In re USG Corporation Stockholder Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE USG CORPORATION ) CONSOLIDATED
STOCKHOLDER LITIGATION ) C.A. No. 2018-0602-SG

MEMORANDUM OPINION

Date Submitted: June 22, 2020
Date Decided: August 31, 2020

Blake A. Bennett, of COOCH & TAYLOR, P.A., Wilmington, Delaware; OF
COUNSEL: Michael J. Palestina, of KAHN SWICK & FOTI, LLC, New Orleans,
Louisiana; Juan E. Monteverde and Miles D. Schreiner, of MONTEVERDE &
ASSOCIATES, New York, New York, Attorneys for Plaintiffs.

Raymond J. Dicamillo, Srinivas M. Raju, Robert L. Burns, Matthew D. Perri, and
Angela Lam, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware;
OF COUNSEL: Robert S. Faxon, Andrienne F. Mueller, and Robert E. Johnson, of
JONES DAY, Cleveland, Ohio, Attorneys for Defendants.

GLASSCOCK, Vice Chancellor
 This matter involves the acquisition (the “Acquisition”) of USG Corporation

(“USG”)1, a building materials company, by a strategic buyer, Gebr. Knauf KG. The

Plaintiffs, former USG stockholders, allege that USG’s directors—party

Defendants—breached fiduciary duties in connection with USG’s sale to Knauf.2

They seek monetary damages.

USG’s stockholders overwhelmingly approved the sale. The Defendants have

moved to dismiss; first, they seek a dismissal under the rubric of Corwin v. KKR

Financial Holdings, LLC.3 That case stands for the proposition that where the

stockholder-owners of a corporation are given an opportunity to approve a

transaction, are fully informed of the facts material to the transaction, and where the

transaction is not coercive, there is no agency problem for a court to review, and

litigation challenging the transaction is subject to dismissal under the business

judgment rule. The Defendants’ Motion in reliance on Corwin is rather easy to deal

with, as the Plaintiffs’ Verified Amended Complaint (the “Amended Complaint”)

specifically pleads facts, which I must assume at this pleading stage are true, that

make it reasonably conceivable that USG’s stockholders were not fully informed at

the time they approved the Acquisition. The Plaintiffs allege that USG’s Board of

1
USG makes a popular product so dominant in its field that it risks becoming a common noun: the
famous “Sheetrock” wallboard.
2
Knauf, as defined below, includes Gebr. Knauf KG, together with affiliated entities and
individuals.
3
125 A.3d 304 (Del. 2015).

1
Directors (the “Board”) had reached a subjective belief that USG had an intrinsic

value nearly 15% higher than the deal price, yet the directors failed to disclose this

fact to USG’s stockholders. Breaches of duty inherent in the Acquisition, therefore,

cannot be deemed cleansed under the Corwin rationale.

This raises the question of what bearing the determination described above

has on the balance of the Defendants’ Motion to Dismiss, which alleges that the

Plaintiffs have failed to state a claim upon which relief can be granted against the

Defendants. Due to an exculpation clause in USG’s charter, the Plaintiffs will be

required to demonstrate a breach of the duty of loyalty, or its doppelganger bad faith,

to recover damages.4 It became clear in briefing and at Oral Argument that the

Plaintiffs make two assumptions that I find unwarranted. The first is that, having

pled facts that raise a reasonable inference of disclosure deficiencies sufficient to

scuttle the Corwin defense, they have necessarily cleared the bar of pleading bad

faith on the part of the Defendant directors for purpose of withstanding a dismissal

under Rule 12(b)(6). Doctrinally, however, the concept of bad faith, and the

determination of adequate disclosure for Corwin purposes, are fundamentally

separate. They involve different inquiries, the outcomes of which are not necessarily

mutually supportive.

4
In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179–80 (Del. 2015).

2
 A series of hypotheticals may help illustrate the distinction. First, consider an

allegation, for example, that directors omitted from a proxy statement the fact that

they had received a kickback from the buyer, in return for which they cut short a

sales process. Such an allegation, if adequately pled, would easily support a

rejection of Corwin cleansing and a pleading of breach of loyalty. But the focus of

the two inquires would be different. For Corwin purposes, the focus would be on

what the stockholders were told; the 12(b)(6) analysis would focus on the director’s

allegedly faithless actions. By counterexample, this hypothetical bribe, if fully

disclosed to the stockholders in way of a non-coercive vote, and in the (unlikely)

scenario that the stockholders nonetheless approved the transaction, theoretically

would result in dismissal under Corwin despite adequate pleading of a clear breach

of loyalty on the part of the directors.5

Conversely, posit a situation where the defendant directors have approved and

submitted a merger in which the stockholders will receive $9.50/share. They

authorize a proxy statement that discloses, truthfully and completely, that their

financial advisor has opined that a range of fair value for the company is $9.00–

$9.99 per share. Now assume that, via a printer’s error, half the proxies issued

erroneously give the fairness range as $6.00–$6.66 per share. The stockholders

approve the sale, half of them in theoretical reliance on the erroneous fairness range.

5
I concede that likelihood that any vote in such a scenario would be coercive.

3
Clearly, the error would be material and would render Corwin inapplicable. Such a

finding by the court would have no bearing, however, on whether the complaint

otherwise adequately pled bad faith or breach of the duty of loyalty against the

directors sufficient to withstand a motion under Rule 12(b)(6).

In my view, civil litigation in general can be seen as akin to a steeplechase,

where the plaintiff must clear a series of obstacles: first, sufficient pleading to state

a claim and withstand a motion to dismiss under 12(b)(6); next, perhaps, amassing

a record sufficient to carry across a motion for summary judgment, and finally proof

by a preponderance of the evidence at trial. After having cleared such hurdles the

plaintiff would be entitled to a remedy. But fiduciary duty litigation in the corporate

arena, of the type before me here, is designed to address problems of agency, and

where fiduciaries can eliminate agency problems by satisfying Corwin, they may

seek dismissal on that ground. Then, the course is never run: the starting tape never

drops to allow the steeplechase to begin. Where a court determines that Corwin does

not apply, conversely, the race is on; the starter calls, the tape falls away, and the

litigants are off—to run the same course that lies in front of them just as they would

had the defendants never sought to dismiss under Corwin.

Viewed in that light, and having determined that Corwin does not cleanse the

transaction here, I must turn to the allegations of the Amended Complaint to see

whether a claim has been pled upon which I may grant relief.

4
 The Plaintiffs’ second assumption—erroneous, in my view—is that they must

simply plead claims that are reasonably conceivable as a breach of duty under

Revlon6 and its progeny to withstand a motion to dismiss. That is, according to the

Plaintiffs, they have stated a claim by merely alleging facts that make it reasonably

conceivable that the Defendant directors did not act reasonably with regard to

achieving maximum value for USG’s stockholders via the Acquisition. In this post-

closing damages action, however, the Defendants are exculpated from liability for

damages by a provision in USG’s charter, absent breach of the duty of loyalty or bad

faith. Therefore, to plead a claim sufficient to withstand the Defendants’ Motion to

Dismiss, the Plaintiffs must plead facts that make it reasonably conceivable that the

Defendants have acted with the requisite culpability. I find that the disclosure

deficiency alleged, although it prevents the application of Corwin, is insufficient to

reasonably imply bad faith, and that the other facts alleged likewise fail to state a

claim of breach of the duty of loyalty or reasonably imply actions taken in bad faith.

Accordingly, the Defendants’ Motion to Dismiss is granted. The facts, together with

a more detailed statement of my rationale, are laid out, below.

6
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

5
 I. BACKGROUND7

A. The Parties and Relevant Non-Parties

Non-party USG was a Delaware corporation headquartered in Chicago,

Illinois.8 USG was a manufacturer and distributor of building materials, and is best

known as the manufacturer and seller of Sheetrock brand drywall and wall products.9

At the time of the Acquisition, USG was the largest distributor of wallboard in the

United States and the largest manufacturer of gypsum products in North America.10

Defendant Steven F. Leer was a director of USG from July 2005 through the

close of the Acquisition, and was Chairman of the Board at all relevant times.11

Defendant Jennifer F. Scanlon was USG’s Chief Executive Officer and

President from November 2016 through the close of the Acquisition, and was a

director of USG from September 2016 through the close of the Acquisition.12

Defendant Jose Armario was a director of USG from January 2007 through

the close of the Acquisition.13 Armario was not re-elected to the Board at USG’s

7
The facts, except where otherwise noted, are drawn from the Plaintiffs’ Verified Amended Class
Action Complaint, D.I. 78 (the “Amended Complaint” or “Am. Compl.”), and are presumed true
for the purposes of evaluating the Defendants’ Motion to Dismiss.
8
Am. Compl., ¶ 21.
9
Id. ¶ 2.
10
Id.
11
Id. ¶ 11.
12
Id. ¶ 12.
13
Id. ¶ 13.

6
2018 annual stockholder meeting, but continued to serve as a holdover director at all

relevant times.14

Defendant William H. Hernandez was a director of USG from September

2009 through the close of the Acquisition.15 Hernandez was not re-elected to the

Board at USG’s 2018 annual stockholder meeting, but continued to serve as a

holdover director at all relevant times.16

Defendant Richard P. Lavin was a director of USG from November 2009

through the close of the Acquisition.17

Defendant Brian A. Kenney was a director of USG from February 2011

through the close of the Acquisition.18

Defendant Gretchen R. Haggerty was a director of USG from May 2011

through the close of the Acquisition.19 Haggerty was not re-elected to the Board at

USG’s 2018 annual stockholder meeting, but continued to serve as a holdover

director at all relevant times.20

Defendant Matthew Carter, Jr. was a director of USG from September 2012

through the close of the Acquisition.21

14
Id.
15
Id. ¶ 14.
16
Id.
17
Id. ¶ 15.
18
Id. ¶ 16.
19
Id. ¶ 17.
20
Id.
21
Id. ¶ 18.

7
 Defendant Thomas A. Burke was a director of USG from September 2013

through the close of the Acquisition.22

Non-party Gebr. Knauf KG (“Gebr. Knauf”) is a limited partnership

organized under the laws of the Federal Republic of Germany. 23 Gebr. Knauf is

owned and controlled by members of the Knauf family.24 C&G Verwaltungs GmbH

(“C&G”) is a limited liability company organized under the laws of the Federal

Republic of Germany and is an indirect subsidiary of Gebr. Knauf.25 World Cup

Acquisition Corporation (“Merger Sub”) is a Delaware corporation and wholly

owned subsidiary of Gebr. Knauf.26 Gebr. Knauf together with its various affiliated

individuals and entities including Alexander Knauf (“Mr. Knauf”), Manfred

Grundke, C&G, and Merger Sub, are collectively referred to herein as “Knauf.”27

Knauf is a German manufacturer of building materials.28 Knauf beneficially

owned approximately 10.6% of USG’s outstanding common stock at the time of the

execution of the agreement and plan of merger between USG, Gebr. Knauf, and

Merger Sub (the “Merger Agreement”).29

22
Id. ¶ 19.
23
Id. ¶ 22.
24
Id.
25
Id. ¶ 23.
26
Id. ¶ 24.
27
Id. ¶ 25. I refer to all individuals in this Memorandum Opinion by only their last name other
than Alexander Knauf, who I refer to as Mr. Knauf. I use the honorific only to distinguish Mr.
Knauf from the Knauf entities.
28
Id. ¶ 3.
29
Id. ¶ 25.

8
 Berkshire Hathaway Inc. is a Delaware corporation headquartered in Omaha,

Nebraska.30 Berkshire Hathaway Inc. is a holding company that owns subsidiaries

engaged in various business activities including insurance, freight, rail

transportation, utilities, and consumer goods.31 The famed investor Warren Buffett

is Berkshire Hathaway Inc.’s Chairman and controller.32 Berkshire Hathaway Inc.

together with its various affiliated entities is collectively referred to herein as

“Berkshire Hathaway” or “Berkshire.”33 At the time of the execution of the Merger

Agreement Berkshire Hathaway beneficially owned approximately 31.1% of USG’s

outstanding common stock.34

Plaintiffs Kevin D. Anderson and Susan Fitzgerald are, and at all times

pertinent were, stockholders of USG.35

B. Knauf and Berkshire Hathaway Amass Stakes in USG

Knauf initially acquired USG stock in October 2000 when Knauf International

GmbH purchased approximately 4.3 million shares of USG common stock on the

30
Id. ¶ 26.
31
Id. ¶ 47.
32
Id.
33
Berkshire Hathaway Inc.’s affiliated entities include, but are not limited to: Berkshire Hathaway
Life Insurance Company of Nebraska, a Nebraska corporation; Berkshire Hathaway Assurance
Corporation, a New York corporation; National Indemnity Company, a Nebraska corporation;
General Re Life Corporation, a Connecticut corporation; General Reinsurance Corporation, a
Delaware corporation; and General Re Corporation, a Delaware corporation. Id. ¶¶ 27–32.
34
Id. ¶ 33.
35
Id. ¶ 10. I assume by this pleading the Plaintiffs intend to convey that they were stockholders
of USG until the Acquisition closed.

9
open market.36 Subsequently, Knauf representatives regularly met with USG’s

senior management to discuss Knauf’s ownership in USG and opportunities for

transactions between USG and Knauf.37 In 2001, USG and Knauf formed a joint

venture to manufacture and distribute concrete panels throughout Europe and the

former Soviet Union.38 Knauf began purchasing more USG shares on the open

market in 2007, and by January 8, 2008 had amassed a stake of 14.5% of USG’s

outstanding common stock.39 USG explored an equity offering in 2008, and Knauf

approached USG about expanding its equity stake in USG with a path to acquiring

a controlling interest and/or eventual full ownership of USG, but Knauf ultimately

declined to participate in the equity offering.40 In 2012, Knauf acquired USG’s

European ceilings and surfaces business for approximately $80 million, and in

December 2015, Knauf acquired USG’s interest in USG and Knauf’s

aforementioned European joint venture for approximately €48 million in cash.41

Knauf explored additional possibilities of commercial cooperation between itself

and USG, although they did not ultimately come to fruition.42

36
Id. ¶ 44.
37
Id.
38
Id.
39
Id.
40
Id. ¶ 45.
41
Id. ¶ 46.
42
Id.

10
 Berkshire Hathaway first acquired an interest in USG in November 2000 by

purchasing 6.5 million shares on the open market.43 In January 2006, during the

pendency of USG’s Chapter 11 reorganization, Berkshire Hathaway provided a

backstop commitment to purchase up to 45 million shares of USG as part of a rights

offering transaction that formed part of the funding for USG’s then-proposed

Chapter 11 plan of reorganization and bankruptcy exit.44 Berkshire Hathaway

committed to a maximum aggregate purchase price of $1.8 billion in connection with

the rights offering, and was paid a non-refundable commitment fee of $100 million

by USG.45

Berkshire Hathaway acquired beneficial ownership of an additional 6,969,274

shares of USG common stock pursuant to the rights offering transaction.46 Berkshire

Hathaway immediately began purchasing more shares of USG on the open market

and by October 4, 2006, Berkshire Hathaway had increased its stake in USG to

17,072,192 shares, equivalent to 19% of USG’s outstanding common stock.47

In November of 2008, Berkshire Hathaway purchased an aggregate of $300

million of 10% Contingent Convertible Senior Notes due 2018 (the “Notes”), which

became convertible into USG common stock at any time prior to the Notes’ final

43
Id. ¶ 48.
44
Id. ¶ 50.
45
Id.
46
Id. ¶ 52.
47
Id.

11
maturity (unless repurchased or redeemed by USG).48 By April 11, 2014, Berkshire

Hathaway had converted all of the Notes into common stock—pursuant to such

conversion Berkshire Hathaway beneficially owned an aggregate of 43,387,980

shares of USG, amounting to 30.4% of USG’s outstanding common stock.49

C. Knauf Approaches USG and Berkshire Hathaway Regarding an
Acquisition; Knauf and Berkshire Hathaway’s Initial Discussions; Knauf
Makes a Formal Offer to USG

