016 WL 5865004, at *10 (“Plaintiff has alleged particularized facts
sufficient to create a reasonable doubt as to Edens, Jacobs, and Nierenberg’s
disinterestedness in the HLSS transactions because of their dual fiduciary positions at
Fortress and New Residential.”); Chen v. Howard-Anderson, 87 A.3d 648, 670 (Del. Ch.
2014) (“If the interests of the beneficiaries to whom the dual fiduciary owes duties diverge,
the fiduciary faces an inherent conflict of interest.”); In re Nine Sys. Corp. S’holders Litig.,
2014 WL 4383127, at *29–30 (Del. Ch. Sept. 4, 2014) (describing the so-called “dual-
fiduciary problem”); Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (“There is
no ‘safe harbor’ for such divided loyalties in Delaware.”).
169
See Chester Cty., 2016 WL 5865004, at *9 (“When a director of a corporation owes
fiduciary duties as a director or officer of another corporation, the director is conflicted for
purposes of the first prong of Aronson. . . .”); Kahn v. Portnoy, 2008 WL 5197164, at *7
38
5. Van der Hoof Holstein
Plaintiff challenges Van der Hoof Holstein’s fitness to consider a demand
based on her especially close ties to Edens. Van der Hoof Holstein is employed in
a leadership position at PIH, a non-profit organization where Edens’ wife has for
many years served on the board of directors and to which the Edens family makes
substantial financial and other contributions.170 To illustrate the close connection,
Plaintiff points to the fact that Edens’ daughter wore her self-described “lucky” PIH
pin while appearing on national television at the NBA draft as a representative of
her father (and the NBA team he owns). He also highlights Edens’ hands-on support
of PIH’s relief efforts in Haiti; support that was praised by Van der Hoof Holstein’s
immediate supervisor in several publications.171 These close ties are further revealed
(Del. Ch. Dec. 11, 2008) (“Portnoy, as a director of HPT and TA, is therefore bound to act
in the best interest of both companies. Thus, when Portnoy acted on behalf of TA in
approving the transaction, his loyalties as an HPT director raise at least a reasonable doubt
as to whether he was acting in the best interest of TA.”).
Compl. ¶¶ 53–54. The Complaint alleges that “[t]he Edens family has donated between
170
$100,000 and $1,000,000 to PIH every fiscal year from 2008–2012 and in 2015.”
Compl. ¶ 54.
171
Compl. ¶¶ 55–58. Van der Hoof Holstein’s direct supervisor is Dr. Paul Farmer, the
founder of PIH. Compl. ¶ 56. The recognition in a Van der Hoof Holstein-edited book
was with respect to Edens’ connection to GHDP. Compl. ¶ 58. “GHDP is a partnership
between [the Department of Global Health and Social Medicine] and PIH that trains
healthcare professionals to deliver medical care to destitute populations worldwide.”
Compl. ¶ 57. Van der Hoof Holstein is not listed as an employee on the GHDP website
(Dr. Farmer is) but her connection to and position as Associate Director of GHDP does not
appear to be contested. See Klein Aff. Ex. 4 (2015 Proxy Statement), at 8. The Complaint
further supports the claim of strong ties by reference to a comment by Chelsea Clinton in
39
in the fact that Van der Hoof Holstein serves alongside Edens on several boards,
including A&K (an organization founded by Fortress).172 The compensation for her
board service, as facilitated by Edens, amounts to at least half of her annual
income.173
This court has considered on several occasions the extent to which charitable
donations to a cause associated with a director made by an interested individual or
entity might serve as a basis to reasonably doubt whether the director was beholden
to the interested donor. Defendants rely primarily on this court’s analysis of the
issue in In re Goldman Sachs174 and In re J.P. Morgan Chase175 to support their
argument that Edens’ charitable contributions to PIH do not raise a reasonable doubt
regarding Van der Hoof Holstein’s independence. In Goldman Sachs, a member of
2015 acknowledging that the “Edens’[] extraordinary support for PIH’s work in Haiti,
include[ed] traveling to Haiti with Dr. Paul Farmer (PIH’s founder and [Van der] Hoof
Holstein’s boss) and Clinton.” Compl. ¶ 56.
172
Compl. ¶ 59.
173
Compl. ¶ 59. “According to PIH’s publicly available Form 990 tax returns, Hoof
Holstein earned $72,500 from PIH in 2013, $106,002 from PIH in 2014, and $149,855
from PIH in 2015, for working 60 hours a week. Hoof Holstein therefore receives at least
half of her income from her New Senior Board service. It is also reasonable to infer that
Hoof Holstein receives similar compensation from A&K Global Health, which means that
the vast majority of her compensation comes through her service on Fortress-affiliated
boards with Edens.” Id.
174
2011 WL 4826104 (Del. Ch. Oct. 12, 2011).
175
In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808 (Del. Ch. 2005).
40
the company’s board was also the chair of a $100 million renovation campaign for
a charitable organization and a trustee of the University of Chicago where part of his
responsibilities also included raising money.176 The plaintiffs alleged that the
company made contributions to the renovation campaign as well as to the
university.177 The court determined that the allegations failed to raise a reasonable
doubt regarding the director’s independence when
nothing more can be inferred from the complaint than the facts that the
Goldman Foundation made donations to a charity that Bryan served as
trustee, that part of Bryan’s role as a trustee was to raise money, and
that Goldman made donations to another charity where Bryan chaired
a renovation campaign. The Plaintiffs do not allege that Bryan received
a salary for either of his philanthropic roles, that the donations made by
the Goldman Foundation or Goldman were the result of active
solicitation by Bryan, or that Bryan had other substantial dealings with
Goldman or the Goldman Foundation. The Plaintiffs do not provide the
ratios of the amounts donated by Goldman, or the Goldman Foundation,
to overall donations, or any other information demonstrating that the
amount would be material to the charity. Crucially, the Plaintiffs fail to
provide any information on how the amounts given influenced Bryan’s
decision-making process.178
In J.P. Morgan, the court found the allegations of conflict similarly lacking.
The plaintiff there challenged several directors’ independence based on the
defendant company’s donations to two organizations (the American Natural History
176
2011 WL 4826104, at *8.
177
Id.
178
Id. at *9.
41
Museum and the United Negro College Fund) at which the directors held various
positions, including president, trustee and CEO.179 The court found that the
complaint lacked any indication that the contributions to the respective non-profits
were of import to the directors or how the donations would affect the directors’
decision making.180
For his part, Plaintiff cites to In re Oracle181 and Delaware County Employees
Retirement Fund v. Sanchez.182 In Oracle, then-Vice Chancellor Strine analyzed the
independence of a two-person special litigation committee that had moved to dismiss
a derivative action.183 The committee members were both tenured professors at
Stanford who were tasked with investigating claims of insider trading against other
directors on the company’s board. The court found the following ties to exist
between the targets of the committee’s investigation and Stanford: one director was
also a professor at Stanford who had taught one of the committee members; another
was a Stanford alumnus who had directed millions of dollars of donations over the
179
906 A.2d at 814–15.
180
Id. at 822–23.
