IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TEAMSTERS LOCAL 237 )
ADDITIONAL SECURITY BENEFIT )
FUND, TEAMSTERS LOCAL 237 )
SUPPLEMENTAL FUND FOR )
HOUSING AUTHORITY )
EMPLOYEES, and ALAN )
WATERHOUSE, )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0620-PAF
)
DAN CARUSO, )
)
Defendant. )
)
MEMORANDUM OPINION
Date Submitted: May 19, 2021
Date Decided: August 31, 2021
Joel Friedlander, Jeffrey M. Gorris, Christopher M. Foulds, FRIEDLANDER &
GORRIS, P.A., Wilmington, Delaware; Gregory V. Varallo, BERNSTEIN
LITOWITZ BERGER & GROSSMAN LLP, Wilmington, Delaware; Mark
Lebovitch, Jeroen van Kwawegen, Andrew E. Blumberg, BERNSTEIN
LITOWITZ BERGER & GROSSMAN LLP, New York, New York; Randall J.
Baron, David Wissbroecker, ROBBINS GELLER RUDMAN & DOWD LLP, San
Diego, California; Christopher H. Lyons, ROBBINS GELLER RUDMAN &
DOWD LLP, Nashville, Tennessee; Attorneys for Plaintiffs.
Edward B. Micheletti, Cliff C. Gardner, Veronica B. Bartholomew, Gregory P.
Ranzini, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington,
Delaware; Attorneys for Defendant.
The plaintiffs are former stockholders of Zayo Group Holdings, Inc. (“Zayo”
or the “Company”). On March 9, 2020, a consortium of equity co-investors acquired
the Company (the “Merger”) under an agreement and plan of merger dated May 8,
2019 (the “Merger Agreement”). The total transaction value was approximately
$14.3 billion. In the Merger, each share of Zayo common stock was converted into
the right to receive $35 in cash. During the sale process, defendant Dan Caruso
served as the Company’s Chief Executive Officer and Chairman of the Board. The
plaintiffs contend that Caruso, under threat of removal by activist stockholders,
breached his fiduciary duty by steering the sale process toward the acquiror so that
he could capture the future upside of the business through a rollover of his stock and
remaining as CEO post-merger. Plaintiffs further allege that, despite being aware of
Caruso’s conflicts, the Zayo board did not sufficiently oversee and manage Caruso’s
conduct to maximize stockholder value. Plaintiffs also assert that Caruso is
personally liable for materially misleading disclosures and omissions in the proxy
statement disseminated to Zayo stockholders recommending that they approve the
Merger (the “Proxy”).
Caruso has moved to dismiss, contending that the Complaint lacks sufficient
allegations to state a claim. He contends that the involvement of an informed and
engaged board of directors defeats any claim for liability arising from the Merger.
He maintains that the Zayo board of directors (the “Board”) was independent, well
aware of Caruso’s potential conflicts, and managed them in accordance with their
fiduciary duties. Defendant further argues that the Merger was ratified under
Corwin1 by a fully-informed, uncoerced stockholder vote.
The allegations of the Complaint do not support a reasonable inference that
the Merger is subject to entire fairness review or that Caruso breached his fiduciary
duties by corrupting the sale process. Plaintiffs have alleged facts creating a
pleadings-stage inference that Caruso was subject to a conflict of interest because he
knew from the outset that the ultimately successful bidder required that Caruso
remain as CEO post-closing. Though Caruso was subject to a conflict of interest,
that is not fatal to his motion to dismiss. The Complaint lacks allegations supporting
a reasonable inference that Zayo’s Board did not act in a manner reasonably designed
to manage the conflict or maximize value. It lacks well-pleaded allegations
supporting a reasonable inference that Caruso disabled the Board by failing to inform
it about critical events or by acting unilaterally without the Board’s knowledge.
Plaintiffs have identified a discussion between Caruso and the acquiror’s
representative that was not disclosed in the Proxy, even though the Proxy discloses
other, similar communications between them regarding the Merger price. It is
reasonably conceivable that this omission was material in light of the related
1
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 308 (Del. 2015) (holding that an
“uncoerced, informed stockholder vote is outcome-determinative, even if Revlon applied
to the merger”).
2
disclosures. Accordingly, I conclude that the Complaint pleads facts from which it
is reasonably conceivable that Caruso could be determined to be liable for a breach
of the duty of care in his capacity as an officer for his involvement in the preparation
of the Proxy.