Knauf had long cited USG as a potential acquisition target that would allow

Knauf to secure a significant beachhead in the North American market.50 At a

January 25, 2017 meeting between Knauf’s principals (Mr. Knauf and Grundke) and

certain members of USG’s management (including Defendant Scanlon, USG’s

CEO), Knauf indicated that it was looking for ways to partner with USG.51 On

February 8, 2017, Scanlon updated USG’s Board regarding the January 25 meeting,

and noted that following Knauf’s then-recent acquisition of a wallboard plant in

Mexico, Knauf was potentially considering entering the U.S. wallboard market

(wallboard being USG’s primary business).52 The next day, the Board indicated to

Knauf that USG would not be in a position to respond to its inquiry until the

completion of a strategic review process expected to be completed in mid-2017.53

48
Id. ¶¶ 53–54.
49
Id. ¶ 55.
50
Id. ¶ 61.
51
Id. ¶ 62.
52
Id. ¶ 63.
53
Id. ¶ 64.

12
 In March 2017, Knauf (through its financial advisor Morgan Stanley Bank

AG (“Morgan Stanley”)) reached out to Berkshire Hathaway regarding Knauf’s

plans and the sides discussed such plans throughout the month.54 By mid-May 2017

it was clear to Knauf that Berkshire Hathaway was ready to sell its stake in USG and

that it would do so at or near $40 per share.55 Indeed, at Berkshire Hathaway Inc.’s

May 6, 2017 annual stockholder meeting, Warren Buffett noted that Berkshire

Hathaway’s USG investment was “disappointing,” not a “brilliant investment,” and

“not one of my great ideas.”56 Knowing it would have Berkshire Hathaway’s

support for an acquisition that valued USG at over $40 per share, Knauf began to

consider how to structure such a transaction.57 Knauf sought to avoid executing a

formal agreement with Berkshire Hathaway in the short term to avoid disclosure

obligations under U.S. securities laws.58 Knauf and Berkshire Hathaway continued

to negotiate and began communicating directly (rather than through Morgan Stanley)

in July of 2017.59

On September 19, 2017, USG informed Knauf that based on its strategic

review USG did not see value in a combination.60 On October 4, 2017, Morgan

54
Id. ¶ 65.
55
Id. ¶ 66.
56
Id. ¶ 67.
57
Id. ¶ 68.
58
Id.
59
Id. ¶ 69.
60
Id. ¶ 70.

13
Stanley delivered a Knauf-USG Acquisition Analysis Presentation to Berkshire

Hathaway that assumed a purchase price of $40 per USG share.61 On October 18,

2017, Knauf (represented by Mr. Knauf and Grundke) and Berkshire Hathaway

(represented by Buffett and his first lieutenant Combs) met in Omaha, Nebraska to

discuss USG, and at the meeting agreed to a price of $40 per share.62

On November 29, 2017, Knauf met with Scanlon—along with USG’s Chief

Financial Officer and General Counsel—and informed USG of Knauf’s intention to

make a proposal to acquire USG in an all-cash transaction.63 At the meeting Knauf

delivered to USG an indicative and non-binding proposal to acquire USG for $40.10

per share in cash—the offer stated that it was not to be disclosed except to the Board,

USG’s advisors, and Berkshire Hathaway.64 USG’s Board met on December 15,

2017 and discussed the possibility of a hostile tender offer by Knauf or others, and

discussed Knauf’s business and the relationship between USG and Knauf

generally.65 Berkshire Hathaway’s interest in USG was also discussed, including

Berkshire Hathaway’s previously stated desire for an exit from its USG

investment.66 The Board recognized that Berkshire Hathaway was practically unable

61
Id. ¶ 72.
62
Id. ¶ 74.
63
Id. ¶ 79.
64
Id.
65
Id. ¶ 83.
66
Id. ¶ 84.

14
to exit its USG investment at the market price given its large position.67 The Board

decided to contact Berkshire Hathaway prior to responding to Knauf’s offer to

inquire about Berkshire Hathaway’s interactions with Knauf.68

Informed by its own determination of USG’s intrinsic value, the Board

determined at the meeting that Knauf’s offer was “inadequate and insufficient.”69 At

the meeting management noted that USG was experiencing positive momentum in

the fourth quarter of 2017 and specifically expressed confidence in management’s

long term plan for USG.70 The Board also received a detailed review of valuation

analyses conducted by its financial advisors.71

On December 19, 2017, Scanlon and USG’s General Counsel held a call with

Buffett where Buffett acknowledged that Berkshire Hathaway had communicated

with Knauf’s financial advisors as of that morning—Buffett did not disclose the

parties’ previous discussions.72 Buffett also remarked that he would not take

independent action.73 Scanlon stated that the Board had determined that Knauf’s

offer was “not in the range of [USG’s] intrinsic value”—Buffett communicated his

support for an all-cash acquisition and encouraged Scanlon to engage with Knauf.74

67
Id. ¶ 85.
68
Id.
69
Id. ¶ 86.
70
Id. ¶ 83.
71
Id.
72
Id. ¶ 87.
73
Id.
74
Id.

15
 On December 20, 2017, USG formally notified Knauf that the Board had

determined Knauf’s offer was “wholly inadequate given [USG’s] intrinsic value and

therefore it was not in the best interests of [USG’s] stockholders.”75 Berkshire

Hathaway indicated to Knauf that it viewed the Board’s rejection as “absolutely

disgusting,” that Berkshire Hathaway was “willing to vote against the directors,” and

that Berkshire Hathaway would share its opinion publicly should the offer become

public.76

D. Knauf Makes a Second Offer; Knauf’s Overtures Become Public

Knauf and Berkshire Hathaway continued to engage in discussions regarding

an acquisition of USG in late 2017 and early 2018—Berkshire Hathaway made clear

that it would vote against the Board though it was not yet willing to say so publicly.77

On February 8, 2018, Knauf contacted Leer, USG’s Chairman, and demanded a

meeting to “establish a relationship” with Leer.78 On March 8, 2018, USG held its

inaugural “Investor Day” presentation, the primary purpose of which was to “help

investors and analysts understand the long-term value proposition of [USG]”—at the

Investor Day USG disclosed certain financial projections through the end of USG’s

2020 fiscal year.79

75
Id. ¶ 89.
76
Id. ¶ 91.
77
Id. ¶ 93.
78
Id. ¶ 94.
79
Id. ¶ 96.

16
 On March 12, 2018, Mr. Knauf and Grundke met with Leer and Scanlon and

reiterated Knauf’s “determination” to acquire USG, indicated that a revised proposal

would be forthcoming, and threatened that it would approach USG’s stockholders

directly if the Board would not “play ball.”80 Three days later Knauf delivered to

USG a revised takeover proposal for $42.00 per share.81 The proposal stated:

“Should you choose not to engage in good faith discussions with us we may

reconsider our behavior.”82 USG and Berkshire Hathaway thereafter discussed

Knauf’s revised proposal.83

On March 23, 2018, the Board met to discuss Knauf’s revised proposal.84 At

the meeting one of USG’s financial advisors noted the “possibility of a change of

behavior” by Knauf, and that USG’s 52-week high stock price and the median and

highest analyst stock prices had all increased.85 The financial advisors also informed

the Board that USG’s discounted cash flow (“DCF”) valuation had increased since

December 2017, and that Knauf’s revised proposal was at the low end of their DCF

value ranges and below the average for various premium analysis metrics.86 The

Board discussed its thoughts regarding USG’s “intrinsic value.” 87 The Board also

80
Id. ¶ 97.
81
Id. ¶ 98.
82
Id.
83
Id. ¶ 99.
84
Id. ¶ 100.
85
Id.
86
Id.
87
Id.

17
discussed Berkshire Hathaway and specifically recognized that “they could not

substitute the judgment of one shareholder for what they believed to be in the best

interest of all shareholders, particularly given the different posture of that one

shareholder.”88 The Board further discussed the possibility that Knauf would

attempt to acquire USG for “less than its intrinsic value” and that Knauf may

“attempt to push for a shareholder vote.”89 The Board unanimously determined that

Knauf’s revised proposal was “wholly inadequate.”90

On that same day, Berkshire Hathaway and Knauf met, and at the meeting

Berkshire Hathaway proposed to grant Knauf an option to purchase all of Berkshire

Hathaway’s USG stock for $42.00 per share.91 On March 25, 2018, Berkshire

Hathaway notified Morgan Stanley that it would publicly disclose the existence of

Knauf’s proposal, Knauf and Berkshire Hathaway’s communications, and that

Berkshire Hathaway had offered Knauf an option to buy Berkshire Hathaway’s USG

stock at $42.00 per share.92 Knauf sought to persuade Berkshire Hathaway to not

make the public disclosure, and also sought at a minimum to edit some of the text of

the proposed disclosure.93

88
Id. ¶ 101.
89
Id. ¶ 102.
90
Id.
91
Id. ¶ 104.
92
Id. ¶ 105.
93
Id. ¶¶ 106–08.

18
 On March 26, 2018, Berkshire Hathaway amended its Schedule 13D to

disclose the March 23, 2018 conversation and option offer—Knauf likewise

amended its own Schedule 13D to disclose the option offer and its revised

proposal.94 Neither filing substantively disclosed the coordination between Knauf

and Berkshire Hathaway that had occurred in the previous year.95

Also on March 26, 2018, USG’s Board formally rejected Knauf’s revised

proposal as “wholly inadequate”—the Board was “focused on the intrinsic value of

our long-term strategic plan and measuring that against the proposal price.”96 On

the same day, USG issued a press release that acknowledged its receipt of Knauf’s

proposal, disclosed that the Board has unanimously rejected the revised proposal,

and stated that the $42.00 per share offer “substantially undervalues the Company

and is not in the best interest of all of USG’s shareholders,” and that the revised

proposal “does not reflect USG’s intrinsic value.”97

E. Knauf Initiates the Withhold Campaign; Berkshire Hathaway Publicly
Supports Knauf’s Bid and Withhold Campaign

After the public disclosures, Knauf took measures consistent with the

commencement of hostile stockholder action, specifically an 8 Del. C. § 220 demand

requesting a list of USG’s stockholders in advance of USG’s 2018 annual meeting

94
Id. ¶ 111.
95
Id.
96
Id. ¶ 112.
97
Id.

19
with a stated purpose of communication regarding the stockholders’ mutual interests

“including the solicitation of proxies for the election of directors in connection with

the annual meeting.”98

At an April 5, 2018 meeting between USG and Knauf’s respective advisors,

USG’s advisors remarked that Knauf’s offer was not within a range to support

engaging in a diligence process and that it did not appear that Knauf would be willing

to propose a price that would reflect the Board’s intrinsic value of USG. 99 When

asked about its intentions regarding the § 220 demand, Knauf stated that it “simply

intended to preserve [its] options.”100 Knauf left the meeting with an understanding

that an offer of $45.00 per share would guarantee it access to additional

information.101 On that same day, Buffett and Scanlon spoke in order to provide

Buffett with a confidential update on the USG’s engagement with Knauf to date—

Buffett encouraged continued engagement with Knauf and communicated that he

thought USG’s stockholders would approve a transaction.102 Buffett confirmed that

Berkshire Hathaway was “engaging” with Knauf on Berkshire Hathaway’s option

offer.103

98
Id. ¶ 115.
99
Id. ¶ 116.
100
Id.
101
Id.
102
Id. ¶ 117.
103
Id.

20
 An April 9, 2018 Knauf internal presentation remarked on Knauf’s leverage

over the Board considering Berkshire Hathaway’s support, and Knauf determined

not to pursue Berkshire Hathaway’s option offer because it already had Berkshire

Hathaway’s public support at $42 per share “without having to pay for it upfront.”104

The next day USG indicated that Knauf’s § 220 demand did not comply with the

statute and asked for additional evidence that Knauf was a stockholder of USG.105

On April 10, 2018, Knauf issued a press release announcing its intention to

solicit proxies from USG’s stockholders against USG’s four director nominees in

connection with the 2018 annual meeting and filed its preliminary proxy materials

in connection with Knauf’s withhold campaign (the “Withhold Campaign”).106

Knauf’s press release acknowledged that Knauf had Berkshire Hathaway’s support

for any offer over $42.00 per share and reserved the right to nominate one or more

individuals for election as directors.107 USG issued a reactionary press release

wherein Leer stated that USG’s offer was “wholly inadequate, opportunistic, and

104
Id. ¶¶ 119–20.
105
Id. ¶ 121.
106
Id. ¶ 122. “In uncontested director elections—and the overwhelming majority of elections are
uncontested—the only choice for shareholders who do not want to vote for a board nominee is to
mark their proxy card (or voting instruction form) to withhold authority to vote for the director at
issue.” Marcel Kahan & Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347,
1358 (2011).
107
Am. Compl., ¶ 122.

21
does not reflect the intrinsic value of the company.” 108 Scanlon stated that Knauf

“ha[d] not indicated any willingness to pay full value to all of our shareholders.”109

On April 12, 2018, the Board issued a formal letter to USG’s stockholders

urging stockholders to vote for the election of USG’s four director nominees at the

2018 annual meeting.110 The Board stated that Knauf’s campaign was a “misguided

attempt to pressure the Board into accepting a proposal from Knauf to purchase

USG, that we believe is substantially below our intrinsic value,” and that “[t]he

Board is creating value for all our stockholders through the execution of our strategic

plan[.]”111

On the same day, Berkshire Hathaway publicly communicated its intent to

support Knauf and vote against the Board’s nominees.112 Knauf stated that it was

“pleased” that Berkshire Hathaway had indicated its support for the Withhold

Campaign and reiterated that its offer “present[ed] and [sic] immediate, high-value

and cash-certain monetization opportunity for all USG shareholders.”113 The

Plaintiffs note a “strong suggestion” that Berkshire Hathaway’s and Knauf’s public

statements were coordinated.114 Morgan Stanley told Knauf that Buffett “pushed it

108
Id. ¶ 123.
109
Id.
110
Id. ¶ 124.
111
Id.
112
Id. ¶ 126.
113
Id. ¶ 127.
114
Id. ¶ 128.

22
into the public and now declared his vote against the company; never does this;

speaks volume [sic].”115

On April 16, 2018, USG’s Board met to discuss the “new reality.”116 At the

meeting, representatives of the Board’s legal counsel reviewed the Board’s legal

obligations and provided an update on the possible outcome of a vote against USG’s

director nominees.117 On the same day, Knauf publicly responded to the rejection

of its § 220 demand and threatened litigation.118

On April 17, 2018, Knauf filed materials with the Securities and Exchange

Commission (“SEC”) including a presentation touting Berkshire Hathaway’s

support for Knauf’s $42.00 per share offer.119 Knauf issued a press release on the

same day similarly emphasizing Berkshire Hathaway’s support for the offer and the