181
824 A.2d 917 (Del. Ch. 2003).
182
124 A.3d 1017, 1022 (Del. 2015) (finding a pleading sufficient to raise a reasonable
doubt as to director independence when the pled facts alleged that the director had been
friends with the interested director for over fifty years and that friendship had resulted in
economic advantages (including full-time employment) for the director).
183
824 A.2d 917.
42
years to Stanford; and the third was the company’s CEO who donated millions of
dollars to Stanford through a personal foundation.184 The court concluded that “the
ties among the [committee], the Trading Defendants, and Stanford are so substantial
that they cause reasonable doubt about the [committee]’s ability to impartially
consider whether the Trading Defendants should face suit.”185 The court reached
this conclusion by applying a “contextual approach,” explaining:
Delaware law should not be based on a reductionist view of human
nature that simplifies human motivations on the lines of the least
sophisticated notions of the law and economics movement. Homo
sapiens is not merely homo economicus. We may be thankful that an
array of other motivations exist that influence human behavior; not all
are any better than greed or avarice, think of envy, to name just one.
But also think of motives like love, friendship, and collegiality, think
of those among us who direct their behavior as best they can on a
guiding creed or set of moral values.
Nor should our law ignore the social nature of humans. To be direct,
corporate directors are generally the sort of people deeply enmeshed in
social institutions. Such institutions have norms, expectations that,
explicitly and implicitly, influence and channel the behavior of those
who participate in their operation.186
In my view, Oracle is the more fitting and persuasive authority here. Plaintiff
has pled that Van der Hoof Holstein is employed by, and has a leadership role in, a
relief organization that clearly derives substantial support, both financial and
184
Id. at 920–21.
185
Id. at 942.
186
Id. at 938.
43
devotional, from the Edens family through considerable donations, aide in relief
efforts and service on its board. Plaintiff’s failure to quantify precisely the
contributions made by the Edens family, as argued by Defendants, does not undercut
the particularized pleading that their support is significant to PIH, Van der Hoof
Holstein’s main employer, and to Van der Hoof Holstein.187 The fact that Plaintiff
does not allege that Van der Hoof Holstein actually solicited the donations or the
other support provided by the Edens family to PIH does not dilute their relevance to
the “independence” analysis.188 When the Edens family’s ties to PIH are coupled
with the substantial and clearly material director fees Van der Hoof Holstein receives
from service on boards at the behest of Edens, I am satisfied that these allegations
raise reasons to doubt Van der Hoof Holstein’s independence from Edens.
187
Defs.’ Opening Br. 27–28 (“Plaintiff has failed to allege how donations amounting to
less than 1% of PIH’s annual revenue would affect the decision-making of Ms. van der
Hoof Holstein.”).
188
Defs.’ Opening Br. 24, 28 (“Plaintiff has not alleged that Ms. van der Hoof Holstein’s
role at PIH had anything to do with fundraising, let alone that she personally solicited the
Edens family donations.”). See In re Limited, Inc., 2002 WL 537692, at *4 (Del. Ch.
Mar. 27, 2002) (“The Court in ascertaining the sufficiency of a complaint challenging a
director’s loyalty does not apply an objective reasonable director standard; instead, the
Court must apply a subjective actual person test to determine whether a particular director
lacks independence because he is controlled by another.”) (internal quotation omitted);
McMullin v. Beran, 765 A.2d 910, 923 (Del. 2000) (“In assessing director independence,
Delaware courts apply a subjective ‘actual person’ standard to determine whether a ‘given’
director was likely to be affected in the same or similar circumstances.”).
44
With that conclusion, I have determined that a majority of the seven directors
that would have considered a demand from Plaintiff are in some way conflicted.
Thus, I could stop the Aronson analysis here. For the sake of completeness,
however, I will address the independence of both Colbert and McFarland as well.
6. Colbert
The thrust of Plaintiff’s allegations with respect to Colbert is that there is
reason to doubt his independence from Edens after Edens invited Colbert to join the
Milwaukee Bucks ownership group, a unique, prestigious and lucrative opportunity
available, by NBA rule, to no more than 750 people in the world.189 In return for
this invitation, Colbert, through Partners for Community Impact, LLC, assisted
Edens and the City of Milwaukee in their efforts to build a new arena in downtown
Milwaukee.190 This connection, according to Plaintiff, creates such “a special and
highly unusual financial and social relationship because of the prestige associated
with an ownership stake” that Colbert could not be expected to act against Edens’
189
Compl. ¶¶ 60–61. According to the Complaint, NBA rules limit team ownership groups
to 25 individuals, each of whom must own at least 1% of the team. Compl. ¶ 60. Thus, it
is alleged that it is unlikely that Colbert would have the opportunity to “become an owner
of another team if Edens, as the team’s dominant partner, decided to squeeze Colbert out
of the [Bucks] ownership group.” Pl.’s Answering Br. 38.
190
Compl. ¶ 62.
45
interests, especially given that Colbert joined Edens’ Bucks ownership group around
the same time he joined the New Senior Board.191
Plaintiff likens the Bucks ownership connection between Edens and Colbert
to the unique relationship at issue in Sandys v. Pincus.192 In Pincus, our Supreme
Court found that a derivative plaintiff had raised a reasonable doubt regarding a
director’s independence by pleading that the interested director’s family and the
family of the challenged director owned a private plane together.193 The Court based
its finding on the fact that “[c]o-ownership of a private plane involves a partnership
in a personal asset that is not only expensive, but also requires close cooperation in
use, which is suggestive of detailed planning indicative of a continuing, close
personal friendship.”194 Such close relationships, the Court explained, would be
expected “to heavily influence a human’s ability to exercise impartial judgment.”195
191
Compl. ¶ 61. The Complaint does not say much about the financial rewards Colbert has
received or might expect to receive from his ownership interest in the Bucks. It only alleges
that the “relationship is . . . lucrative” and that other investors have “reaped a 25-fold gain
on [their] investment[s].” Id. The real thrust of the Complaint, and Plaintiff’s futility
argument, is that Edens invited Colbert to join an exclusive and highly rewarding “club”
that Colbert likely would not have had access to but for Edens’ generosity. Compl. ¶ 62.
192
152 A.3d 124 (Del. 2016).
193
Id. at 130.
194
Id.
195
Id.
46
Defendants argue that the relationship Plaintiff has proffered here is nothing
like the one presented in Pincus. Colbert is a co-owner of a sports team with Edens,
along with several others. According to Defendants, this business relationship does
not evidence the kind of close friendship or personal relationship that can reasonably
be inferred when individuals own a private plane together.
I agree with Defendants that the relationship dynamics are different. There is
likely little or no planning required between Edens and Colbert to ensure that the
Bucks continue to operate successfully as an NBA franchise.196 But that does not
mean the dynamics of joining together to own a professional sports team are any less
revealing of a unique, close personal relationship. Edens invited Colbert to join him
in a relatively small group of investors who would own a highly unique and
personally rewarding asset. In return, Colbert assisted Edens in the effort to build a
new arena for the team they now co-owned. I am satisfied that this relationship
creates a reason to believe that Colbert “may feel . . . beholden to [Edens].”197
196
Id. (emphasizing the planning and coordination required to own a private plane
together). For example, I suspect that Colbert and Edens collectively have absolutely
nothing to do with whether the “Greek freak” remains healthy, happy, productive and a
major draw for Bucks fans. See http://www.espn.com/nba/player/_/id/3032977/giannis-
antetokounmpo (a.k.a., the “Greek freak,” number 34 in your Bucks program).