Withhold Campaign, stating that Berkshire Hathaway “has offered Knauf an option

at $42, which Knauf believes validates the value of its offer, and has publicly stated

its intention to VOTE AGAINST USG’s four director nominees.”120 Knauf

similarly publicized Berkshire Hathaway’s support in other public filings and

115
Id. ¶ 130.
116
Id. ¶ 137.
117
Id.
118
Id. ¶ 138.
119
Id. ¶ 139.
120
Id. ¶ 140 (capitalization in original).

23
statements, with one opining: “[r]arely does Berkshire Hathaway take such public

positions.”121

On April 20, 2018, Knauf and USG both filed their respective proxy materials

in connection with the Withhold Campaign.122 Around this date, both Knauf and

Berkshire Hathaway spoke separately with Institutional Shareholder Services

(“ISS”).123 On April 24, 2018, Knauf met with Shapiro Capital (“Shapiro”), USG’s

fifth-largest stockholder—Shapiro stated that they would publicly announce their

intention to vote against the Board.124 On the same day, Morgan Stanley circulated

to Knauf an analysis of voting scenarios that estimated 57% of withholds in the “base

case” of just Knauf and Berkshire Hathaway voting against out of the large proxy

institutions and proxy advisors, 65% withholds if ISS endorsed the Withhold

Campaign but without the support of the other large stockholders, and 74% with

support of the proxy advisors and largest institutions other than Vanguard and

Harris.125

USG’s Board met on April 25, 2018.126 During the meeting, Scanlon

informed the Board that both Berkshire Hathaway and Shapiro had publicly

indicated their support for the Withhold Campaign, and that with 45% of USG’s

121
Id. ¶¶ 140, 144.
122
Id. ¶ 142.
123
Id. ¶ 143.
124
Id. ¶ 145.
125
Id. ¶ 146.
126
Id. ¶ 147.

24
stockholders already indicating they would vote against the director nominees it was

likely that USG’s director nominees would not receive a majority of the votes cast

at USG’s 2018 annual meeting.127 The Board considered providing its view of value

to either Knauf or publicly, but “deferred doing so at that time and until other

potential acquirers were ruled out.”128 USG issued a press release the same day

announcing its first quarter 2018 results and filed its quarterly report in connection

with the same—USG disclosed a 4% increase on an adjusted basis in net sales year-

over-year.129 Scanlon was quoted as saying that the quarter “reinforces our

confidence in our strategy” and that USG had “the opportunity and available capital

to focus on growth and shareholder value creation with a balance sheet that supports

our plan.”130 The following day, Knauf issued a press release reaffirming its

proposal to acquire USG at $42.00 per share and promoting the Withhold

Campaign.131

On April 26, 2018, the Board filed a letter and presentation to all of USG’s

stockholders; the presentation was entitled “USG Maximizing Value for All

Shareholders.”132 The presentation described Knauf’s offer as “significantly

undervalu[ing] USG” and that it did not “adequately compensate[] ALL

127
Id.
128
Id.
129
Id. ¶ 148.
130
Id.
131
Id. ¶ 149.
132
Id. ¶ 150 (bold in original).

25
shareholders.”133 The presentation also stated that the Board rejected the bid “based

on USG’s intrinsic value.”134 The letter reiterated many of the same themes, and

remarked that the Withhold Campaign was designed “to undermine YOUR Board’s

ability to negotiate to maximize value for ALL stockholders” and that Knauf was

“trying to get you to pressure the USG Board into accepting its opportunistic

proposal.”135 The Board continued: “YOU OWN the industry’s CROWN JEWEL

and its does not make sense to sell below intrinsic value.”136

The Board began receiving interest from other potential buyers in April

2018.137 The Amended Complaint states that USG interfaced with a “Company A”

regarding Company A’s potential interest in making a proposal for USG, but

Company A later communicated that it was unable to pursue a transaction with USG

at that time.138 Companies “C” and “D” indicated potential interest in a strategic

transaction with USG but were not in a position to do so at that time. 139 While it was

awaiting Company’s A’s response, the Board reviewed the pros and cons of

engaging with Knauf or waiting until USG received further information regarding

133
Id. (capitalization in original).
134
Id.
135
Id. ¶ 151 (capitalization in original).
136
Id. (capitalization in original).
137
Id. ¶ 152.
138
Id.
139
Id.

26
Company A’s interest, but ultimately declined to make a decision and decided to

“discuss further actions at a later date.”140

F. Knauf Prevails in its Withhold Campaign; Knauf and USG Agree to the
Acquisition

USG’s Board meet on April 30, 2018, and Scanlon informed the Board that

the last of the few potential competing bidders with whom the Board had attempted

to engage was unwilling or unable to pursue a transaction at that time. 141 Scanlon

also notified the Board that proxy voting advisory services ISS and Glass Lewis had

publicly announced their support for the Withhold Campaign, and that the Board

was “facing the likelihood of a majority vote against its four director nominees.”142

At the same meeting, the Board authorized Scanlon to begin negotiations within a

unanimously-agreed range of $48.00 to $51.00 per share.143 This range was

informed by the Board’s view of USG’s intrinsic value, and the Board held a detailed

discussion with input from its financial advisor to this end.144 USG’s management

specifically recommended against the Board publicly stating its views on USG’s

intrinsic value, and the Board determined not to make such a statement; the Board

140
Id.
141
Id. ¶ 154.
142
Id.
143
Id. ¶ 155.
144
Id.

27
concluded that Knauf’s $42.00 per share offer did not reflect USG’s intrinsic

value.145

Knauf and USG met later that day and Knauf stated its “desire to have

assurances regarding the final price that the Board would accept before making a

further offer” and remarked on the likelihood that the Board would want a resolution

before the upcoming 2018 annual meeting to avoid a vote against USG’s four

director nominees.146 On May 1, 2018, USG issued a press release announcing the

Board’s authorization for USG to begin negotiations with Knauf; Scanlon called

Buffett that same day to discuss the public announcement of the commencement of

negotiations with Knauf.147

USG’s Board held a meeting on May 3, 2018 where it again considered

issuing a public statement on USG’s intrinsic value but did not do so.148 The Board

also discussed the length of a standstill with Knauf, which was then being negotiated;

Knauf sought a 30-day standstill at most while USG proposed a 12-month standstill,

and the parties eventually entered into a confidentiality agreement with a four-month

standstill period.149

145
Id.
146
Id. ¶ 156.
147
Id.
148
Id. ¶ 158.
149
Id.

28
 On May 7, 2018, two days before USG’s annual meeting, Buffett was

interviewed on CNBC and stated that this may have been the first time in 53 years

that Buffett and Berkshire Hathaway had voted against a slate of directors; Buffett

remarked: “we felt that they – they did not represent our interest, and we said that

we intended to vote against them at the annual meeting . . . . [W]e just think that

directors are there to represent shareholders. And we do not feel that they were

certainly representing us with a 30% interest.”150

On May 8, 2018, USG met with Knauf and communicated a counterproposal

of $50.00 per share.151

USG’s 2018 annual meeting was held on May 9, 2018.152 At the meeting

approximately 75% of shares voted were cast against each of USG’s director

nominees.153 As a result, Defendants Armario, Haggerty, and Hernandez were not

duly re-elected and only continued to serve as holdover directors; Dana Cho was not

elected to the Board and the Board voted to reduce its size.154 The Board met later

that day, and Scanlon discussed the defeat as well as the decision to propose $50 per

share as USG’s counterproposal to Knauf, which Scanlon said was based on DCF

150
Id. ¶ 159.
151
Id. ¶ 160.
152
Id. ¶ 161.
153
Id.
154
Id.

29
valuations performed by the Board’s financial advisors and was within the authority

approved by the Board.155

On May 22, 2018, Knauf rejected USG’s $50.00 per share counteroffer and

indicated that it was willing to increase its offer to $43.50 per share.156 During a

meeting the next day, Knauf informed Scanlon and Leer that if “Knauf and USG

[were] not able to reach agreement, Knauf did not intend to stop pursuing an

acquisition of USG.”157 In response, Scanlon and Leer reiterated to Knauf “that the

Board believes the intrinsic value of [USG] is $50 a share and that conversations

with shareholders led [the Board] to believe that stockholder expectations were

closer to the Board’s view of value.”158 Nevertheless, Scanlon and Leer indicated

that they believed the Board may be willing to support a sale as low as $47.00 per

share.159

USG’s Board met on May 24, 2018 to discuss the ongoing negotiations.160

The Board was told that Knauf was not assuming any value from synergies, not

engaging with the Board’s bankers in a typical fashion, and that Knauf did not

consider the $47.00 per share suggested by Scanlon and Leer to be a formal

155
Id. ¶ 162.
156
Id. ¶ 164.
157
Id.
158
Id.
159
Id.
160
Id. ¶ 165.

30
counteroffer.161 The Board noted its concerns and the risk that Knauf would walk

away from negotiations and engage in a hostile acquisition of USG at or below

$42.00 per share or pursue an alternative transaction with one of USG’s domestic

competitors.162 Scanlon recounted to the Board Mr. Knauf’s assertion that “Knauf

did not intend to stop pursuing an acquisition of USG.”163 Scanlon informed the

Board that she intended to “reiterate the Board’s view of intrinsic value” in

upcoming negotiations with Knauf and intended to “ground th[ose] conversation[s]

in the Board’s view of intrinsic value.”164 The Board acknowledged that $47 was a

“walk away price for Knauf” and contemplated the likely next steps by Knauf and

Berkshire Hathaway in the event the parties were unable to agree on a transaction.165

Leer polled each of the directors as to what they believed USG’s walk away price

should be, though those views are not recorded in the Board’s minutes.166 After

discussion, the Board approved the negotiation of a transaction as low as $44.00 per

share.167

Throughout May 2018, USG and Knauf continued to engage in

negotiations.168 During this time the Board authorized outreach to Company A and

161
Id.
162
Id.
163
Id.
164
Id. ¶ 166.
165
Id.
166
Id. ¶ 167.
167
Id.
168
Id. ¶ 168.

31
four other potential bidders, but each potential bidder indicated that they were unable

or unwilling to submit a competing bid for USG at that time.169

On May 29, 2018, Knauf reaffirmed its $43.50 per share proposal and

prepared internally to present USG’s Board with a “best and final” ultimatum of

$44.00 per share.170 Knauf recognized internally that USG’s Board was unwilling

to go below $45.00 per share and Knauf’s advisors noted that Knauf’s

representatives should “avoid making direct threats.”171

On June 5, 2018, Knauf delivered to USG a “best and final” offer of $44.00

per share, consisting of $43.50 per share in cash at closing plus $0.50 per share in a

conditional special dividend that USG would be permitted to pay upon obtaining

stockholder approval of adoption of the Merger Agreement.172

USG’s Board met and discussed Knauf’s revised offer on June 6, 2018.173 The

Board determined that it was willing to accept this offer, and in coming to the

decision specifically “discussed whether [absent a deal] Knauf would be obligated

to vote for [USG’s] director nominees at the next annual meeting[.]”174 The Board

also discussed Knauf’s “perseverance” and Knauf’s representation that it expected

169
Id.
170
Id. ¶ 169.
171
Id.
172
Id. ¶ 170.
173
Id. ¶ 171.
174
Id.

32
the support of Berkshire Hathaway.175 The next day, Scanlon and USG’s General

Counsel spoke with Buffett on a confidential basis to inform him that Knauf wanted

Berkshire Hathaway to sign a voting agreement supporting a transaction with USG

(the “Voting Agreement”).176 Buffett informed Scanlon that he supported the deal,

and Knauf communicated that it was “very important that Berkshire continue to

demonstrate its support for the transaction.”177

On June 10, 2018, USG’s Board unanimously approved the Merger

Agreement at $44.00 per share and the parties executed the Merger Agreement on

the same day.178 Berkshire Hathaway executed the Voting Agreement, pursuant to

which Berkshire Hathaway agreed to vote all of its beneficially owned shares in

favor of the adoption of the Merger Agreement and the approval of the Acquisition,

and agreed to vote all of its shares then owned against any acquisition proposal,

whether or not it was a superior proposal.179

On June 11, 2018, USG and Knauf issued a joint press release announcing the

execution of the Merger Agreement.180 On that same day, Knauf and Berkshire

175
Id.
176
Id. ¶ 172.
177
Id.
178
Id. ¶ 174.
179
Id. Berkshire Hathaway also agreed “to vote (or cause to be voted) all of its shares then owned
against . . . any action or omission that would result in a breach of any representation, warranty,
covenant, agreement or other obligation of Berkshire Hathaway under the Voting Agreement[.]”
Id.
180
Id. ¶ 175.

33
Hathaway amended their respective Form SC 13D/As to disclose the execution of

the Voting Agreement and Knauf’s concomitant shared voting power with respect

to Berkshire Hathaway’s USG stock.181 On August 23, 2018, the Board authorized

USG’s filing of a proxy statement in connection with the Acquisition (the “Proxy

Statement”).182 USG’s stockholders voted on and approved the Merger Agreement

on September 26, 2018, and the Acquisition closed on April 24, 2019.183

G. Procedural History

The original complaint in this Action was filed on August 13, 2018. After

two substantially similar putative class actions challenging the Acquisition were

consolidated, I heard oral argument on the Plaintiffs’ motion for preliminary

injunction seeking to enjoin the Acquisition on the basis that the Plaintiffs were

likely to succeed in showing that the Acquisition violated 8 Del. C. § 203 and that

the Proxy Statement failed to make material disclosures.184 I denied the Plaintiffs’

motion for a preliminary injunction on September 25, 2018, finding that the Proxy

Statement provided an adequate description of Berkshire Hathaway’s role in the

Acquisition, and that 8 Del. C. § 203 was not implicated because Berkshire

Hathaway and Knauf never entered a meeting of the minds that would allow Knauf

181
Id. ¶ 176.
182
Id. ¶ 179.
183
Id. ¶ 180.
184
Pls.’ Opening Br. in Support of Mot. for Prelim. Inj., D.I. 51, at 62–69; see Pls.’ Reply Br. in
Further Support of Mot. for Prelim. Inj., D.I. 65.

34
to control Berkshire Hathaway’s shares.185 As noted, supra, the Acquisition closed

on April 24, 2019.

The Plaintiffs filed the Amended Complaint on November 26, 2019. The

Amended Complaint pleads one count: breach of fiduciary duty against each of

USG’s directors at the time of the Acquisition.186 The Amended Complaint alleges

that USG’s stockholders “did not receive the highest available value for their equity

interest in USG,” and “suffered the injury of an uninformed stockholder vote”; the

Plaintiffs seeks damages including by way of quasi-appraisal.187

The Defendants moved to dismiss this Action on February 5, 2020. I heard

Oral Argument on the Defendants’ Motion on June 22, 2020, and considered the

matter submitted for decision on that date.

II. ANALYSIS

The Defendants have moved to dismiss this Action pursuant to Chancery

Court Rule 12(b)(6).188 The standard of review for a Rule 12(b)(6) motion is well

settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences

185
Telephonic Ruling of the Court Re Pls.’ Mot. for Prelim. Inj. Relief, D.I. 71. I specifically
found that “[t]he record demonstrates that Berkshire Hathaway retained control of its stock to
pursue its interest, regardless of whether that interest diverged from that of Knauf.” Id. at 12:17–
12:20.
186
Am. Compl., ¶¶ 207–11.
187
Id. ¶ 211.
188
Ch. Ct. R. 12(b)(6).

35
 in favor of the nonmoving 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.189

When reviewing a motion to dismiss, the Court may take into consideration

documents incorporated into the pleadings by reference and judicially noticeable

facts available in public SEC filings.190

The Amended Complaint pleads a single claim for breach of fiduciary duty

against each of the nine members of USG’s Board regarding their approval of the

Acquisition. The Plaintiffs allege that USG’s Board failed to obtain the “highest

value available for USG in the marketplace,” in a process that, per the Plaintiffs, was

infected by both a conflicted controlling stockholder (Knauf) and approved in bad

faith by an interested (and/or non-independent) Board. In moving to dismiss, the

Defendants contend that the Plaintiffs’ claims are subject to business judgment rule

review under the rationale of Corwin v. KKR Financial Holdings LLC.191 The

Defendants argue that Knauf was not USG’s controller, and that Corwin’s cleansing

effect bars me from engaging in a substantive review of the Acquisition.192

189
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
190
Reith v. Lichtenstein, 2019 WL 2714065, at *1 (Del. Ch. June 28, 2019). I take judicial notice
of the Proxy Statement filed with the SEC in connection with the Acquisition, which is attached
as Exhibit B to the Defendants’ Opening Brief in support of their Motion to Dismiss, and quoted
throughout the Amended Complaint.
191
125 A.3d 304 (Del. 2015).
192
Singh v. Attenborough, 137 A.3d 151, 151–52 (Del. 2016) (“When the business judgment rule
standard of review is invoked because of a vote, dismissal is typically the result. That is because
the vestigial waste exception has long had little real-world relevance, because it has been

36
 Because the Plaintiffs allege that Knauf was a conflicted controlling

stockholder of USG, I first must determine whether the Plaintiffs have sufficiently

pled that Knauf was a conflicted controller before reaching the Defendants’ Corwin

defense.193 After review, I find that it is not reasonably conceivable that Knauf was

USG’s controlling stockholder, and it is consequently not reasonably conceivable

that the Plaintiffs’ claims are subject to entire fairness on that ground.

I next determine that though USG’s stockholder vote could have cleansed the

Acquisition under Corwin, it did not do so because a rational inference exists, based

on the facts pled, that the vote was not fully informed due to a material omission in

the Proxy Statement.194

But that the Acquisition is not cleansed under Corwin does not end my inquiry

at this motion to dismiss stage. In light of USG’s charter’s 8 Del. C. § 102(b)(7)

exculpatory clause, to survive the Motion to Dismiss the Plaintiffs must plead facts

making it reasonably conceivable that the Defendant directors breached their duty

understood that stockholders would be unlikely to approve a transaction that is wasteful.”
(footnotes omitted)); see e.g. In re Merge Healthcare Inc. S’holders Litig., 2017 WL 395981, at
*13 (Del. Ch. Jan. 30, 2017); In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839, at *13
(Del. Ch. Jan. 5, 2017).
193
See In re Rouse Props., Inc. Fiduciary Litig., 2018 WL 1226015, at *11 (Del. Ch. Mar. 9, 2018)
(noting that the Corwin analysis “must be deferred” until the allegation that the defendant was a
conflicted controller is addressed); Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25,
2016).
194
See Corwin, 125 A.3d at 309; Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018).

37
of loyalty or acted in bad faith.195 Because I find that the Plaintiffs have not

adequately pled such facts, this Action must be dismissed.

A. Knauf Was Not USG’s Controlling Stockholder

In Corwin, the Delaware Supreme Court held that “when a transaction not

subject to the entire fairness standard is approved by a fully informed, uncoerced

vote of the disinterested stockholders, the business judgment rule applies.”196 In

Larkin v. Shah,197 Vice Chancellor Slight clarified that “a transaction not subject to

the entire fairness standard,” as used in Corwin, should not be read “rigorously

literal[ly]”—that is Corwin should not be read to hold that all transactions subject to

entire fairness for any reason are not subject to Corwin cleansing—and is instead

meant only to refer to certain entire fairness transactions involving a controlling

stockholder.198 Moreover, “the mere presence of a controller does not trigger entire

fairness per se. Rather, coercion is assumed, and entire fairness invoked, when the

controller engages in a conflicted transaction, which occurs when a controller sits on

both sides of the transaction, or is on only one side but ‘competes with the common

195
In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179 (Del. 2015).
196
Corwin, 125 A.3d at 309.
197
2016 WL 4485447 (Del. Ch. Aug. 25, 2016).
198
Id. at *1 (Del. Ch. Aug. 25, 2016) (“In the absence of a controlling stockholder that extracted
personal benefits, the effect of disinterested stockholder approval of the merger is review[ed]”
under business judgment, “even if the transaction might otherwise have been subject to the entire
fairness standard due to conflicts faced by individual directors.”).

38
stockholders for consideration.’”199 Where a controller exists, it is thus only those

instances where the controller has engaged in a conflicted transaction that Corwin

necessarily has no application.200 Corwin cannot cleanse such an “inherently

coercive” transaction because of the concern that “fear of controller retribution in

the face of a thwarted transaction may overbear a determination of best corporate

interest by the unaffiliated majority.”201

The Plaintiffs contend that Knauf was a conflicted controller of USG. Knauf

undoubtedly sat on both sides of the Acquisition, as both the purchaser and a

blockholder of USG stock. Consequently, Corwin is inapplicable if the Plaintiffs

have adequately alleged Knauf’s controller status.

A stockholder can be found to be a controller under Delaware law where they

“(1) own[] more than 50% of the voting power of a corporation or (2) own[] less

than 50% of the voting power of the corporation but exercise[] control over the

business affairs of the corporation.”202 The Plaintiffs plead that Knauf beneficially

owned only 10.6% of USG’s common stock outstanding at the time the Merger

199
In re Merge Healthcare Inc. S’holders Litig., 2017 WL 395981, at *6 (Del. Ch. Jan. 30, 2017)
(citing Larkin, 2016 WL 4485447, at *8; Kahn v. M &F Worldwide Corp., 88 A.3d 635, 644 (Del.
2014)).
200
Larkin, 2016 WL 4485447, at *15; Merge, 2017 WL 395981, at *6; In re Solera Holdings, Inc.
S’holder Litig., 2017 WL 57839, at *6 n.28 (Del. Ch. Jan. 5, 2017).
201
Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *15 (Del. Ch. May 31, 2017).
202
Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251 (Del. 2019) (quoting In re KKR Fin.
Holdings LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014)) (internal quotation marks
omitted); accord In re Rouse Props., Inc. Fiduciary Litig., 2018 WL 1226015, at *11 (Del. Ch.
Mar. 9, 2018).

39
Agreement was executed, far below the 50% threshold.203 Consequently, to plead

control, the Plaintiffs must adequately pled that Knauf was a controller under the

“actual control” test.204

To plead actual control, a plaintiff must allege facts that support a reasonable

inference of either “(i) control over the corporation’s business and affairs in general

or (ii) control over the corporation specifically for purposes of the challenged

transaction.”205 Pleading general control requires that a plaintiff allege facts

showing that a defendant or a group of defendants “exercised sufficient influence

that they, as a practical matter, are no differently situated than if they had majority

voting control.”206 The Plaintiffs do not attempt to plead that Knauf had general

control over USG.

But pleading such ubiquitous control is not required, because even a

stockholder who does not exercise actual control over a corporation generally can

“exercise actual control over the board of directors during the course of a particular

transaction,” and consequently “assume fiduciary duties for purposes of that

transaction.”207 Thus, a plaintiff can plead control by pleading facts supporting a

203
Am. Compl., ¶ 25.
204
Rouse, 2018 WL 1226015, at *11.
205
Voigt v. Metcalf, 2020 WL 614999, at *11 (Del. Ch. Feb. 10, 2020).
206
Id. (quoting In re PNB Holding Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug.
18, 2006)) (internal quotation marks omitted).
207
Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *26
(Del. Ch. July 6, 2018).

40
reasonable inference that the defendant “in fact exercised actual control with regard

to the particular transaction that is being challenged.”208 The challenged transaction

here is, of course, Knauf’s Acquisition of USG. Therefore, to invoke entire fairness

on the basis of Knauf being USG’s controlling stockholder, the Amended Complaint

must contain well-pled facts demonstrating Knauf’s actual control over USG with

regard to the Acquisition.209

“It is impossible to identify or foresee all of the possible sources of influence

that could contribute to a finding of actual control over a particular decision,” but,

“[i]nvariably, the facts and circumstances surrounding the particular transaction will

loom large.”210 In determining actual control over a challenged transaction, the court

“can consider whether the [alleged controller] insisted on a particular course of

action, whether there were indications of resistance or second thoughts from other

fiduciaries, and whether the [alleged controller’s] efforts to get its way extended

beyond ordinary advocacy to encompass aggressive, threatening, disruptive, or

punitive behavior.”211

208
Voigt, 2020 WL 614999, at *11 (quoting Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co.,
2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006)) (internal quotation marks omitted).
209
Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *16 (Del. Ch. May 31, 2017)
(“To invoke entire fairness, the Complaint must contain well-pled facts ‘demonstrating [the
stockholder’s] actual control with regard to the particular transaction that is being challenged.’”
(quoting In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014))).
210
Basho, 2018 WL 3326693, at *26, *28.
211
Id. at *28 (citing Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114 (Del. 1994); In re
Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *15 (Del. Ch. Mar. 28, 2018); New Jersey
Carpenters Pension Fund v. Infogroup, Inc., 2011 WL 4825888, at *11 (Del. Ch. Sept. 30, 2011)).

41
 As an initial matter, it is, to my mind, not reasonably conceivable that Knauf

exercised actual control over the Board before the culmination of the Withhold

Campaign. That is, the Plaintiffs’ allegations of a hard-fought proxy contest urging

USG’s stockholders to withhold votes from USG’s director nominees makes it not

reasonably conceivable that prior to the success of the Withhold Campaign, Knauf

had “such formidable voting and managerial power that they, as a practical matter,

[were] no differently situated than if they had majority voting control [of USG].”212

The reason for this is simple: the Board appointed its nominees for election; Knauf

fought tooth-and-nail such that those nominees would not be re-elected by a vote of

USG’s stockholders; had Knauf exercised control over USG’s Board, it inferably

would have been able to control who the Board’s nominees were; and, inferably

would not have consented to the appointment of nominees who it would then oppose

in a public and bruising campaign.

Knauf did not formally prevail in the Withhold Campaign until USG’s 2018

annual meeting on May 9, 2018.213 But the Plaintiffs have pled that USG’s Board

acknowledged the “writing on the wall”214—that Knauf would be victorious—on

212
KKR, 101 A.3d at 992 (quoting In re PNB Holding Co. S’holders Litig., 2006 WL 2403999, at
*9 (Del. Ch. Aug. 18, 2006)).
213
Am. Compl., ¶ 161.
214
This is an apt reference by the Plaintiffs given that it meant that the days of the directors’ reign
were numbered.

42
April 30, 2018.215 Consequently, even drawing all reasonable inferences in favor of

the Plaintiffs, as I must, it is not reasonably conceivable that Knauf had actual control

over USG’s Board with regard to the Acquisition before April 30, 2018.

This leaves the crux of the Plaintiffs’ control claim: is it reasonably

conceivable that Knauf exercised actual control over USG’s Board with regard to

the Acquisition between April 30, 2018 and June 10, 2018, the date that the Board

unanimously approved the Merger Agreement?

The Plaintiffs’ briefing cites to scattershot allegations of the Amended

Complaint regarding Knauf and Berkshire Hathaway’s relationship, including that

Knauf (independently and through its coordination with Berkshire Hathaway)

“wielded substantial control” and that Knauf and Berkshire Hathaway had aligned

interests that manifested in a coordinated effort to pressure the Board into selling to

Knauf.216 The Plaintiffs contend that Knauf forced the Board into the Acquisition

and the Board succumbed because it was “confronted with the reality that its two

largest shareholders were working together to force the [Acquisition].”217

215
Id. ¶ 154 (“Defendant Scanlon also informed the Board that both ISS and Glass Lewis had
publicly announced their support for the [W]ithhold [C]ampaign and that, ‘in light of these
recommendations, and the fact that Berkshire and Shapiro have publicly stated that they intend to
vote against the directors,’ the Board was facing the likelihood of a majority vote against its four
director nominees.”).
216
Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Am. Class Action Compl., D.I. 95 “(Pls.’
Opp’n Br.”), at 47.
217
Id. at 47–48.

43
 “Stockholders can collectively form a control group where those shareholders

are connected in some legally significant way—e.g. by contract, common

ownership, agreement, or other arrangement—to work together toward a shared

goal.”218 But while the Plaintiffs’ briefing insinuates that Knauf and Berkshire

Hathaway formed a control group, the Amended Complaint does not explicitly

allege a control group—inferably, the Plaintiffs concede that such a finding is

foreclosed by my previous findings that Knauf and Berkshire Hathaway “never

entered a meeting of the minds” and that Berkshire Hathaway’s interests were “allied

with the other unaffiliated stockholders.”219 Regardless, the Amended Complaint

offers no contradicting reasonable inferences.

The Plaintiffs have pled facts from which I can reasonably infer that both

Knauf and Berkshire sought a sale of USG, but, importantly, the Plaintiffs have pled

no facts to permit me to reasonably infer the existence of a control group given the

fact that Knauf’s and Berkshire Hathaway’s interests diverged regarding the most

important detail of the Acquisition: the price. The only reasonable inference is that

Berkshire Hathaway’s interests aligned with the Board—not Knauf—insofar as the

Acquisition price was concerned. Inferably, Knauf (as the buyer) sought to pay as

218
van der Fluit v. Yates, 2017 WL 5953514, at *5 (Del. Ch. Nov. 30, 2017) (quoting Frank v.
Elgamal, 2012 WL 1096090, at *8 (Del. Ch. Mar. 30, 2012)) (internal quotation marks omitted).
219
Telephonic Ruling of the Court Re Pls.’ Mot. for Prelim. Inj. Relief, D.I. 71, at 12:21–13:1,
18:5–18:7.

44
little as possible, and Berkshire Hathaway (as USG’s largest stockholder) sought to

obtain as high a price as possible for its USG stock. Berkshire Hathaway allegedly

wished an exit, but that only indicates Berkshire Hathaway would have supported

an acquisition at the highest price exceeding its minimum return. Indeed, while there

are plenty of allegations that the Board (and Knauf) considered Berkshire

Hathaway’s potential actions after the culmination of the Withhold Campaign, there

are meager allegations of coordination between Knauf and Berkshire Hathaway.220

According to the Amended Complaint it was, in fact, USG’s CEO who informed

Berkshire Hathaway that Knauf wanted Berkshire Hathaway to sign the Voting

Agreement supporting the Acquisition and that “Knauf’s counsel would be in touch

with Berkshire Hathaway’s counsel.”221 That the Plaintiffs have pled that USG’s

CEO was the one to inform Berkshire Hathaway that Knauf wanted Berkshire

220
E.g. Am. Compl., ¶¶ 166 (“In the same breath, though, the Board also acknowledged that $47
was ‘a walk away price for Knauf’ and worried over ‘the likely next steps by Knauf and other
shareholders i.e., Berkshire in the event that the parties are unable to reach terms. During this
meeting, the Board also specifically considered the fact that, while Knauf was limited to making
only one public statement during its standstill period, Berkshire was not so limited, and the Board
engaged in a discussion of ‘the potential paths for Berkshire to exit USG’s stock, with a banker
noting that none of them are likely if Berkshire believes a sale of [sic] Knauf is possible.’ The
Board also received a presentation on alternative ways for Berkshire to exit its investment.”), 169
(“On May 29, 2018, Mr. Knauf reaffirmed Knauf’s $43.50 per share proposal. Internally, Knauf
prepared to present the Board with a ‘best and final’ ultimatum of $44.00 per share. In so doing,
it internally planned to leverage Berkshire’s continued support.”), 171 (“On June 6, 2018,
following discussion, which included a discussion of Knauf’s ‘perseverance in the current
instance’ and Mr. Knauf’s representation to Defendant Scanlon that Knauf expected the support
of Berkshire Hathaway, the Board determined that it was willing to accept this offer—marking a
decrease of more than $1 billion in what the Board considered fair value for the Company.”).
221
Id. ¶ 172.

45
Hathaway’s support for a sale of USG at $44.00 per share hardly suggests that Knauf

and Berkshire Hathaway were in coordination. At most, the Amended Complaint

pleads a shared goal of a sale of USG, supported by the Plaintiffs’ allegations

regarding the Withhold Campaign, but the Plaintiffs “must allege more than mere

concurrence of self-interest among certain stockholders to state a claim based on the

existence of a control group.”222 Because it is not reasonably conceivable that Knauf

and Berkshire Hathaway formed a control group with respect to Knauf’s Acquisition

of USG at $44.00 per share, to the extent that the Amended Complaint implies that

a control group was formed, such implication is not supported by well-pled facts.