197
Pincus, 152 A.3d at 128.
47
7. McFarland
As for the final director, McFarland, the Complaint alleges that he serves on
the board of Drive Shack, where he was placed as a Fortress designee alongside
Edens, and that he receives 60% of his publicly reported income from his service on
Fortress-affiliated boards.198 The Complaint further characterizes as “telling” the
fact that McFarland lists his address for purposes of investment activities as “C/O
Fortress Investment Group.”199
Plaintiff’s allegations concerning McFarland’s lack of independence are more
scant than those pled regarding the other directors. As I review these allegations, I
am reminded that, in Sanchez, our Supreme Court observed that “[d]etermining
whether a plaintiff has pled facts supporting an inference that a director cannot act
independently of an interested director for purposes of demand excusal . . . can be
difficult.”200 While a close call, I am satisfied that there is reason to doubt
McFarland’s independence. In so finding, I acknowledge that our law is settled that
service on another board alongside the interested director, alone, is insufficient to
Compl. ¶ 63. “Fortress and Edens, with and through their affiliates, own approximately
198
8% of Drive Shack’s outstanding stock, and Fortress is the manager of Drive Shack.” Id.
199
Compl. ¶ 63.
200
Sanchez, 124 A.3d at 1019.
48
raise a reasonable doubt as to a director’s independence,201 especially when the
interested director does not control either company.202 But there is more pled here.
McFarland is a director of New Senior and Drive Shack, both of which are
managed by Fortress. He was placed on these boards by Fortress and serves on both
of them alongside Edens. Based on public filings, McFarland receives 60% of his
publicly reported income from Fortress-managed companies.203 And he lists his
address on SEC Form 4s (for investments unrelated to Fortress) as “C/O Fortress.”
Weighing the totality of these facts, there is reason to doubt whether McFarland’s
material ties with Fortress and Edens would affect his ability independently to
evaluate a demand to bring claims against them.204
201
See, e.g., Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17,
2006) (finding that allegations of service on the boards of different companies alongside
one another only provides a “naked assertion of a previous business relationship [that] is
not enough to overcome the presumption of a director’s independence”).
202
Compl. ¶ 63.
203
Compl. ¶ 63.
204
See, e.g., Portnoy, 2008 WL 5197164, at *8 (“The complaint alleges similar facts with
respect to Gilmore and Donelan. Gilmore is a director of TA and FVE. For 2007, she was
paid $89,480 in fees as a director of TA and $70,940 in fees as a director of FVE,
compensation the complaint alleges is material to Gilmore because it exceeds the
compensation from her position as a clerk in the United States Bankruptcy Court. Gilmore
also worked at Sullivan & Worcester LLP from 1993 to 2000, during part of which time
Portnoy was a partner and chairman of the firm. Donelan is a director of TA and a trustee
of HRPT and the ILC. In 2007, Donelan was paid $88,980 in fees as a director of TA and
$73,600 in fees as a trustee of HRPT.”); In re Ply Gem Indus., Inc. S’holders Litig., 2001
WL 1192206, at *1 (Del. Ch. Oct. 3, 2001) (“past benefits conferred . . . may establish an
49
* * * * * * * *
Plaintiff has pled sufficient facts to raise a reasonable doubt regarding the
disinterestedness and independence of the majority of the New Senior Board such
that demand would have been futile under the first prong of Aronson. I need not and
decline to address Aronson’s second prong.205 The motion to dismiss under Court
of Chancery Rule 23.1 is denied.
B. Plaintiff Has Stated Viable Claims Against the Board and Givens as
Officer
Rule 12(b)(6) imposes a “less stringent” pleading standard than Rule 23.1.206
“Thus, a complaint that survives a motion to dismiss pursuant to Rule 23.1 also will
survive a 12(b)(6) motion to dismiss, ‘assuming that it otherwise contains sufficient
facts to state a cognizable claim.’”207 “The standards governing a motion to dismiss
for failure to state a claim are well settled: (i) all well-pleaded factual allegations are
accepted as true; (ii) even vague allegations are ‘well-pleaded’ if they give the
obligation or debt (a sense of ‘owingness’) upon which a reasonable doubt as to a director’s
loyalty to a corporation may be premised”).
205
See Cambridge, 2014 WL 2930869, at *6 (finding demand futility under the first prong
of Aronson and, therefore, declining to consider the second prong); TVI Corp. v. Gallagher,
2013 WL 5809271, at *10 (Del. Ch. Oct. 28, 2013) (same); Limited, 2002 WL 537692, at
*7 (same).
206
TVI Corp., 2013 WL 5809271, at *12.
207
Id.
50
opposing party notice of the claim; (iii) the Court must draw all reasonable
inferences in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances susceptible of proof.”208
Plaintiff’s claims sound in breach of fiduciary duties. As this court explained
in Frederick Hsu:
when determining whether directors breached their fiduciary duties,
Delaware corporate law distinguishes between the standard of conduct
and the standard of review. The standard of conduct describes what
directors are expected to do and is defined by the content of the duties
of loyalty and care. The standard of review is the test that a court
applies when evaluating whether directors have met the standard of
conduct.209
With this distinction in mind, a logical approach to analyzing the breach of fiduciary
duty claims is to “work[] through the standard of conduct, apply[] a standard of
review, and then determin[e] whether the defendants have properly invoked any
immunities or defenses, such as exculpation.”210 I follow that approach here.
208
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
209
Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *15 (Del. Ch.
Apr. 24, 2017).
210
Id.
51
1. The Standard of Conduct
“In performing their duties the directors [of Delaware corporations] owe
fundamental fiduciary duties of care and loyalty.”211 “[T]he duty of loyalty
mandates that the best interest of the corporation and its shareholders takes
precedence over any interest possessed by a director, officer or controlling
shareholder and not shared by the stockholders generally.”212 Thus, “Delaware law
is clear that the board of directors of a for-profit corporation . . . must, within the
limits of its legal discretion, treat stockholder welfare as the only end, considering
other interests only to the extent that doing so is rationally related to stockholder
welfare.”213
Plaintiff has alleged that the Board defendants caused New Senior to pay more
than was reasonable for the Holiday Portfolio to advance the interests of Fortress
and Edens at the expense of New Senior and its stockholders.214 Accepted as true,
211
Polk v. Good, 507 A.2d 531, 536 (Del. 1986).
212
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). Plaintiff alleges that
the Board defendants breached both their duty of care and duty of loyalty. I focus on the
duty of loyalty allegations, however, because, as discussed below, Defendants have
invoked a Section 102(b)(7) defense that would exculpate them from liability for breaches
of the duty of care.
213
Leo E. Strine, Jr., A Job Is Not a Hobby: The Judicial Revival of Corporate Paternalism
and Its Problematic Implications, 41 J. Corp. L. 71, 107 (2015).