Left with the allegation that Knauf—a 10.6% stockholder, mind you—was a

controller in its own right, the Amended Complaint fails to plead facts from which I

can reasonably infer Knauf’s actual control over USG’s Board. In In re Tesla

Motors, Inc. Stockholder Litigation,223 Vice Chancellor Slights remarked that “the

cases where this Court has found that a minority blockholder was, in fact, a

controlling stockholder recognize that it is the controller’s ‘ability to dominate the

corporate decision-making process’ that is important to the controlling stockholder

analysis.”224 Likewise, in In re Cysive, Inc. Shareholders Litigation,225 a post-trial

222
van der Fluit, 2017 WL 5953514, at *5 (quoting In re Crimson Expl. Inc. S’holder Litig., 2014
WL 5449419, at *15 (Del. Ch. Oct. 24, 2014)).
223
2020 WL 553902 (Del. Ch. Feb. 4, 2020).
224
Id. at *5 (quoting Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at
*4 (Del. Ch. Aug. 25, 2006)).
225
836 A.2d 531 (Del. Ch. 2003).

46
opinion, a 35% stockholder, who was the company’s “visionary founder and a

‘hands-on’ Chairman and CEO” was found to be a controlling stockholder.226 The

CEO in Cysive “had placed two of his close family members in executive positions

at the company,” giving him influence over “the ordinary managerial operations of

the company.”227 Thus, under these circumstances the minority blockholder

“possessed, as a practical matter, a combination of stock voting power and

managerial authority that enabled him to control the corporation, if he so wished.”228

Notably, the Plaintiffs do not plead that Knauf had any managerial authority.

Moreover, there is no reasonable inference that Knauf’s stock voting power alone

enabled Knauf to control USG “if [it] so wished.”229

Recognizing that a 10.6% voting stake leaves a steep uphill climb to plead the

Knauf was USG’s controlling stockholder, the Plaintiffs note that “[a]ctual control

over business affairs may stem from sources extraneous to stock ownership.”230 The

Plaintiffs argue that Knauf was a controller because it had the ability to take

“retributive action in the wake of rejection by an independent board.”231 The

226
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014) (citing Cysive,
836 A.2d 531).
227
Cysive, 836 A.2d at 551–52; see In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656,
665–66 (Del. Ch. 2013).
228
Morton’s, 74 A.3d at 666 (quoting Cysive, 836 A.2d at 553) (internal quotation marks and
alterations omitted).
229
Id. (quoting Cysive, 836 A.2d at 553) (internal quotation marks and alterations omitted).
230
In re Zhongpin Inc. S’holders Litig., 2014 WL 6735457, at *8 (Del. Ch. Nov. 26, 2014) rev’d
on other grounds, In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173 (Del. 2015).
231
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 441 (Del. Ch. 2002).

47
retributive action doctrine concerns the “risk that that those who pass upon the

propriety of the transaction might perceive that disapproval may result in retaliation

by the controlling shareholder.”232 Examples of retaliatory acts by a controlling

stockholder include “decid[ing] to stop dividend payments or to effect a subsequent

cash out merger at a less favorable price.”233

The “retributive action” put forth by the Plaintiffs is that Knauf launched the

Withhold Campaign.234 But the Plaintiffs fail to identify what precisely is retributive

about the attempt to obtain support from other stockholders in order to influence the

course of corporate decision making. Further, even if the Board’s defeat in the

Withhold Campaign led to the directors acceding to the Acquisition, it was the

approximately 75% vote of USG’s stockholders that would have caused such a

decision by the Board, not Knauf’s decision to launch the Withhold Campaign in the

first place. With this in mind, the Plaintiffs’ retributive action argument must then

rely only on the allegation that the simple decision to embark on the Withhold

Campaign was a retributive act. But any stockholder could have engaged in such a

232
Cysive, 836 A.2d at 552 n.31 (quoting Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997)).
233
Pure, 808 A.2d at 436 n.18 (quoting Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1116
(Del. 1994)).
234
Pls.’ Opp’n Br., at 49 (“Here, Plaintiffs have adequately alleged that Knauf exercised ‘actual
control’ and secured the sale that it demanded through its ability to take ‘retributive action,’ that it
did as a matter of fact take retributive action against the Board through its Withhold Campaign
when its overtures were initially rejected, and that the Board responded by acceding to the
[Acquisition].”).

48
campaign. For these reasons, it is not reasonably conceivable that the Withhold

Campaign was a retributive act evincing Knauf’s controller status.

The Plaintiffs have failed to plead facts from which I can reasonably infer that

Knauf exercised actual control over USG’s Board. Consequently, it is not

reasonably conceivable that Knauf was a conflicted controller of USG, nor that the

Acquisition is subject to entire fairness review on that basis. Thus, the Acquisition

is eligible for Corwin cleansing.235

B. The Stockholder Vote Was Not Fully Informed

Under Corwin, the Acquisition will be reviewed under the business judgment

rule if it was approved by a “fully informed, uncoerced majority of the disinterested

stockholders.”236 88.07% of USG’s votes outstanding approved the adoption of the

Merger Agreement.237 The Amended Complaint does not allege nor do the Plaintiffs

argue that a majority of USG’s disinterested stockholders did not approve the

Acquisition or that such disinterested stockholders were coerced. However, the

Plaintiffs do plead that the stockholder vote was not fully informed.238

235
Larkin v. Shah, 2016 WL 4485447, at *15 (Del. Ch. Aug. 25, 2016); In re Solera Holdings,
Inc. S’holder Litig., 2017 WL 57839, at *6 n.28 (Del. Ch. Jan. 5, 2017).
236
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 306 (Del. 2015).
237
Opening Br. in Support of Defs.’ Mot. to Dismiss the Verified Am. Class Action Compl., D.I.
87 (“Defs.’ Opening Br.”), Ex. D., at 2. I take judicial notice of USG’s Form 8-K, filed with the
SEC on September 26, 2018, disclosing the results of the stockholder vote to approve the Merger
Agreement.
238
Am. Compl., ¶ 204.

49
 In analyzing whether USG’s stockholder vote was fully informed, I must

determine whether USG’s disclosures “apprised stockholders of all material

information and did not materially mislead them.” 239 The operative question is

whether the Amended Complaint “supports a rational inference that material facts

were not disclosed or that the disclosed information was otherwise materially

misleading.”240 This inquiry is “necessarily fact intensive and the Court should deny

a motion to dismiss when developing the factual record may be necessary to make a

materiality determination as a matter of law.”241

To show that USG’s stockholder vote was uninformed, the Plaintiffs must

adequately allege that material facts were not disclosed or that the disclosures made

were materially misleading. “An omitted fact is material if there is a substantial

likelihood that a reasonable shareholder would consider it important in deciding how

to vote.”242 Stated otherwise, materiality turns on whether there is “a substantial

likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the ‘total mix’ of information

made available.”243 That disclosures must not be materially misleading means that

239
Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018) (citing Appel v. Berkman, 180 A.3d 1055,
1057 (Del. 2018)).
240
Id.
241
Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *10 (Del. Ch.
June 21, 2019).
242
Morrison, 191 A.3d at 282 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del.
1985)).
243
Id. at 283 (quoting Rosenblatt, 493 A.2d at 944).

50
“once [D]efendants traveled down the road of partial disclosure of the history

leading up to the [Acquisition] . . . they had an obligation to provide [USG’s]

stockholders with an accurate, full, and fair characterization of those historic

events.”244

Once the Plaintiffs identify a deficiency in the Proxy Statement the

Defendants have the burden to “establish that the alleged deficiency fails as a matter

of law in order to secure the cleansing effect of the vote.”245

The Plaintiffs allege that the Proxy Statement issued by the Board in

connection with the stockholder vote did not disclose: (1) the Board’s internal

valuation of USG on an inherent, standalone basis, and the Board’s “internal

misgivings” that $44.00 per share did not reflect USG’s intrinsic value,246 (2)

information regarding the Board’s motive to support the Acquisition, 247 and (3)

certain preliminary banker analyses that led the Board to reject Knauf’s $42.00 per

share offer.248

1. The Board’s View of USG’s Intrinsic Value

The Plaintiffs’ allegations regarding the Board’s view of USG’s intrinsic

value test the line between omissions and misleading disclosures. That is, the

244
Id. (quoting Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1280 (Del. 1994)).
245
English v. Narang, 2019 WL 1300855, at *10 (Del. Ch. Mar. 20, 2019) (quoting In re Solera
Holdings, Inc. S’holder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017)).
246
Am. Compl., ¶ 205.
247
Id. ¶¶ 84, 165, 171.
248
Id. ¶ 100.

51
Plaintiffs essentially plead that the Board determined USG had an intrinsic value,

that the Board did not disclose this material fact, and that by not disclosing its

intrinsic valuation the Board’s other disclosures, namely its representations that the

Acquisition was favorable to USG’s stockholders, were rendered materially

misleading.249

The Plaintiffs have alleged that the Board believed that USG’s intrinsic value

was $50.00 per share, and have pled that this fact was not disclosed to USG’s

stockholders.250 Among other retorts, the Defendants dispute whether the Board had

a “personal and unanimous” opinion of USG’s intrinsic value.251 But the Proxy

249
The Proxy Statement reads: “The Board considered that the transaction value was more
favorable to our stockholders than the potential value that would reasonably be expected to result
from other alternatives available to the Company, including the continued operation of the
Company on a standalone basis and other potential actionable strategic transactions.” Defs.’
Opening Br., Ex. C (“Proxy Statement”), at 45.
250
Am. Compl., ¶¶ 164, 193.
251
For example, the Plaintiffs cite USG’s opening counteroffer of $50.00 per share, together with
the disclosure that the counteroffer was informed by the Board’s view of intrinsic value, as support
for their allegation that the Board had a view of USG’s intrinsic value. See Pls.’ Opp’n Br., at 8.
The Defendants urge that the USG’s negotiating position (i.e. USG’s counteroffer of $50.00 per
share) should not be confused with the Board’s opinion of USG’s value. See In re OPENLANE,
Inc., 2011 WL 4599662, at *15 (Del. Ch. Sept. 30, 2011) (“[A] counteroffer is not necessarily a
reliable indicator of a Board’s view of the Company’s value.”); Van de Walle v. Unimation, Inc.,
1991 WL 29303, at *17 (Del. Ch. Mar. 7, 1991) (“[T]he $120 to $150 million figures were not
intended as the board’s opinion of the company’s value. They were merely an asking price,
deliberately set high . . . .”). The Defendants are correct that basic negotiation tactics instruct that
a counteroffer is not necessarily representative of value. OPENLANE, 2011 WL 4599662, at *15
(“[R]egardless of what a selling party may consider a company’s fair value to be, that person will
seek the highest price she can receive, even if that price is far above the presumed fair value. Thus,
it is not clear from a counteroffer what a seller believes a company’s fair value to be.”). But, the
Plaintiffs cite the counteroffer merely as support of their allegation, which is explicitly pled, that
the Board’s view of intrinsic value was $50.00; thus, the Defendants’ argument in this regard is
unpersuasive.

52
Statement frequently cites to the Board’s view of USG’s intrinsic value.252

Therefore, it is not an unreasonable inference that the Board actually had formed a

252
By my count, the Proxy Statement references USG’s intrinsic value fifteen times. Proxy
Statement, at 3 (“Our focus on intrinsic value, not daily share price, is evident in the timing of our
proposal.”), 35 (“She also informed Mr. Buffett that the Board had determined that the per share
price proposed by Knauf did not adequately reflect the Company’s intrinsic value.”) (“Ms. Scanlon
stated that the Board would consider any bona fide offer that reflected the Company’s intrinsic
value.”) (“On December 20, 2017, the Company provided a written response to Knauf indicating
that the Board, in consultation with its financial and legal advisors, had considered Knauf’s
proposal and had determined that the per share purchase price was wholly inadequate given the
Company’s intrinsic value and therefore it was not in the best interest of the Company’s
stockholders.”) (“Ms. Scanlon explained certain factors the Board considered in determining the
Company’s intrinsic value, as well as how the Board viewed U.S. tax reform.”) (“She also noted
that Knauf would need to offer a higher value before the Company’s senior management would be
authorized to share non-public information and that the Board would consider all bona fide
proposals that reflected the Company’s intrinsic value.”), 36 (“The Board, members of the
Company’s senior management and the advisors also discussed certain possible transaction
complexities that could arise relating to the Company’s UBBP joint venture, the fact that Berkshire
Hathaway was positioned differently than the Company’s other stockholders and would need to
take a substantial discount to market to exit its position in the Company’s stock in the absence of
a sale of the Company, the supermajority vote required by the Company’s stockholders to approve
a merger with Knauf and possible actions by Knauf or other stockholders to attempt to acquire the
Company for less than its intrinsic value.”) (“The Board then discussed with the Company’s senior
management and representatives of Jones Day, Goldman Sachs and J.P. Morgan the possible
responses to Knauf’s revised proposal and methods to give Knauf additional direction that could
cause Knauf to meaningfully improve its proposal to better reflect the Company’s intrinsic value,
including the strategy of rejecting Knauf’s offer so that Knauf would further increase its
proposal.”) (“The Board authorized Ms. Scanlon to send a written response to Knauf rejecting the
current $42.00 proposal, while also providing additional information regarding the elements of the
Company’s business plan that the Board believed supported a higher intrinsic value for the
Company.”), 37 (“Ms. Scanlon again reiterated that the Board would engage around any bona fide
proposal that reflects the Company’s intrinsic value, and offered to have a meeting between the
respective financial advisors to discuss the Company’s views on value.”) (“The Board requested
that legal counsel attend any meeting of financial advisors given the competitive concerns and also
confirmed that the purpose of the meeting was not to negotiate value, but to provide insights on
how the parties were thinking about intrinsic value.”) (“The Company’s advisors again reiterated
that Knauf’s proposed price was not within a range to support the additional costs and distraction
to the Company of engaging in a diligence process with Knauf or the risks to the Company of
sharing material non-public information with a strategic competitor, and it did not appear that
Knauf would be willing to propose a price per share that would be reflective of the Board’s view
of the intrinsic value of the Company.”), 38–39 (“The letter to stockholders indicated that although
the Board had not made a decision to sell the Company, it remained open to evaluating any
proposal to acquire the Company, as it had done with Knauf’s proposals, and that if Knauf, or any

53
view of USG’s intrinsic value, supported by the Plaintiffs’ pleading that Scanlon

told Knauf that “the Board believes that the intrinsic value of [USG] is $50 a

share.”253

The Defendants also contend that if the Board did have an opinion of USG’s

intrinsic value the Board disclosed this opinion by disclosing (i) that it authorized

Scanlon to begin negotiations within a range of $48.00 to $51.00 per share, and (ii)

USG’s first counterproposal to Knauf of $50.00.254 The Defendants argue that these

disclosures, along with the disclosure that USG attempted to persuade Knauf to

increase its offer based on the Board’s view of USG’s intrinsic value, were sufficient

to make the stockholder vote fully informed.255 But, as the Defendants themselves

have successfully argued,256 negotiating price is not indicative of a view of intrinsic

value. More fundamentally, it cannot be seriously disputed that the Proxy Statement

did not disclose the Board’s view of USG’s intrinsic value, because the Proxy

other viable bidder, made a proposal that reflected the Company’s intrinsic value, the Board would
seek to negotiate an appropriate confidentiality arrangement to allow it to share information with
the potential counterparty.”) (“The Company also filed a letter to its stockholders, which among
other things, outlined its disagreements with Knauf’s public statements and reiterated the Board’s
view that Knauf’s proposal did not represent the intrinsic value of the Company.”), 40 (“The Board
also authorized Ms. Scanlon to begin negotiations on value within a range of $48.00 and $51.00
per share and discussed the pros and cons of issuing a public statement regarding the Board’s view
of intrinsic value, but decided not to issue such a statement.”) (emphasis added to all).
253
Am. Compl., ¶ 164.
254
See Proxy Statement, at 40–41.
255
See id. at 41–42.
256
See n.251, supra.

54
Statement discloses that the Board determined not to disclose its view of intrinsic

value.257

Even if the Board had a view of intrinsic value, and even if it did not disclose

such a view, the Defendants argue that the Board’s undisclosed belief of USG’s

intrinsic value was not material. To this end, Vice Chancellor Laster noted in In re

Appraisal of Stillwater Mining Co.258: “Whether called fundamental value, true

value, intrinsic value, or fair value, the really-real value of something is always an

unobservable concept. No valuation methodology provides direct access to it.

Fundamental value is like a Platonic form, and the various valuation methodologies

only cutouts casting shadows on the wall of the cave.”259 In this vein, the Defendants

contend that any belief the Board may have had regarding USG’s intrinsic value was

amorphous, and that the material fact required to be disclosed, and that was

disclosed, was that the Board considered $44.00 a share to provide “attractive value”

to USG’s stockholders considering financial valuations of the company260 and “the

possibility that, in the absence of a proposed strategic transaction with Knauf, when

factoring in the cyclicality of the industry in which [USG] operates, the trading price

257
Proxy Statement, at 40 (“The Board also authorized Ms. Scanlon to begin negotiations on value
within a range of $48.00 and $51.00 per share and discussed the pros and cons of issuing a public
statement regarding the Board’s view of intrinsic value, but decided not to issue such a statement.”
(emphasis added)).
258
2019 WL 3943851 (Del. Ch. Aug. 21, 2019).
259
Id. at *51.
260
On DCF, unaffected market price, recent precedent transactions, and trading multiple bases.

55
of [USG’s] common stock . . . may decrease in relation to its trading price prior to

the initial public announcement of Knauf’s proposal.”261

I agree with Vice Chancellor Laster’s eloquent explanation that “intrinsic

value” or “fair value” are nebulous, even illusory, concepts. Belief in any particular

intrinsic value, by any being less than an omniscient god, is necessarily a belief that

is subjective in nature.262 But that is not determinative of the disclosure issue at

hand. The Amended Complaint avers that the Defendants had a belief as to the

precise intrinsic value of USG, and that their disclosures in the Proxy Statement

repeatedly imply that such a belief was formed. They, as directors, had a better

opportunity to develop a reliable, if still subjective, belief as to intrinsic value than

did USG’s unaffiliated stockholders.

The animating question is whether by disclosing that the directors had reached

a conclusion as to intrinsic value, and in not disclosing what that conclusion was but

nonetheless recommending the Acquisition, is it reasonably conceivable that the

Defendants created a proxy that was materially misleading to stockholders. I find

that the answer is yes.

USG’s stockholders should have been “informed of the value that the [Board]

placed on [USG] at a point in the negotiations when it had sufficient financial

261
Proxy Statement, at 45.
262
But see 8 Del. C. § 262.

56
information to make a serious offer.”263 This disclosure requirement ordinarily

refers to the value of a price proposal in negotiations.264 But here, because the Proxy

Statement disclosed that the Board held a view of intrinsic value and frequently

referenced such a view during its disclosures about the sales process,265 USG’s

stockholders were entitled to know the Board’s opinion of USG’s intrinsic value,

even if it was unachievable due to market forces and Knauf’s threats to launch a

hostile takeover.

If the Board “believed that one estimate was more accurate or realistic than

another, it was free to endorse that estimate and to explain the reason for doing so;

but full disclosure, in [my] view, was a prerequisite.”266 The Amended Complaint

supports a rational inference that the Board held a view of USG’s intrinsic value that

it referred to and relied on throughout the sales process, and that the Board’s view

of intrinsic value was not disclosed to USG’s stockholders. There is a substantial

likelihood that a reasonable stockholder would have considered the Board’s oft-

mentioned view of intrinsic important in deciding how to vote.267 Because this view

of intrinsic value was not disclosed, there is a rational inference that material facts

263
In re Dell Techs. Inc. Class V S’holders Litig., 2020 WL 3096748, at *40 (Del. Ch. June 11,
2020) (quoting In re S. Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 795 (Del. Ch.
2011)).
264
E.g. id.; S. Peru Copper, 52 A.3d at 795.
265
See n.252, supra.
266
Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977).
267
Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018).

57
were not disclosed, and consequently, USG’s stockholder vote was not fully

informed.268

Since the stockholder vote was insufficient to impose Corwin, I could end my

Corwin analysis here. However, given the distinct but related issues regarding

whether the Board’s disclosures were in good faith, I think it is appropriate to discuss

the other alleged non-disclosures in the Proxy Statement.

2. The Board’s Motives

The Plaintiffs also contend that the Proxy Statement misrepresented the

Board’s motives for approving the Acquisition. The Plaintiffs cite allegations that

the Board did not disclose its discussion of Berkshire Hathaway’s “previously stated

desire for an eventual exit,” that Knauf “did not intend to stop pursuing an

acquisition of USG,” and the Board’s concern of whether Knauf “would be obligated

to vote for [USG’s] director nominees at the next annual meeting.”269

Regarding Berkshire Hathaway’s desires, the Plaintiffs essentially contend

that Berkshire Hathaway forced the Board to capitulate to the Acquisition, and the

Proxy Statement did not disclose that this was the source of the Board’s support for

the Acquisition. The Proxy Statement did disclose that “[t]he Board considered the

268
To the extent disclosures in the Proxy Statement were rendered materially misleading because
the Board’s view of USG’s intrinsic value was not disclosed, USG’s stockholder vote was likewise
not fully informed.
269
Am. Compl., ¶¶ 94, 165, 171.

58
fact that a significant number of the Company’s stockholders had urged the

Company to engage with Knauf following the public disclosure of Knauf’s proposal

to acquire the Company for $42.00 per share.”270 It is not reasonably conceivable

that this was not a disclosure of the Board’s consideration of stockholder desires for

a sale of USG, particularly because the Withhold Campaign was framed by both

sides as a referendum on USG’s $42.00 per share offer.271 USG’s director nominees

lost by a wide margin, and even “[g]etting a substantial, but less than a majority,

withhold vote is still an embarrassment and often induces board actions.”272 The

Amended Complaint also acknowledges that Berkshire Hathaway’s support for the

Withhold Campaign was widely known.273 Thus, it is not reasonably conceivable

that the effect of the loss of the Withhold Campaign, i.e. overwhelming support of

Berkshire Hathaway’s desire for a sale at $42.00 per share, was concealed from

USG’s stockholders via the Proxy Statement. It is therefore not reasonably

270
Proxy Statement, at 47.
271
E.g. Am. Compl., ¶¶ 140 (A Knauf press release stated: “Additionally, after Knauf initiated its
‘Withhold’ campaign, Berkshire Hathaway publicly stated its intention to vote against USG’s
director nominees. Knauf believes that this is a clear indication that Berkshire Hathaway views
$42.00 as a reasonable offer price.”), 150 (The Board’s investor presentation stated: “If Knauf
wants to buy USG, it should meaningfully improve its offer price — a vote FOR USG’s Board
nominees strengthens our negotiating position with Knauf.” (capitalization in original)), 151 (“The
Board also stated: ‘Knauf . . . has launched a campaign to encourage you to vote against USG’s
Board nominees. Knauf is doing this in support of its $42 per share proposal to acquire USG . . .
.’”).
272
Sherwood v. Ngon, 2011 WL 6355209, at *10 (Del. Ch. Dec. 20, 2011) (quoting Marcel Kahan
& Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347, 1419 (2011)).
273
Am. Compl., ¶ 140 (“Berkshire Hathaway, a long-term USG shareholder with an approximately
31% ownership stake . . . has publicly stated its intention to VOTE AGAINST USG’s four director
nominees.” (capitalization in original)).

59
conceivable that the Proxy Statement did not disclose the effect of Berkshire

Hathaway’s desire to exit its investment on the Board’s decision to approve the

Acquisition.

The Plaintiffs also contend that the Proxy Statement only disclosed that a

delay in negotiations “could result in Knauf potentially . . . commencing a hostile

tender offer to acquire [USG] at a lower price,” when the Plaintiffs allege that the

Board knew as a certainty that Knauf would launch a hostile tender offer because

Mr. Knauf told Scanlon that “should Knauf and USG not be able to reach agreement,

Knauf did not intend to stop pursuing an acquisition of USG.” 274 But it is not

reasonably conceivable that the Board knew as a certainty that Knauf would launch

a hostile tender offer,275 and, nevertheless, the Amended Complaint “alleges no facts

suggesting that the undisclosed information is inconsistent with, or otherwise

significantly differs from, the disclosed information.”276 What the Proxy Statement

disclosed—that failure to approve the Acquisition could result in Knauf launching a

hostile tender offer—does not materially differ from Mr. Knauf’s alleged statement

made in the midst of tense negotiations. Consequently, it is not reasonably

conceivable that there was a material omission in the Proxy Statement with regard

to the prospect of a hostile tender offer by Knauf.

274
Proxy Statement, at 45 (emphasis added); Am. Compl., ¶ 165.
275
There is no allegation that any Board member is a clairvoyant.
276
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000).

60
 Remaining of the Plaintiffs’ allegations regarding omissions of the Board’s

motives is the Board’s consideration of whether, absent the transaction, Knauf

“would be obligated to vote for [USG’s] director nominees at the next annual

meeting.”277 But it is unclear what effect the Amended Complaint alleges the

Board’s consideration of an upcoming stockholder meeting had on its motives to

approve the Acquisition, and to the extent it was tied to Knauf’s ability to engage in

further hostilities, that was disclosed. It is not reasonably conceivable that disclosing

whether Knauf would have supported the Board’s nominees at the following year’s

annual meeting would have “been viewed by the reasonable investor as having

significantly altered the ‘total mix’ of information made available,” when the Proxy

Statement already disclosed the possibility that Knauf would go hostile if the

stockholders did not immediately approve the Acquisition.278 It is clear from the

Proxy Statement that in recommending that USG’s stockholders approve the

Acquisition the Board considered and disclosed the possibility of future hostilities

between itself and Knauf.

277
Am. Compl., ¶ 171.
278
Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018) (quoting Rosenblatt v. Getty Oil Co., 493
A.2d 929, 944 (Del. 1985)).

61
 3. Banker Analyses

The final alleged nondisclosure is the banker analyses that informed the

Board’s decision to reject Knauf’s $42.00 per share offer as “wholly inadequate.”279

Specifically, the Plaintiffs contend that these preliminary analyses showed that the

$42.00 per share proposal was at the low end of the analyses’ DCF valuations, below

the average for premium analyses, and did not appear to account for lower corporate

tax rates.280

But the Board was only required to provide a “fair summary of the substantive

work performed by the investment bankers upon whose advice the recommendations

of their board as to how to vote on a merger or tender rely.”281 The Proxy Statement

did provide a fair summary of the preliminary analyses, and regardless the financial

analyses underlying the Board’s recommendation that USG’s stockholders approve

the Acquisition282 were disclosed in a manner that the Plaintiffs do not challenge.

The Plaintiffs attempt to fit the square peg of the facts alleged here into the

round hole of Clements v. Rodgers,283 which involved two analyses where the latter

was “more pessimistic,” and there was a plausible inference “that the [valuations]

changed in order to justify a bargaining outcome.”284 Conversely, there is no

279
Am. Compl., ¶¶ 100–02.
280
Id. ¶ 100.
281
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002).
282
Proxy Statement, at 36, 50–63.
283
790 A.2d 1222 (Del. Ch. 2001).
284
Id. at 1243.

62
allegation here that the analyses underlying the Acquisition were fudged to support

the Board’s desired-for outcome, nor any allegation from which I can reasonably

infer that differences that could have existed between the preliminary and final

analyses were pretense. Consequently, it is not reasonably conceivable that material

facts were not disclosed regarding the preliminary banker analyses.

C. The Plaintiffs Have Not Adequately Pled a Non-Exculpated Claim for
Breach of Fiduciary Duty

Because there is a rational inference that USG’s stockholder vote was not fully

informed, Corwin is inapplicable, and the Plaintiffs are entitled to a review of

whether they have adequately pled breach of fiduciary duty claims against USG’s

directors. USG’s Restated Certificate of Incorporation (the “Charter”) contains an

exculpatory provision under 8 Del. C. § 102(b)(7) that insulates the Defendants from

liability for violations of their duty of care.285 Consequently, under In re

Cornerstone Therapeutics Inc. Stockholder Litigation,286 the Plaintiffs must plead a

non-exculpated breach of fiduciary duty claim, that is, one that implicates the

Defendants’ duty of loyalty.287 “This ‘rule applies regardless of the underlying

standard of review for the transaction.’”288

285
Defs.’ Opening Br., Ex. E., at Article Eleventh. I take judicial notice of USG’s Charter.
286
115 A.3d 1173 (Del. 2015).
287
Id. at 1179–80.
288
Reith v. Lichtenstein, 2019 WL 2714065, at *18 (Del. Ch. June 28, 2019) (quoting Cornerstone,
115 A.3d at 1179).

63
 To plead a non-exculpated claim sufficient to survive this Motion to Dismiss,

the Plaintiffs must plead facts “supporting a rational inference that the director[s]

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.’”289 A “plaintiff must [adequately plead] a

loyalty breach against each individual director; so-called ‘group pleading’ will not

suffice.”290

The Plaintiffs allege that the Board breached its duty of loyalty because it

lacked independence and was interested in the Acquisition. The Plaintiffs also

contend that the Board otherwise acted in bad faith in approving the Acquisition.

But, to my mind, it is not reasonably conceivable under the facts pled that the Board

breached a non-exculpated duty, and consequently the Plaintiffs’ claims must be

dismissed.

1. It is Not Reasonably Conceivable that the Board Lacked
Independence or Was Interested in the Acquisition

Other than by pleading bad faith (which I address, infra), a plaintiff can plead

a non-exculpated breach of duty by pleading facts from which it is reasonably

289
Cornerstone, 115 A.3d at 1179–80.
290
Reith, 2019 WL 2714065, at *18 (quoting In re Tangoe, Inc. S’holders Litig., 2018 WL
6074435, at *12 (Del. Ch. Nov. 20, 2018)).

64
conceivable that the defendants lacked independence or were interested in the

transaction.291

“Independence means that a director’s decision is based on the corporate

merits of the subject before the board rather than extraneous considerations or

influences.”292 “Establishing a lack of independence requires pleading allegations

that the directors are beholden to the [interested party] or so under [its] influence

that their discretion would be sterilized.”293 The Plaintiffs allege that the Defendant

Board members lacked independence from Knauf because of their alleged fear of

Knauf.

The Plaintiffs contend that after Knauf succeeded in its Withhold Campaign,

the Board abandoned its standalone plan for USG, rushed or abandoned other

potential buyers, and acceded to the Acquisition even though it had “misgivings”

about the deal.294 But the Plaintiffs allege no facts from which it can be reasonably

inferred that the Board’s actions were the result of anything other than the corporate

merits of the subject. The Plaintiffs simply argue that the Board’s actions “have

little rational explanation other than fear of Knauf.”295 But “Delaware law presumes

291
Morrison v. Berry, 2019 WL 7369431, at *13 (Del. Ch. Dec. 31, 2019).
292
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *21 (Del. Ch. Oct. 24, 2014)
(quoting Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)).
293
Id. (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)) (internal quotation marks
omitted).
294
Am. Compl., ¶ 8; see Pls.’ Opp’n Br., at 52.
295
Pls.’ Opp’n Br., at 52.