214
Compl. ¶¶ 4–10, 109, 111, 128, 150.
52
these allegations describe the kind of self-dealing transaction that gives rise to a
classic breach of the duty of loyalty claim.215
2. The Standard of Review
As is often the case at the pleadings stage, much ink has been spilled by the
parties to express their competing views regarding the applicable standard of
review.216 Plaintiff argues that his claims implicate entire fairness review because
the Challenged Transactions were interested transactions. Accordingly, given the
heightened scrutiny with which the Court must review his claims, he maintains that
the Court cannot adjudicate them on a motion to dismiss under Rule 12(b)(6).217
Not surprisingly, Defendants argue that the Court should review Plaintiff’s
claims under the business judgment rule. They maintain that the Complaint, at best,
215
See, e.g., Chen, 87 A.3d at 671 (“Delaware cases recognize that liquidity is one benefit
that may lead directors to breach their fiduciary duties, and stockholder directors may be
found to have breached their duty of loyalty if a desire to gain liquidity caused them to
manipulate the sale process and subordinate the best interests of the corporation and the
stockholders as a whole.”) (internal quotation omitted); Rales v. Blasband, 634 A.2d 927,
935 (Del. 1993) (explaining that allegations that the company’s board decided to buy “junk
bonds” for the sole benefit of two directors “who were acting in furtherance of their
business relationship” with the company issuing the bonds would, if proven true, constitute
a breach of the duty of loyalty); Carsanaro v. Bloodhound Technologies, Inc., 65 A.3d 618,
659 (Del. Ch. 2013) (finding a breach of the duty of loyalty alleged where directors had
participated in financing rounds at favorable terms explaining that “each financing
challenged in the complaint was a self-interested transaction implicating the duty of loyalty
and raising an inference of expropriation”).
216
See Larkin v. Shah, 2016 WL 4485447, at *7 (Del. Ch. Aug. 25, 2016) (characterizing
the determination of the appropriate standard of review as the “gating question”).
217
Pl.’s Answering Br. 62.
53
pleads facts that would allow a reasonable inference that only Edens, Givens and
perhaps Malone were interested in the Challenged Transactions. Thus, because a
majority of the Transaction Committee was disinterested, the Challenged
Transactions fit within the safe harbor codified in 8 Del. C. § 144(a)(1) and,
therefore, the business judgment rule applies. Moreover, they maintain that, even
without the safe harbor, “[t]o invoke entire fairness [at the pleading stage], in the
absence of a controlling shareholder, Plaintiff would need to allege that a majority
of the board was interested in the [Challenged Transactions] or beholden to an
interested party.”218 Since the Complaint pleads neither factual predicate (majority
interest or lack of independence) for entire fairness review, the business judgment
presumption must apply. I disagree on both counts.
a. Section 144
Defendants’ Section 144(a)(1) argument catenates along the following
analytical tree: (i) under Supreme Court precedent, approval by a majority of
disinterested directors under Section 144(a)(1) triggers review under the business
judgment rule; (ii) for purposes of applying the safe harbor of Section 144(a)(1), the
Court should consider only whether directors are interested in the transaction, and
should not be concerned with whether the majority of the board is also independent;
218
Defs.’ Opening Br. 43 (citing Orman, 794 A.2d at 23) (emphasis in the original).
54
and (iii) since Plaintiff has only challenged three directors on grounds they were
interested in the Challenged Transactions, the majority of the Board met the
requirements of Section 144(a)(1) and their decisions must, therefore, be protected
as valid business judgments.219 In support of this argument, Defendants rely
principally upon Benihana of Tokyo, Inc. v. Benihana, Inc., decided by our Supreme
Court in 2006.220 There, applying Section 144(a)(1), the Court stated “[a]fter
approval by disinterested directors, courts review the interested transaction under
the business judgment rule . . . .”221
Our case law interpreting Section 144(a)(1) is murky at best. A search of
one’s favorite legal research site would yield cases that appear to support the view
that Section 144(a)(1)’s safe harbor works as Defendants suggest.222 That same
219
Defs.’ Opening Br. 51 (“[R]egardless of whether any of the four directors who approved
the Acquisition were not independent, they are disinterested in the Acquisition, and the
Amended Complaint should be dismissed.”).
220
Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del. 2006) (“Benihana II”).
221
Id. at 120.
222
See, e.g., Sutherland v. Sutherland, 2009 WL 857468, at *4 n.13 (Del. Ch. Mar. 23,
2009) (“Notably, before the law related to Section 144 of the DGCL finally settled, see,
e.g., Benihana II, 906 A.2d at 120 (stating that interested director transactions approved
pursuant to the 144(a)(1) safe harbor are reviewed under the business judgment rule), it
was frequently suggested that Section 144 . . . did no more than to remove a director’s
disability to participate in a quorum to vote on an interested transaction, but did nothing to
sanitize such a transaction if it was inherently unfair.”); Oberly v. Kirby, 592 A.2d 445,
466 (Del. 1991) (“The enactment of 8 Del. C. § 144 in 1967 limited the stockholders’
power in two ways. First, section 144 allows a committee of disinterested directors to
approve a transaction and bring it within the scope of the business judgment rule. Second,
where an independent committee is not available, the stockholders may either ratify the
55
search, however, would yield several cases, even post-Benihana II, where our courts
have viewed Section 144(a)(1) much more narrowly.223
To put Benihana II in context, it is useful to review the decision of this court
in Benihana I that was affirmed. In clarifying the interaction between
Section 144(a)(1) and the common law business judgment rule, this court explained:
transaction or challenge its fairness in a judicial forum, but they lack the power
automatically to nullify it. When a challenge to fairness is raised, the directors carry the
burden of establishing the transaction’s entire fairness, sufficient to pass the test of careful
scrutiny by the courts.”).
223
See Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 185 (Del. Ch. 2005)
(“Benihana I”), aff’d, 906 A.2d 114 (Del. 2006) (“While I find that the Benihana Board’s
approval of the BFC Transaction meets the requirements of 8 Del. C. § 144(a)(1), that
section merely protects against invalidation of a transaction “solely” because it is an
interested one. . . . Because BOT also contends that the Director Defendants breached their
fiduciary duties of loyalty and care, my analysis does not end with the “safe harbor”
provisions of § 144(a).”); Khanna v. McMinn, 2006 WL 1388744, at *25 n.201 (Del. Ch.
May 9, 2006) (same); Cinemara, 662 A.2d at 1169 (same); Valeant Pharm. Int’l v. Jerney,
921 A.2d 732, 745 (Del. Ch. 2007) (“Before the 1967 enactment of 8 Del. C. § 144, a
corporation’s stockholders had the right to nullify an interested transaction. To ameliorate
this potentially harsh result, section 144 as presently enacted provides three safe harbors to
prevent nullification of potentially beneficial transactions simply because of director self-
interest. First, section 144 allows a committee of disinterested directors to approve a
transaction and, at least potentially, bring it within the scope of the business judgment
rule.”); Zimmerman v. Crothall, 2012 WL 707238, at *18 (Del. Ch. Mar. 5, 2012) (“As the
Delaware Supreme Court observed in Fliegler v. Lawrence, § 144 ‘merely removes an
interested director cloud when its terms are met and provides against invalidation of an
agreement solely because such a director . . . is involved.’ That is, the statute only
addresses the void or voidable issue presented by the common law before the 1967
amendments to the Delaware General Corporation Law. Thus, it does not appear that
either 8 Del. C. § 144 or § 6.13 of the Operating Agreement, which is based on § 144, was
intended to address the common law rules for liability for breach of fiduciary duty.