65
the independence of corporate directors,” and the Plaintiffs must overcome the

presumption by alleging facts as to Board’s lack of independence.296 The Plaintiffs’

conclusory allegation that no other explanation exists for the Board’s actions is

insufficient to carry their burden.297 That the Board chose to approve the Acquisition

three months after it had told Knauf that its $42.00 proposal was “wholly

inadequate” and that the Board was “highly focused on the intrinsic value of [its]

long-term strategic plan and measuring that against [$42.00 per share]” 298 is

insufficient to reasonably infer lack of independence because the Plaintiffs offer no

reasonable basis from which to conclude that the Board’s decision to accept the later

$44.00 offer was the result of “extraneous considerations or influences.”299 Again,

it is the Plaintiffs’ burden to plead lack of independence.300

Additionally, to my mind it is not clear how “fear” evinces lack of

independence when such fear, as alleged, results from a withhold campaign that the

Board vigorously contested. The Plaintiffs fail to allege facts that show the Board

simply capitulated after its defeat; on the contrary the Proxy Statement reflects

296
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 995 (Del. Ch. 2014).
297
Pfeffer v. Redstone, 965 A.2d 676, 685 (Del. 2009) (“[C]onclusory allegations need not be
treated as true, nor should inferences be drawn unless they truly are reasonable.” (quoting Feldman
v. Cutaia, 951 A.2d 727, 731 (Del. 2008))).
298
Am. Compl., ¶ 112;
299
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *21 (Del. Ch. Oct. 24, 2014)
(quoting Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)).
300
Actions inexplicable as a matter of business judgment, of course, may be relevant to allegations
of lack of good faith, a matter addressed, infra.

66
robust negotiations between USG and Knauf in May and June of 2018.301 The only

reasonable inference is that any influence that Knauf had on the Board resulted from

quotidian calculations of corporate interest, not a disabling lack on independence.

“Fear” of a corporate takeover threat—here fully justified after Knauf’s resounding

withhold victory—is a nod to reality, not a disabling extraneous influence. For these

reasons, it is not reasonably conceivable that the Board lacked independence from

Knauf.

The Plaintiffs also attempt to plead a non-exculpated claim by invoking the

Defendants’ alleged interestedness in the Acquisition. The Plaintiffs plead that all

Defendants other than Scanlon—that is, all eight of USG’s Board members other

than USG’s CEO (the “Non-Scanlon Defendants”)—were interested in the

Acquisition because a public ouster by Knauf would have imperiled their other

business and career interests, which they were not willing to sacrifice in light of their

relatively small financial interest in a higher sale price. If adequately pled, such a

claim would survive the Defendants’ Motion to Dismiss because “[w]hen entire

fairness is invoked at the pleading stage, the plaintiffs will be able to survive a

motion to dismiss by interested parties regardless of the presence of an exculpatory

301
E.g. Am. Compl., ¶¶ 164 (“Mr. Knauf rejected the Company’s $50.00 per share counterproposal
and indicated that Knauf was willing to increase its proposed price per share to $43.50 . . .
Defendants Scanlon and Leer . . . indicated that they believed that the Board may be willing to
support a sale as low as $47.00 per share.”), 170 (“On June 5, 2018, Mr. Knauf delivered by email
a revised written proposal, together with a markup of the merger agreement, in which he
communicated Knauf’s ‘best and final’ offer of $44.00 per share.”).

67
charter provision because their conflicts of interest support a pleading-stage

inference of disloyalty.”302 “Interestedness means that the directors ‘appear on both

sides of a transaction [or] expect to derive any personal benefit from it in the sense

of self-dealing, as opposed to a benefit which devolves upon the corporation or all

stockholders generally.’”303 That the extraneous “benefit” here is actually the

avoidance of a detriment is of no moment to the analysis. The Defendant directors

must be considered individually in determining whether they were interested in the

Acquisition in breach of their duty of loyalty.304

The Amended Complaint details the other business interests and positions of

the Non-Scanlon Defendants which the Plaintiffs contend made the Non-Scanlon

Defendants interested in the Acquisition. They include director and officer positions

at other public companies, and board positions at nonprofit organizations.305 Though

the Defendants must be considered individually, it suffices to say that the Plaintiffs’

argument with respect to each of the Non-Scanlon Defendants’ interest in the

Acquisition (given their various reputational interests) is identical. The Plaintiffs

allege that each of the Non-Scanlon Defendants faced an “inherent positional

302
In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *19 n.244
(Del. Ch. June 25, 2018) (quoting In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d
1173, 1180–81 (Del. 2015)).
303
Crimson, 2014 WL 5449419, at *21 (quoting Aronson, 473 A.2d at 812).
304
Cornerstone, 115 A.3d at 1182 (“[E]ach director has a right to be considered individually when
the directors face claims for damages in a suit challenging board action.”).
305
Am. Compl., ¶ 186.

68
conflict” regarding the Acquisition because they had much to lose from a

“potentially career-ending and reputation killing proxy fight loss,” little to gain from

standing up to Knauf, and the Acquisition afforded them a liquidity event in the sale

of their equity interests in USG.306

The Plaintiffs’ principal argument is that Non-Scanlon Defendants capitulated

to Knauf because Knauf had made it known they would not stop pursuing an

acquisition of USG, and a proxy fight loss would damage their other business

interests, positions in other companies, and memberships on other public boards.307

Quoting at length a law review article by then-Chief Justice Strine, the Plaintiffs

contend that independent directors—such as the Non-Scanlon Defendants—are

“highly sensitive to resisting institutional campaigns at any company on whose

board they serve for fear that they will be targeted for withhold campaigns at all

companies with which they are affiliated.”308

Regardless of the merits of Chief Justice Strine’s argument, it is simply not

applicable here. Under the facts alleged, it is not reasonably conceivable that the

Non-Scanlon Defendants capitulated to Knauf in selfish defense of their outside

reputational interests because USG’s directors had already lost a public fight with

306
Id. ¶¶ 186–91; see Pls.’ Opp’n Br., at 53.
307
See Am. Compl., ¶ 186.
308
Pls.’ Opp’n Br., at 55 (quoting Leo E. Strine, Jr., Who Bleeds When the Wolves Bite?: A Flesh-
and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System,
126 Yale L.J. 1870, 1926 (2017)).

69
Knauf. Withhold votes were first proposed by Professor Grundfest as a referendum

on managerial performance, and they “represent an important form of shareholder

activism.”309 The Amended Complaint recounts at length the publicity surrounding

the Withhold Campaign, including Warren Buffett’s public opposition to the Board,

and that both ISS and Glass Lewis supported Knauf. Thus, the Board had already

lost exactly the type of public fight that the Plaintiffs contend made the Board

interested.310

In fact, the Plaintiffs plead that in the midst of the Withhold Campaign, Knauf

“threat[ened]” that the Board “would surely want resolution [on a deal] prior to the

annual meeting of stockholders scheduled for May 9, 2018, to avoid a vote against

the Company’s four director nominees.”311 That is, Knauf alluded to the Defendants’

opportunity to take the path that the Plaintiffs suggest amounts to a breach of the

duty of loyalty. But the Board declined this course of action, instead proceeding

with negotiations on a more measured timeline, thereby accepting the reputational

harm of an institutional campaign defeat in order to continue to pursue the corporate

interest.

309
Marcel Kahan & Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347, 1358,
1374 (2011).
310
Pope Clement VII learned in dealing with Henry VIII that excommunication is a tool that loses
its edge after it is employed. It is the same with withhold campaigns, I presume.
311
Am. Compl., ¶ 156 (internal quotation marks omitted).

70
 Likewise, the Plaintiffs ask me to draw the inference that the Non-Scanlon

Defendants “for the purpose of protecting their reputations as fiduciaries, breached

their fiduciary duties, risking the far greater blackening of their fiduciary

reputations.”312 Ironic if true. This sounds like a misplaced motivation, because, I

believe it is. Given the circumstances alleged by the Plaintiffs, it is not reasonably

conceivable that the Non-Scanlon Defendants capitulated to Knauf to protect their

reputations, after the Withhold Campaign’s success, when any reputational loss that

could come from a public loss to Knauf had already occurred.

The Plaintiffs’ remaining allegations regarding the interestedness of the Non-

Scanlon Defendants are likewise not reasonably conceivable. The Plaintiffs allege

that the Non-Scanlon Defendants did not have enough of a financial interest to push

Knauf for a better price but at the same time had enough pecuniary interest in a

liquidity event such that they were interested in the Acquisition. But this Court has

held that “[w]hen directors or their affiliates own ‘material’ amounts of common

stock, it aligns their interests with other stockholders by giving them a ‘motivation

to seek the highest price’ and the ‘personal incentive as stockholders to think about

the tradeoff between selling now and the risks of not doing so.’”313 The Non-Scanlon

Defendants’ personal financial interest in liquidating their USG stock thus aligned

312
Morrison v. Berry, 2019 WL 7369431, at *14 (Del. Ch. Dec. 31, 2019).
313
Chen v. Howard-Anderson, 87 A.3d 648, 671 (Del. Ch. 2014) (quoting In re Dollar Thrifty
S’holder Litig., 14 A.3d 573, 600 (Del. Ch. 2010)).

71
their interests with stockholders and they did not receive a benefit in that regard other

than “a benefit which devolves upon the corporation or all stockholders

generally.”314 Given that it is not reasonably conceivable that the Non-Scanlon

Defendants were interested in the Acquisition due to their fear of a public loss to

Knauf, it is likewise not reasonably conceivable that the personal give of pushing

for a higher price (i.e. putting their reputations on the line) was not worth the get (in

the form of increased consideration).315 Consequently, it is not reasonably

conceivable that the Non-Scanlon Defendants’ incentives were akilter, nor that they

were interested in the Acquisition. I note that the Amended Complaint is silent with

respect to any individual director’s need for “fire sale” liquidity, nor does the lengthy

resistance to Knauf indicate it is reasonably conceivable.

With regard to Scanlon, the Plaintiffs simply allege that she stood to receive

a more than $36 million “golden parachute” in connection with the Acquisition.316

But I need not address whether Scanlon was interested in the Acquisition; since the

Plaintiffs have not pled facts from which it is reasonably conceivable that a majority

314
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); accord Chen, 87 A.3d at 671 (“If the decision
is made to sell, ‘[a] director who is also a shareholder of his corporation is more likely to have
interests that are aligned with the other shareholders of that corporation as it is in his best interest,
as a shareholder, to negotiate a transaction that will result in the largest return for all
shareholders.’” (quoting Orman v. Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002))).
315
Notwithstanding the Plaintiffs’ allegation that the Defendants owned relatively little USG stock,
Am. Compl., ¶ 188, because there was no further threat of reputational harm, they faced only the
upside of increased consideration for their USG stock.
316
Id. ¶ 190.

72
of the Board was interested in the Acquisition, it is not reasonably conceivable that

the Acquisition would be subject to entire fairness due to the interestedness of

Scanlon alone.317 Consequently, there can be no pleading-stage inference of

disloyalty in this regard, and the Plaintiffs’ allegations of interestedness are

insufficient to state a non-exculpated claim for breach of fiduciary duty.

2. It is Not Reasonably Conceivable that the Defendants Acted in Bad
Faith

Other than pleading lack of independence or interestedness, the Plaintiffs can

survive the Defendants’ Motion to Dismiss by pleading facts supporting a rational

inference that the Defendants acted in bad faith.318 “A director acts in bad faith

where he or she ‘intentionally fails to act in the face of a known duty to act,

demonstrating a conscious disregard for his or her duties.’”319 “A demonstration of

bad faith requires acts or omissions taken against the interest of [USG], with

scienter.”320

317
City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr. v. Comstock, 2016 WL 4464156, at
*18 (Del. Ch. Aug. 24, 2016) (“If a plaintiff alleging a duty of loyalty breach is unable to plead
facts demonstrating that a majority of a board that approved the transaction in dispute was
interested and/or lacked independence, the entire fairness standard of review is not applied and the
Court respects the business judgment of the board.” (quoting Orman, 794 A.2d at 23)).
318
In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1180 (Del. 2015).
319
van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. Nov. 30, 2017) (quoting In re Answers
Corp. S’holder Litig., 2012 WL 1253072, at *7 (Del. Ch. Apr. 11, 2012)).
320
Morrison v. Berry, 2019 WL 7369431, at *14 (Del. Ch. Dec. 31, 2019).

73
 a. Omissions in the Proxy Statement

The Plaintiffs suggest that the material non-disclosure of the Board’s view of

intrinsic value (and its consequent “misgivings” about the Acquisition) give rise to

an inference of bad faith. This non-disclosure, of course, permitted the Plaintiffs to

plead around Corwin.

In contrast with the required showing to plead around Corwin, a pleading of

bad faith “requires a pleading of facts with respect to the [maldisclosures] from

which I may reasonably infer breach of the duty of loyalty, and not simply adequate

pleading of a [maldisclosure].”321 An adequate pleading of bad faith must plead that

the maldisclosure was “intentional and constitute[d] more than an error of judgment

or gross negligence.”322 This standard is entirely distinct from the required pleading

to show an uninformed vote under Corwin, which merely requires that the complaint

“when fairly read, supports a rational inference that material facts were not disclosed

or that the disclosed information was otherwise materially misleading.”323 Nowhere

does the standard for pleading a material non-disclosure or materially misleading

disclosure under Corwin refer to, or incorporate, any inquiry regarding knowledge

and purpose of the non-disclosure. The focus is on the stockholder-reader, not the

321
Id. at *18 (Del. Ch. Dec. 31, 2019) (citing Nguyen v. Barrett, 2016 WL 5404095, at *3 (Del.
Ch. Sept. 28, 2016)).
322
Id.
323
Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018).

74
drafter. But when analyzing bad faith, the creator is the crux of the analysis, and the

why is the locus of the inquiry.324 Consequently, even if allegations of omissions or

misleading disclosures are sufficient to preclude business judgment review under

Corwin, where the same omissions or misleading disclosures are pled as evincing

bad faith, the pleading is subject to a finer-toothed comb—that of scienter—which

is among our law’s most straightened.325 To plead bad faith based on the non-

disclosure of the Board’s view of USG’s intrinsic value, the Plaintiffs must plead

that the Defendant directors intentionally withheld their view of intrinsic value in

conscious disregard of their fiduciary duties.326

The Plaintiffs’ allegations of bad faith omissions intimate that the Board did

not disclose its view of USG’s intrinsic value so that USG’s stockholders would

approve a transaction that the Board did not believe offered USG’s stockholders fair

value. But as noted, supra, it is not reasonably conceivable that the Board lacked

independence or was interested in the Acquisition, and so there is no reasonable

inference that the disclosure deficiency emanated from extraneous influences or

324
Ironworkers Dist. Council of Philadelphia & Vicinity Ret. & Pension Plan v. Andreotti, 2015
WL 2270673, at *27 n.257 (Del. Ch. May 8, 2015), aff’d 132 A.3d 748 (Del. 2016) (TABLE)
(noting the role of motive in determining whether bad faith is adequately pled).
325
Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *13 (Del. Ch. Aug. 29, 2018)
(“The scienter pleading requirement is among the most difficult in our law to satisfy.” (citing RBC
Capital Mkts., LLC v. Jervis, 129 A.3d 816, 862 (Del. 2015))).
326
van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. Nov. 30, 2017).

75
considerations. The Plaintiffs thus must allege bad faith “in the disclosures

themselves.”327

Of course, the Board’s view of intrinsic value—$50.00 as alleged by the

Plaintiffs—is not the same as the $44.00 per share deal price. At the same time, the

Proxy Statement disclosed that “[t]he Board considered that [$44.00 per share] was

more favorable to our stockholders than the potential value that would reasonably

be expected to result from other alternatives available to [USG], including the

continued operation of the [USG] on a standalone basis and other potential

actionable strategic transactions, in light of a number of factors.”328 Thus, as the

Board told it, consideration of whether the deal price was favorable was influenced

by many considerations, including considerations external to the operations of

USG’s business. This is unsurprising to any market observer.

Assuming that the Defendant directors believed intrinsic value to be $50.00,

in isolation their statement that $44.00 is higher than the “reasonably . . . expected”

value of continued operations on a “standalone basis,” appears inconsistent. That

inconsistency tends to disappear in light of the threat of hostile action should the

“standalone” option be pursued; it certainly does not create a reasonable inference

of bad faith.

327
Morrison, 2019 WL 7369431, at *18.
328
Proxy Statement, at 45.

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 Considering the other disclosures in the Proxy Statement, it is not reasonably

conceivable that the Proxy Statement “represents the knowingly-crafted deceit or

knowing indifference to duty that would show bad faith.”329 The Proxy Statement

disclosed that the Board initially approved Scanlon to begin negotiations with USG

within a range of $48.00 to $51.00.330 Thus, it was no secret to USG’s stockholders

that the Board preferred to sell USG for more than $44.00 per share. Moreover, the

Proxy Statement disclosed that the approval of that negotiation range was informed

by the Board’s view of intrinsic value, and that the Board’s view of intrinsic value

was itself informed by information gathered from USG’s management and

bankers.331 Further, notably, the Board’s approval of the negotiating range occurred

after it was obvious that the Withhold Campaign would succeed. At that point,

329
Morrison, 2019 WL 7369431, at *18.
330
Proxy Statement, at 40.
331
Id. at 36 (“Representatives of Goldman Sachs reviewed with the Board the key terms in the
revised proposal from Knauf. Goldman Sachs also reviewed changes to certain financial analyses
since December 2017, noting that since then there had been an increase in the Company’s 52-week
high stock price, as well as an increase in the median and highest analyst target stock prices. The
discussion then turned to a review by Goldman Sachs and J.P. Morgan of their preliminary
financial analyses and certain inputs that had changed since December 2017 based on market
changes and other factors, including the passage of U.S. tax reform.”) (“The Board then discussed
with the Company’s senior management and representatives of Jones Day, Goldman Sachs and
J.P. Morgan the possible responses to Knauf’s revised proposal and methods to give Knauf
additional direction that could cause Knauf to meaningfully improve its proposal to better reflect
the Company’s intrinsic value, including the strategy of rejecting Knauf’s offer so that Knauf
would further increase its proposal.”) (“The Board authorized Ms. Scanlon to send a written
response to Knauf rejecting the current $42.00 proposal, while also providing additional
information regarding the elements of the Company’s business plan that the Board believed
supported a higher intrinsic value for the Company.”), 37 (“Ms. Scanlon again reiterated that the
Board would engage around any bona fide proposal that reflects the Company’s intrinsic value,
and offered to have a meeting between the respective financial advisors to discuss the Company’s
views on value.”).

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hostile action absent a negotiated transaction was likely, and the Board’s position

with respect to negotiations needed to be reasonable to avoid such hostile action. In

that context, the only reasonable inference is that the Board’s approval of a $48.00

to $51.00 negotiating range represented its view of a realistic transaction price, not

an overblown opening gambit that risked driving Knauf away, as such a position

could have been catastrophic to a negotiated (rather than hostile) transaction. The

fact that the Board disclosed this range in the Proxy Statement belies any bad faith

attempt to conceal “intrinsic value”; a stockholder reading the Proxy Statement

would be well aware that the directors believed a sale should occur in the $48.00 to

$51.00 range, although the Board was unable to achieve such a price.

Moreover, it is not reasonably conceivable that the directors would have

demonstrated a conscious indifference to their fiduciary duties by not disclosing

their view of intrinsic value, while at the same time disclosing to USG’s stockholders

that the Board had chosen not to make that very disclosure.332 It is near-

inconceivable (and thus not reasonably conceivable) that an independent and

disinterested Board acting disloyally would have professed its bad faith to USG’s

stockholders in the Proxy Statement. While I may infer that the Proxy Statement

332
Id. at 40 (“The Board also authorized Ms. Scanlon to begin negotiations on value within a range
of $48.00 and $51.00 per share and discussed the pros and cons of issuing a public statement
regarding the Board’s view of intrinsic value, but decided not to issue such a statement.” (emphasis
added)).

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negligently failed to inform USG’s stockholders of the Board’s view of USG’s

intrinsic value, in light of the other disclosures made, it is not reasonably conceivable

that such non-disclosure rises to the level of conscious disregard of duty.

b. Revlon Claim

Finally, the Plaintiffs argue that the sales process was not reasonable, and that

the Defendants failed to comply with duties imposed under Revlon.333 The Plaintiffs

maintain that, even if they have not pled a non-exculpated breach of loyalty, they

may nonetheless survive this Rule 12(b)(6) Motion to Dismiss if they have pled facts

by which I may reasonably infer the Defendant directors have breached their “Revlon

duties.” That is, they assert that a freestanding “Revlon claim” for damages has been

adequately been pled against the Defendant directors. Describing the duties of

directors in way of a control transaction as “Revlon duties,” to my mind, is something

of a misnomer; the fiduciary duties are loyalty and care, in any situation—the

specific situation, however, dictates the actions required for fulfilment of those

duties. Accordingly, where a board decides to sell the company and thus terminate

stockholder ownership, the director’s fiduciary duties mandate that they concentrate

on securing the best price. Put differently, to comply with Revlon, “when a board

engages in a change of control transaction, it must not take actions inconsistent with

333
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

79
achieving the highest immediate value reasonably attainable.”334 There is no dispute

that the Acquisition constituted a change of control triggering Revlon and that

“Revlon can provide a contextual inquiry about whether the [] Defendants’ choices

were ‘reasonable under the circumstances as a good faith attempt to secure the

highest value reasonably attainable.’”335 The Plaintiffs argue that it follows, that if

it is reasonably conceivable that the Defendants’ actions regarding the Acquisition

were less than reasonable, the Motion to Dismiss must be denied. I disagree.

Revlon “duties” should not be confused with the Revlon standard of review,

applicable principally outside the damages context, under which directors must act

reasonably.336 The Revlon directive that the Defendant directors, having made a

decision to sell, must focus on price, does not alter the Plaintiffs’ pleading burden

here. The Plaintiffs seek only post-closing money damages in this Action. As our

Supreme Court has noted, Revlon “[was] not [a] tool[] designed with post-closing

money damages claims in mind, the standards [it] articulate[s] do not match the gross

negligence standard for director due care liability under Van Gorkom, and with the

prevalence of exculpatory charter provisions, due care liability [itself] is rarely even

334
C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d
1049, 1067 (Del. 2014) (citing Revlon, 506 A.2d at 182).
335
Morrison v. Berry, 2019 WL 7369431, at *15 (Del. Ch. Dec. 31, 2019) (quoting RBC Capital
Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015)).
336
For instance, a showing that directors have constructed an unreasonable sales process can
support pre-merger injunctive relief. See e.g. In re Del Monte Foods Co. S’holders Litig., 25 A.3d
813 (Del. Ch. 2011).

80
available.”337 So it is here; under USG’s Charter, the Defendants are exculpated

from damages for all but loyalty breaches.

Consequently, although “Revlon can provide a contextual inquiry about

whether the [] Defendants’ choices were reasonable under the circumstances as a

good faith attempt to secure the highest value reasonably attainable,” the Plaintiffs

still bear the burden to plead a non-exculpated claim.338 Therefore, an allegation

implying that a Defendant failed to satisfy Revlon is insufficient on its own to plead

a non-exculpated breach of the duty of loyalty,339 and a sufficient pleading must

reasonably imply that the directors’ failure to act reasonably to maximize price was

tainted by interestedness or bad faith.340 “In the context of a sale of corporate

control, bad faith is qualitatively different from ‘an inadequate or flawed effort’ to

337
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015) (citing Smith v. Van Gorkom,
488 A.2d 858 (Del. 1985)).
338
Morrison, 2019 WL 7369431, at *15 (quoting RBC, 129 A.3d at 849) (internal quotation marks
omitted).
339
See In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *17 (Del. Ch. Dec. 30, 2019)
(“In this regard, I have already determined that Plaintiffs have failed to plead viable breach of
fiduciary duty claims against the Essendant Board. But that determination was in the context of,
and informed by, Essendant’s Section 102(b)(7) charter provision; in other words, the focus was
on whether the Complaint contained well-pled allegations of a loyalty breach. There remains a
possibility that Plaintiffs have well pled a breach of the Essendant Board’s Revlon duties flowing
from the duty of care . . . .” (footnotes omitted)).
340
See Morrison, 2019 WL 7369431, at *15 (“In this context, such a pleading requires the Plaintiff
to show that it is reasonably conceivable that the Director Defendants knowingly chose to ignore
their duty once a sale process was commenced; to maximize stockholder value.”); In re Saba
Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017) (“In light of the
exculpatory provision, to state an actionable Revlon claim, Plaintiff must plead that the Individual
Defendants consciously disregarded their duties, ‘knowingly and completely failed to undertake
their responsibilities,’ and ‘utterly failed to attempt to obtain the best sale price.’” (quoting
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243–44 (Del. 2009))); Chester Cty. Emps.’ Ret. Fund
v. KCG Holdings, Inc., 2019 WL 2564093, at *16 (Del. Ch. June 21, 2019).

81
obtain the highest value reasonably available for a corporation.”341 Moreover, absent

sufficient allegation of directors’ “improper intent, a plaintiff must point to ‘a

decision [that] lacked any rationally conceivable basis’ associated with maximizing

stockholder value to survive a motion to dismiss.”342

The Plaintiffs set forth copious allegations designed to demonstrate the

unreasonableness of the Board’s sales process. These include that after Knauf’s

successful Withhold Campaign, the Board abandoned USG’s standalone plan and

undertook a sale, that the Board rushed the sale and/or abandoned other bidders, and

that the Board ultimately capitulated to a sale to Knauf at only $44.00 when it had

repeatedly stated that Knauf’s takeover attempts at $42.00 per share undervalued

USG, were opportunistic, and did not compensate all stockholders for USG’s

intrinsic value.

But for the Plaintiffs to adequately plead a non-exculpated breach of duty,

they must not only allege that the Board’s sales process was unreasonable, they must

also allege that the Board’s alleged failure to run a Revlon-compliant sales process

was an “intentional failure or a conscious disregard of the duty to seek the highest

price reasonably available.”343 Importantly, where (as here) there is no adequate

pleading of conflicted interests or lack of independence on the part of the directors,

341
Essendant, 2019 WL 7290944, at *13 (quoting Lyondell, 970 A.2d at 243).
342
Id. (quoting Chen v. Howard-Anderson, 87 A.3d 648, 684 (Del. Ch. 2014)).
343
Id. at *14 (citing Lyondell, 970 A.2d at 243) (emphasis in original).

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the scienter requirement compels that “a finding of bad faith should be reserved for

situations where ‘the nature of [the director’s] action[s] can in no way be understood

as in the corporate interest.’”344

The Plaintiffs overall gripe is that the Board did not insulate itself from the

pressures of its two largest stockholders and sold at a price less than 5% above an

offer345 the Board had previously stated “substantially undervalues the Company and

is not in the best interest of all of USG’s shareholders.”346 But, as an initial matter,

the Revlon mandate—best price—did not kick in until the Board began negotiating

to sell USG,347 so that an analysis under Revlon excludes the Board’s rejection of

Knauf’s first two offers and its resistance to the Withhold Campaign.

Is it nonetheless reasonably conceivable that the Defendants acted in bad faith

in agreeing to the Acquisition in the aftermath of the Withhold Campaign? The story

painted by the Plaintiffs is that after their defeat, the Defendant directors surrendered

to Knauf, simply asking Knauf to “pay a small ‘obstinance tax’ . . . that allow[ed]

the [B]oard to save face and claim it protected shareholders from a heist.”348

344
Saba, 2017 WL 1201108, at *20 (quoting In re Chelsea Therapeutics Int’l Ltd. S’holders Litig.,
2016 WL 3044721, at *1 (Del. Ch. May 20, 2016)).
345
$42.00.
346
Am. Compl., ¶ 112.
347
Lyondell, 970 A.2d at 242 (Del. 2009). In any event, there is no reasonable inference that these
actions were in bad faith—they were intended to resist an offer that the Board, and Plaintiffs here,
agree was too low.
348
Am. Compl., ¶ 157.

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 However, after review of the allegations in the Amended Complaint I find it

not reasonably conceivable that the Defendants intentionally acted outside of the

corporate interest, or intentionally disregarded that interest. After the Withhold

Campaign’s success was a foregone conclusion, the Board authorized negotiations

within a range that includes what the Plaintiffs plead was USG’s actual value. The

Amended Complaint pleads no facts from which I can reasonably infer that the

negotiation process was a sham or that the Board was not actually seeking a higher

price for USG. The Plaintiffs may contend that the Board negotiated poorly, perhaps

unreasonably,349 but that alone is insufficient to plead bad faith.350 “[T]here is a vast

difference between an inadequate or flawed effort to carry out fiduciary duties and

a conscious disregard for those duties.”351

Given the Board’s situation—against the ropes after being trounced by its two

largest stockholders in the Withhold Campaign—the Board sought a sale at a price

above what Knauf had offered. The Board obtained counsel and advice from

financial professionals;352 sought competing bids;353 negotiated for a higher price;354

349
Because a Revlon violation absent bad faith is exculpated from liability, I need not reach, and
do not reach, a conclusion as to whether the Defendants’ actions were unreasonable.
350
See Lyondell, 970 A.2d at 243 (“[T]here are no legally prescribed steps that directors must
follow to satisfy their Revlon duties. Thus, the directors’ failure to take any specific steps during
the sale process could not have demonstrated a conscious disregard of their duties.”); In re
Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656, 676 n.112 (Del. Ch. 2013).
351
Lyondell, 970 A.2d at 243.
352
Am. Compl., ¶ 155.
353
Id. ¶ 152.
354
Id. ¶ 164.

84
and attempted to persuade Knauf that the Board’s view of value was correct.355

These allegations are a far cry from the “extreme set of facts” necessary to support

a reasonable inference that USG’s Board acted in bad faith in its sale process.356

Ultimately, the Plaintiffs are unsatisfied with the price that resulted from the

Defendants’ efforts, but as succinctly explained by Vice Chancellor Slights,

“criticizing the price at which a board agrees to sell a company, without more, does

not a bad a faith claim make.”357

The Revlon reasonableness standard survives as a pleading standard, in a post-

closing action for damages, where a plaintiff alleges liability on the part of a third

party who has aided and abetted directors’ breach of the standard.358 No such

liability is alleged here. In order to avoid dismissal, a pleading from which I can

merely infer an unreasonable sales process is not enough to overcome an exculpatory

clause’s protections; to survive, such pleading must reasonably imply breach of a

non-exculpated duty. Even if (exculpated) directors have failed to conduct a

reasonable sales process, a viable damages claim based on that process requires well-

pled allegations that implicate the Board’s duty of loyalty.359 Because the allegations

355
Id.
356
In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *14 (Del. Ch. Dec. 30, 2019).
357
Id.
358
See Kahn v. Stern, 183 A.3d 715, at *1 n.4 (Del. 2018) (TABLE).
359
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017)
(“In light of the exculpatory provision, to state an actionable Revlon claim, Plaintiff must plead
that the Individual Defendants consciously disregarded their duties, ‘knowingly and completely
failed to undertake their responsibilities,’ and ‘utterly failed to attempt to obtain the best sale

85
here, together with the reasonable inferences therefrom, do not make it reasonably

conceivable that the Board acted in bad faith in the sales process, the Plaintiffs have

not stated a “Revlon” claim upon which relief may be granted.

III. CONCLUSION

The Defendants’ Motion to Dismiss is GRANTED. The parties should submit

a form of order consistent with this Memorandum Opinion.

price.’”); Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *18 (Del.
Ch. June 21, 2019) (“The allegations support a pleadings-stage inference that the Director
Defendants breached their duty of care by failing to employ a reasonable process that managed
[their financial advisor’s] influence. Whether the Director Defendants’ actions in this regard rose
to the level of bad faith or merely state a claim for breach of the duty of care is a close call.”);
Morrison v. Berry, 2019 WL 7369431, at *15 (Del. Ch. Dec. 31, 2019) (“More to the point, the
Plaintiff must plead facts from which I may reasonably infer that the Director Defendants were
aware of these alternatives, understood that they would maximize value, but nonetheless chose
instead to act against the interests of the Company and its stockholders.”).

86