Therefore, even if Defendants have complied with § 6.13, that would not operate as a safe
harbor against review of the challenged transactions under the entire fairness standard.”)
(internal citation omitted).
56
Satisfying the requirements of § 144 only means that the BFC
Transaction is not void or voidable solely because of the conflict of
interest.
While non-compliance with §§ 144(a)(1), (2)’s disclosure requirement
by definition triggers fairness review rather than business judgment rule
review, the satisfaction of §§ 144(a)(1) or (a)(2) alone does not always
have the opposite effect of invoking business judgment rule review.
Rather, satisfaction of §§ 144(a)(1) or (a)(2) simply protects against
invalidation of the transaction “solely” because it is an interested one.
As such, § 144 is best seen as establishing a floor for board conduct but
not a ceiling. Thus, equitable common law rules requiring the
application of the entire fairness standard on grounds other than a
director’s interest still apply.
After determining that the defendant board members had guided the interested
transaction into Section 144(a)(1)’s safe harbor, and that the transaction, therefore,
would not be voided, Vice Chancellor Parsons proceeded to address the plaintiff’s
allegations that the directors breached their fiduciary duties by applying common
law standards. He ultimately concluded that none of the directors had breached their
duty of loyalty because the majority of the directors that approved the transaction
were disinterested and independent and the Board did not enter into the transaction
for an improper purpose.224
Several commentators and judges, post-Benihana II, have similarly
articulated the difference between the oft-confused Section 144(a) safe harbors and
the common law our courts apply to determine the appropriate standard of review
224
Benihana I, 891 A.2d at 191.
57
by which to adjudicate a challenge to an interested transaction. A particularly cogent
expression of the distinction (and the confusion) can be found in Finding Safe
Harbor: Clarifying the Limited Application of Section 144, where the authors
explain:
section 144(a)(1) provides that a covered transaction will not be void
or voidable solely as a result of the offending interest if it is approved
by an informed majority of the disinterested directors, even though the
disinterested directors be less than a quorum. Under the section 144
statutory analysis, so long as there is one informed, disinterested
director on the board, and so long as he or she approves the transaction
in good faith, the transaction will not be presumptively voidable due to
the offending interest. In other words, a nine-member board with a
single disinterested director may approve a covered transaction and
reap the benefits of the section 144 safe harbor.
Under the common law, however, the factor is somewhat different;
approval must be by a disinterested majority of the entire board. That
is, a plaintiff may rebut the presumption of the business judgment rule
by showing that a majority of the individual directors were interested
or beholden. In the common-law analysis, therefore, a transaction
approved by the nine-member board discussed above (with the single
disinterested director) will be subject to the entire-fairness standard.
The standards are phrased similarly for the statutory and common-law
analyses, but they are in fact quite different.225
225
Blake Rohrbacher, John Mark Zeberkiewicz & Thomas A. Uebler, Finding Safe
Harbor: Clarifying the Limited Application of Section, 144, 33 Del. J. Corp. L. 719, 737–
38 (2008). See also R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of
Corporations and Business Organizations, § 4.16 (3d ed. 2018) (“Apart from the statutory
safe-harbor analysis, the courts also scrutinize interested-director transactions under a
common-law fiduciary review. This fiduciary review involves factors similar—though not
quite identical—to those under Section 144. That is, approval by a disinterested majority
of the board or disinterested stockholders may revive the presumptions of the business
judgment rule. Otherwise, the courts will use the entire-fairness standard to scrutinize the
transaction.”); Leo E. Strine, Jr., Lawrence A. Hamermesh, R. Franklin Balotti &
Jeffrey M. Gorris, Loyalty’s Core Demand: The Defining Role of Good Faith in
58
Based on the plain language of the statute,226 and my reading of the persuasive
authority on the subject, I am satisfied that compliance with Section 144(a)(1) does
not necessarily invoke business judgment review of an interested transaction. The
Court must still adhere to settled common law principles when fixing the appropriate
standard of review by which fiduciary conduct should be measured.227
Corporation Law, 98 Geo. J.L. 629, 656–57 & n.85 (2010) (“The question of whether
section 144 was intended to create a safe harbor from equitable review if its provisions
obviating a statutory fairness burden were met is controversial. . . . To date, the Delaware
courts have generally read the statute more narrowly, while drawing on it in crafting rulings
in equity.”) (citing In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 614–15 (Del.
Ch. 2005)); Zimmerman, 2012 WL 70723, at *18; Valeant, 921 A.2d at 745.
226
8 Del. C. § 144:
(a) No contract or transaction between a corporation and 1 or more of its
directors or officers, or between a corporation and any other corporation,
partnership, association, or other organization in which 1 or more of its
directors or officers, are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the
director or officer is present at or participates in the meeting of the board
or committee which authorizes the contract or transaction, or solely
because any such director’s or officer’s votes are counted for such
purpose, if. . . .
(emphasis supplied).
227
Benihana I, 891 A.2d at 191 (“No safe-harbor exists for divided loyalties in Delaware.”).
I acknowledge that some read our case law as holding that compliance with Section 144
safe harbors justifies a burden-shift in the entire fairness analysis. While I cannot say that
I share that view of our law, I need not weigh in on that issue at this stage of the
proceedings. See Edward P. Welch, Robert S. Saunders, Allison L. Land & Jennifer C.
Voss, Folk on the Delaware General Corporation Law, § 144.02 (6th ed. 2018) (citing
Cooke v. Oolie, 1997 WL 367034, at *9 (Del. Ch. June 23, 1997) (“It is now clear that even
if a board’s action falls within the safe harbor of Section 144, the board is not entitled to
59
b. The Majority of the Board Was Interested In the Challenged
Transactions or Not Independent
In Orman v. Cullman, Chancellor Chandler succinctly laid out the pathway to
overcoming the business judgment presumption at the pleading stage by alleging
that the Board acted out of self-interest or with allegiance to interests other than the
stockholders’:
As a general matter, the business judgment rule presumption that a
board acted loyally can be rebutted by alleging facts which, if accepted
as true, establish that the board was either interested in the outcome of
the transaction or lacked the independence to consider objectively
whether the transaction was in the best interest of its company and all
of its shareholders. To establish that a board was interested or lacked
independence, a plaintiff must allege facts as to the interest and lack of
independence of the individual members of that board. To rebut
successfully business judgment presumptions in this manner, thereby
leading to the application of the entire fairness standard, a plaintiff must
normally plead facts demonstrating that a majority of the director
defendants have a financial interest in the transaction or were
dominated or controlled by a materially interested director.228
“If a director-by-director analysis leaves insufficient [independent] directors to make
up a board majority, then the court will review the board’s decision for entire
fairness.”229
receive the protection of the business judgment rule. Compliance with Section 144 merely
shifts the burden to the plaintiffs to demonstrate that the transaction was unfair.”)).
228
Orman, 794 A.2d at 22–23 (later explaining that interest can also be shown by a director
standing on both sides of a transaction).
229
Frederick Hsu, 2017 WL 1437308, at *26.
60
As noted, the Complaint alleges that a majority of the New Senior directors
approved the self-dealing Acquisition at an excessive price, allowed New Senior to
issue stock to finance the Acquisition at an unreasonable discount, declined to
exercise their independent judgment when making those decisions and let Givens
(and Edens), who stood on both sides of the deal, control the negotiation and sale
process.230 According to Plaintiff, these pled facts make “[t]his [an] entire fairness
case.”231 I agree.
Following Edens’ and Givens’ abstention from the vote, the Acquisition was
approved by the Board members who served on the Transaction Committee—
Malone, Van der Hoof Holstein, Colbert and McFarland. Since the test for director
interest and independence is generally the same for purposes of this analysis as the
test under the first prong of Aronson,232 for the same reasons I determined those
directors were interested or not independent under Aronson, I find that Plaintiff has
230
Compl. ¶ 150.
231
Pl.’s Answering Br. 1.
232
TVI Corp., 2013 WL 5809271, at *14. I note, for the sake of clarity, that finding a
director is either interested or not independent under the first prong of Aronson will not
always translate to a finding of interest or lack of independence in the fiduciary duty
analysis. Under the first prong of Aronson, the focus is on whether the director’s interest
or conflict creates a reasonable doubt that the director could objectively consider a demand.
In the fiduciary duty context, the focus is on whether the director’s interest or conflict
caused the director to do or not do something that has harmed the corporation. While the
inquiries are different, and do not necessarily overlap, they lead to the same answer here,
at least as alleged in the Complaint. See id. at *12.
61
well-pled that each of those directors was interested or not independent with respect
to the Challenged Transactions.233
Additionally, the Complaint alleges that Edens and Givens were the sole
members of the Pricing Committee, setting the terms of the Secondary Offering
under which they both (along with FIG) received share options. The Complaint also
alleges that Givens, who works for Fortress, negotiated the Holiday Management
Agreement with her employer’s affiliate. Those allegations are sufficient to raise a
reasonable inference that Edens and Givens were interested in the Challenged
Transactions. Because the Complaint adequately pleads that no independent and
disinterested Board majority approved the Transactions, the standard of review, for
now, is entire fairness.
I note that “[t]he applicability of the entire fairness standard ‘normally will
preclude a dismissal of a complaint on a Rule 12(b)(6) motion to dismiss.’”234
233
See also Limited, 2002 WL 537692, at *7 (“For the reasons set forth [in the Rule 23.1
analysis], I am satisfied that the Complaint states a claim for breach of the duty of loyalty.
The challenged transactions were approved by a unanimous board of twelve; six of those
directors were either interested or subject to disqualifying doubts about their independence.
As set forth below, the challenged transactions, while perhaps not constituting corporate
waste, appear unfair to the stockholders. Thus, because the challenged transactions were
not approved by a majority of independent and disinterested directors, the Complaint states
a loyalty claim that survives a challenge under Court of Chancery Rule 12(b)(6).”).
234
In re Riverstone Nat’l, Inc. S’holder Litig., 2016 WL 4045411, at *15 (Del. Ch. July 28,
2016) (“Once a plaintiff rebuts the business judgment rule, the burden shifts to the
defendant to establish that the [transaction] was the product of both fair dealing and fair
price.”).
62
Nevertheless, I review briefly the pled facts and find that the Complaint adequately
alleges that the Challenged Transactions were not entirely fair.
Entire fairness review asks whether the transaction (i) was the product of “fair
dealing,” and (ii) reflected a “fair price.”235 I address both elements, albeit in reverse
order. As for unfair price, Plaintiff argues that unfair price is revealed by the
following pled facts: (i) the market reacted poorly to the Acquisition (“New Senior’s
stock price plummeted”)236; (ii) only New Senior submitted a final bid for the
Holiday Portfolio237; (iii) Givens failed to leverage the fact that New Senior was the
only serious bidder and justified her adjustment to the initial bid by drawing a
comparison to a transaction that was very different from the Acquisition involving a
company that elected not to bid for the Holiday Portfolio 238; (iv) Givens and the
Transaction Committee allowed New Senior to enter into a no-bid management
agreement with Holiday at above-market rates239; (v) Edens and Givens caused the
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994) (internal citations
235
omitted).
236
Pl.’s Answering Br. 53. See also Compl. ¶¶ 18, 124, 126.
237
Compl. ¶ 83.
238
Compl. ¶¶ 83–85, Klein Aff. Ex. 11 (June 1, 2015 Committee Minutes), at
SNR00000241 (“Ms. Givens explained that the reduced purchase price was derived by
applying the capitalization rate implied by the purchase price for the last portfolio marketed
by Holiday and sold to Northstar, which was 6.1%.”).
239
Compl. ¶¶ 95–96.
63
Board to approve a Secondary Offering that generated substantial fees for
Fortress240; and (vi) the Secondary Offering was at a grossly discounted price that
benefited Fortress, Givens and Edens but harmed New Senior by causing a sudden
loss in market capitalization amounting to approximately $100 million.241 These
facts more than adequately allow for a reasonable inference of unfair price.
Allegations revealing unfair dealing should focus on “when the transaction
was timed, how it was initiated, structured, negotiated, disclosed to the directors, and
how the approvals of the directors and the stockholders were obtained.” 242 With
these elements clearly in mind, Plaintiff alleges the following facts that allow a
reasonable inference of an unfair process: (i) Fortress, Edens, and Givens stood on
both sides of the deal, and then initiated, structured, and negotiated each element of
the Challenged Transactions243; (ii) the Transaction Committee was flawed in its
composition, led by a Chairman who sat on the board of the primary lender for the
transaction, and ineffective in its execution, inter alia, by allowing Givens to
negotiate exclusively on behalf of New Senior “against” her employer (Fortress)244;
240
Compl. ¶¶ 104, 109–113.
241
Compl. ¶¶ 102, 110–111, 115, 121–122.
242
Lynch, 638 A.2d at 1115.
243
Compl. ¶¶ 73–74, 151.
244
Compl. ¶¶ 42, 82.
64
(iii) the Transaction Committee allowed Givens to make her bids without direction
from, or even consultation with, the Transaction Committee and without the benefit
of advice from the Committee’s financial advisor (Greenhill)245; (iv) Givens
provided Greenhill with flawed data to use in its fairness opinion relating to the
Acquisition246; (v) the Transaction Committee did not seek a fairness opinion with
respect to the Secondary Offering or the Holiday Management Agreement247;
(vi) even though there were no other bidders, the Transaction Committee allowed
Givens to commit to an acquisition agreement with no financing contingency,
thereby ensuring that the Company would have to go forward with the unfair
Secondary Offering248; (vii) the Board allowed Givens and Edens alone to serve on
the Pricing Committee even though they (and Fortress) stood to benefit personally
from the offering (to the exclusion of other stockholders)249; and (viii) the Board
approved the no-bid management agreement Givens offered to Holiday without even
seeing the terms of Holiday’s incentive compensation.250 It can be reasonably
245
Compl. ¶¶ 73, 77, 83, 86–87, 100–101.
246
Compl. ¶¶ 89–94.
247
Compl. ¶ 112.
248
Compl. ¶ 102.
249
Compl. ¶¶ 109, 111.
250
Compl. ¶ 97.
65
inferred from these allegations that New Senior’s directors engaged in an unfair
process when negotiating and approving the Challenged Transactions.251
3. The Exculpatory Charter Provision
Contrary to Plaintiff’s assertion, the application of entire fairness review does
not necessarily result in denial of the motion to dismiss with respect to each
individual defendant.252 New Senior’s certificate of incorporation contains a
Section 102(b)(7) exculpatory provision at Article Six, which exculpates New
Senior’s directors from liability to the fullest extent permitted by Delaware law.253
251
Defendants maintain that Edens and Givens cannot be held liable because they both
abstained from the Board vote approving the Challenged Transactions. Defs.’ Opening
Br. 55. The argument ignores Givens’ nearly exclusive role in negotiating the Challenged
Transactions, Givens and Edens’ role as sole members of the Pricing Committee and settled
Delaware law that rejects the “Geronimo theory,” which posits that a director can avoid
liability by “extricating himself from decision-making about something he knows is going
to be bad [by] pull[ing] the ripcord” and abstaining from the vote. See Cambridge Ret. Sys.
v. Decarlo, C.A. No. 10879-CB, at 14 (Del. Ch. June 16, 2016) (TRANSCRIPT). See also
Gesoff v. IIC Indus., Inc., 902 A.2d 1130 (Del. Ch. 2006) (rejecting argument that
abstaining from the vote shields a director from liability); Valeant, 921 A.2d at 753 (same);
Frederick Hsu, 2017 WL 1437308, at *38 (same).
252
In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173, 1179 (Del.
2015) (“We now resolve the question presented by these cases by determining that
plaintiffs must plead a non-exculpated claim for breach of fiduciary duty against an
independent director protected by an exculpatory charter provision, or that director will be
entitled to be dismissed from the suit. That rule applies regardless of the underlying
standard of review for the transaction.”).
253
Klein Aff. Ex. 36 (Amended and Restated Certificate of Incorporation of New Senior
Investment Group Inc.), at 8.
66
Thus, only claims that, as a matter of law, cannot be exculpated by that provision
can survive the motion to dismiss.254
Breaches of the duty of loyalty are not exculpated under Delaware law.255
I have already addressed the alleged breaches of the duty of loyalty by Edens,
Givens, Malone, Van der Hoof Holstein, Colbert and McFarland (and found them to
be adequately pled). Accepting the well-pled facts of the Complaint as true, they
each were in a conflicted state when they negotiated and approved the Challenged
Transactions and, in that state, acted in a manner that advanced either their own
interests or the interests of those to whom they were beholden at the expense of the
Company.256 These breach of loyalty claims cannot be extinguished at the pleading
stage under Section 102(b)(7).
254
Cornerstone, 115 A.3d at 1180 (“[T]he mere fact that a plaintiff is able to plead facts
supporting the application of the entire fairness standard to the transaction, and can thus
state a duty of loyalty claim against the interested fiduciaries, does not relieve the plaintiff
of the responsibility to plead a non-exculpated claim against each director who moves for
dismissal.”).
255
Id. at 1179–80 (“When a director is protected by an exculpatory charter provision, a
plaintiff can survive a motion to dismiss by that director defendant by pleading facts
supporting a rational inference that the director harbored self-interest adverse to the
stockholders’ interests, acted to advance the self-interest of an interested party from whom
they could not be presumed to act independently, or acted in bad faith.”).
256
Guth v. Loft, 5 A.2d 503, 510 (Del. 1939) (holding that “[c]orporate officers and
directors are not permitted to use their positions of confidence to further their private
interests. . . . The rule that requires an undivided and unselfish loyalty to the corporation
demands that there shall be no conflict between duty and self-interest.”).
67
In Count II, Plaintiff alleges that Givens is separately liable for breaches of
her duty of care and duty of loyalty in her capacity as a New Senior officer.257 While
Plaintiff has alleged similar breaches of the duty of care against all directors
(including Givens in her capacity as director) under Count I,258 those claims fall
directly within the exculpatory charter provision so I will not address them further.
The exculpatory provision, however, does not cover Givens in her capacity as
officer.259 Defendants acknowledge Givens’ exposure but argue that the due care
claim against her must be dismissed because the Complaint does not adequately
differentiate between Givens’ conduct as officer and her conduct as director.
I disagree. Givens, as director, was not a member of the Transaction Committee and
recused herself as director from Board level discussions and votes. Nevertheless, as
officer, along with the remainder of her Fortress-based management team, she led
all aspects of the negotiations and sale process, often without consulting or receiving
direction from the Transaction Committee. Accordingly, Givens may be held liable
257
With respect to the duty of care, Plaintiff alleges, for instance, that Givens’ projections
with respect to the rise of the Holiday Portfolio’s occupancy rate were “grossly negligent”
and that Givens justified the size of New Senior’s bid by reference to a capitalization rate
that she knew was not comparable to the acquisitions under consideration. Pl.’s Answering
Br. 44–46; Compl. ¶¶ 89–93.
258
Pl.’s Answering Br. 42. See, e.g., Compl. ¶¶ 96–97 (“Therefore, the Board could not
have been fully informed when it approved the Holiday Acquisition.”).
259
Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009).
68
for breaching her duties of care and loyalty to New Senior, to the extent such
breaches are proven.260
C. Plaintiff Has Stated a Viable Aiding and Abetting Claim
Finally, at Count III, the Complaint alleges aiding and abetting breaches of
fiduciary duty against Fortress, Holiday, FIG, FOE I and FIG Corp. To state a claim
of aiding and abetting, a complaint must plead facts in support of four elements:
(1) the existence of a fiduciary relationship, (2) a breach of a fiduciary duty,
(3) defendant’s knowing participation in that breach and (4) damages proximately
caused by the breach.261 The first two elements have been addressed in my findings
above. Defendants do not attack the Complaint’s causation allegations. Thus, as is
often the case in aiding and abetting litigation, given the Court’s finding that Plaintiff
has pled breach claims, the focus turns to whether Plaintiff has adequately pled
“knowing participation” by the alleged aiders and abettors.
An adequate pleading of “knowing participation” requires a pleading of
scienter.262 “To establish scienter, the plaintiff must demonstrate that the aider and
260
McPadden v. Sidhu, 964 A.2d 1262, 1275–76 (Del. Ch. 2008) (“Though an officer owes
to the corporation identical fiduciary duties of care and loyalty as owed by directors, an
officer does not benefit from the protections of a Section 102(b)(7) exculpatory provision,
which are only available to directors. Thus, so long as plaintiff has alleged a violation of
care or loyalty, the complaint proceeds against [the officer].”).
261
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
262
See RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 861–62 (Del. 2015) (quoting
Malpiede, 780 A.2d at 1097) (“As an example, this Court has said that ‘a bidder may be
69
abettor had actual or constructive knowledge that their conduct was legally
improper,” and that he acted with “an illicit state of mind.”263 “[T]he requirement
that the aider and abettor act with scienter makes an aiding and abetting claim among
the most difficult to prove.”264 Difficult, but not impossible.
Based on the well-pled facts in the Complaint, it is reasonably conceivable
that all five of the alleged aiders and abettors knowingly participated in the directors’
alleged breaches. Under Delaware law, “the knowledge of an agent acquired while
acting within the scope of his or her authority [and the acts of agents in that scope]
[are] imputed to the principal.”265 In In re Emerging Communications,266 applying
this fundamental agency principle, the court held that two entities were “liable for
having aided and abetted” an individual defendant where the entities were under the
control of that defendant and “were the mechanisms through which” that defendant
“accomplished” the challenged transaction.267 This same type of scheme is alleged
liable to the target’s stockholders if the bidder attempts to create or exploit conflicts of
interest in the board.’”).
263
Id. at 862 (internal quotation omitted).
264
Id.
265
Metro. Life Ins. Co. v. Tremont Gp. Hldgs., Inc., 2012 WL 6632681, at *19 (Del. Ch.
Dec. 20, 2012).
266
In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745 (Del. Ch. May 3,
2004).
267
Id. at *38.
70
here—Givens and Edens are alleged to have facilitated the Challenged Transactions
through the various Fortress subsidiaries named as aiders and abettors.268 Under
basic principles of agency, all of their knowledge is imputed to the Fortress entities
they served as agents.269
Defendants lament that Plaintiff has failed to plead that any of the alleged
aiders and abettors materially benefited from the Challenged Transactions.270 Even
if allegations of materiality were required to support an aiding and abetting claim,
and Defendants cite no authority imposing that requirement, the Complaint goes to
significant lengths to allege how the aiders and abettors benefitted (materially) from
the Challenged Transactions.271
In their roles as director members of New Senior’s Pricing Committee, Givens
and Edens alone set the terms of the Secondary Offering while also being employed
by and otherwise affiliated with FIG. FIG, in turn, receives substantial management
fees from New Senior based on New Senior’s gross equity.272 The allegedly unfair
268
Compl. ¶¶ 6–8, 28–33, 62, 73–82.
269
See Metro. Life, 2012 WL 6632681, at *19 (applying agency principals in aiding and
abetting analysis); Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155, 204 (Del.
Ch. 2014) (same).
270
Defs.’ Opening Br. 59–60.
271
See, e.g., Compl. ¶¶ 65–72, 118–121.
272
Compl. ¶ 7.
71
Secondary Offering approved by Givens and Edens caused New Senior’s gross
equity to increase substantially with resulting increases in FIG’s management
fees.273 Givens and Edens also caused New Senior to issue “approximately
$100 million in additional equity that New Senior did not need for the []
Acquisition” and thereby increased FIG’s fees even more.274 And, of course, by
pushing New Senior into the Secondary Offering, Givens and Edens saw to it that
FIG would receive options to purchase over 2 million shares of New Senior stock
(at the discounted price).275 Given these well-pled facts, it is reasonably conceivable
that FIG knowingly participated in, and benefited from, the individual directors’
breaches of their duty of loyalty or care.276
The allegations are similarly compelling against Fortress. Plaintiff alleges
that Fortress pushed the Acquisition in furtherance of a broader plan to shift its assets
under management to publicly-traded companies that were externally managed by
Fortress, such as New Senior, so it (through FIG) could charge higher management
273
Compl. ¶ 118.
274
Compl. ¶ 7.
275
Compl. ¶ 8.
276
Houseman v. Sagerman, 2014 WL 1478511, at *8 (Del. Ch. Apr. 16, 2014) (holding
that Section 102(b)(7) does not apply to aiding and abetting claims, and collecting cases).
72
fees over longer periods of time.277 He further alleges that FHIF, Fortress’ private
equity fund that is the majority owner of Holiday, pushed the Holiday sale to
facilitate the “return of capital to its investors” in advance of its “maturity date of
January 2017.”278 Those allegations, when coupled with the allegations that Givens
ran the negotiations for New Senior and made bids for the Holiday Portfolio without
any authorization from a Board comprised of members that were either interested in
the Challenged Transactions or beholden to others who were, create a reasonably
conceivable narrative that Fortress knowingly participated in the Board’s and
Givens’ breaches.279
To evaluate the sufficiency of the aiding and abetting claims pled against
FOE I, FIG Corp and Holiday, one first needs to appreciate the close relationships
of these entities within the Fortress network.280 FIG Corp. is the sole general partner
277
Compl. ¶ 9. Fortress has publically stated that it can generate between $375 million and
$425 million of present market value for its shareholders from the fees it earns from
managing $1 billion in a PCV. Compl. ¶ 118. As applied to the $266 million of invested
capital generated by the Secondary Offering, Fortress can expect to generate between
$99.75 million and $113.05 million in value, which is material to Fortress. Id.
278
Compl. ¶ 4.
279
The Complaint also alleges that Fortress stood to gain from Holiday retaining the
property management of the Holiday Portfolio. Compl. ¶ 10. Defendants take issue with
this allegation because the property management fees would go to Holiday not Fortress.
Defs.’ Opening Br. 60. While that is true, Plaintiff has sufficiently alleged the connections
between Fortress and Holiday which lead to the reasonable inference that Fortress, the
indirect owner of a majority of Holiday’s equity, would benefit from additional revenues
collected by Holiday.
280
See appendix.
73
of FOE I and, together with Edens and the remaining two Fortress-principals, it owns
all of FOE I’s limited partnership interests. FOE I, in turn, is the sole managing
partner and sole owner of FIG, which is a subsidiary of Fortress and manages the
Fortress private equity funds that own a majority of the Holiday interests. With the
allegations outlined above pertaining to FIG and Fortress, just as in Emerging
Communications, I am satisfied, for now, that Plaintiff has adequately pled that all
of these networked entities were vehicles that aided and abetted the directors, and
Givens as officer, in their alleged breaches of fiduciary duty.281
III. CONCLUSION
Based on the foregoing, Defendants’ motion to dismiss is DENIED.
IT IS SO ORDERED.
281
Emerging, 2004 WL 1305745, at *38 (finding aiding and abetting pled for two
companies based on the allegations with respect to the person that controlled them).
74
FHIF Subsidiary o Wesley Edens
Fortress o Peter L. Briger, Jr.
Principals
Majority o Randal A. Nardone
owner
Holiday
Parent
New Senior
FHIF (and other FIG
funds that own External
Holiday) manager
Drive Shack
Investment funds Sole managing
that own member & 100%
Nationstar owner
FOE I
100% of limited
partnership interests Sole general
partner
FIG Corp FIG Corp.
“Principals”
o Wesley Edens
o Peter L. Briger, Jr.
o Randal A. Nardone
75
John Cumming v. Wesley R Edens
Combined Opinion