I. FACTUAL BACKGROUND
The facts recited in this Memorandum Opinion are drawn from the Verified
Complaint (the “Complaint” or “Compl.”) and documents integral thereto, including
documents produced to Plaintiffs in response to books and records demands under 8
Del. C. § 220. 2
A. The Parties
Zayo is a global provider of communications infrastructure, with operations
in the United States, Canada, and Europe. 3 “Zayo owns and operates extensive fiber
networks, data centers, and small cell cites used for 5G networks.”4 Zayo is a
Delaware corporation based in Boulder, Colorado, and is Boulder’s largest local
private employer.5
2
The parties agreed that the documents produced to Plaintiffs in response to the § 220
demands are incorporated by reference into the Complaint. Def.’s Opening Br. 30 n.10;
id. Ex. 3, ¶ 2(e). Defendant attached various documents as exhibits to Defendant’s Opening
Brief, and they will be cited as “Ex.” In addition, the Complaint incorporates by reference
the Proxy. The Proxy is attached as Exhibit 1 to Defendant’s Opening Brief.
3
Compl. ¶ 25.
4
Id.
5
Proxy at 1; Compl. ¶¶ 2, 5.
3
Zayo’s business consisted of a large mix of assets and products as a result of
numerous acquisitions. 6 Zayo divided its product groups into five primary operating
segments: Fiber Solutions, Transport, Enterprise Networks, Colocation (or
“zColo”), and Allstream. 7 Zayo conducted internal valuations on a sum-of-the-parts
basis and reported on each segment separately in its filings with the U.S. Securities
and Exchange Commission (the “SEC”). 8 Zayo management believed that the
market undervalued Zayo because of its “mix of idiosyncratic assets.” 9
Defendant Dan Caruso cofounded Zayo in 2007 and served as its Chief
Executive Officer and Chairman of the Board since the Company’s formation.10
Zayo went public in 2014, and as of 2018, Caruso beneficially owned 3.6% of Zayo’s
outstanding common stock.11 The other members of Zayo’s nine-person Board at
the time of the Merger were non-parties Donald Gibs, Linda Rottenberg, Steven
Kaplan, Emily White, Scott Drake, Yancey Spruill, Rick Connor, and Cathy
Morris.12 Caruso was actively involved in the Boulder community and was a
6
Compl. ¶ 29.
7
Id. ¶ 31; see also id. ¶¶ 32–36 (describing each business segment).
8
Id. ¶¶ 31, 39.
9
Id. ¶ 39.
10
Id. ¶ 14.
11
Id. ¶ 15. As of June 21, 2019, Caruso beneficially owned 3.1% of Zayo’s outstanding
common stock. Proxy at 116.
12
Compl. ¶¶ 16–23; Proxy at 116. The Complaint does not identify Connor or Morris by
name.
4
prominent figure in Boulder’s start-up scene. 13 As will be discussed below, Caruso’s
professional and social circles intersected to varying degrees with those of other
Board members. Of Zayo’s nine directors, Caruso is the only Zayo employee and
the only named Defendant in this action.
Plaintiffs: Teamsters Local 237 Additional Security Benefit Fund, the
Teamsters Local 237 Supplemental Fund for Housing Authority Employees, and
Alan Waterhouse (collectively, “Plaintiffs”) were beneficial owners of shares of
Zayo common stock at all relevant times.14
B. The Initial Approach
In July 2018, Marc Ganzi, CEO of Digital Colony Partners, L.P. (with its
affiliates, “Digital Colony”), contacted Caruso to “pitch” a “crazy idea.”15 Ganzi
and Caruso met later that month at Ganzi’s vacation home in Colorado and then
again on August 7 at Caruso’s home.16 In an email after their August meeting, Ganzi
highlighted a previous collaboration between Zayo and a Digital Colony portfolio
company, telling Caruso, “I would like to find more ways for us to work together
Dan. I think we could do great things.” 17 He encouraged Caruso to “think bigger .
13
Compl. ¶ 16.
14
Id. ¶ 13.
15
Id. ¶ 41.
16
Id. ¶¶ 41, 42.
17
Ex. 4.
5
. . . A storm is coming, and I think if properly positioned you can be the biggest
winner of all.” 18 Caruso and Ganzi met again on September 14, 2018 where Ganzi
told Caruso: “I think I have my idea fully mapped out now. . . . I will come back to
you in writing.”19 The Complaint alleges that Caruso did not immediately disclose
Ganzi’s interest to the Board in a “mid-September update.”20 Caruso did disclose
Ganzi’s interest in acquiring the Company to the Board no later than October 2018.21
On August 22, 2018, Zayo reported disappointing earnings and a decline in
the Company’s stock price soon followed. 22 Two days earlier, Zayo’s Strategy
Committee (consisting of Gips, Rottenberg, and White) discussed increased activist
engagement and an “uptick in interest” from Elliott Management Corporation
(“Elliott”), a well-known hedge fund and activist investor. 23 The committee
discussed the Company’s expectation that activist pressure would increase if the
18
Compl. ¶ 42; Ex. 4.
19
Compl. ¶ 44.
20
Id. ¶ 45.
21
Ex. 9. Caruso’s disclosure to the Board in an October 19, 2018 email implies that he had
previously informed them of Ganzi’s interest, but does not specify when. Id. (“Recall that
Marc Ganzi of Digital Bridge approached me in the recent past re: taking Zayo private.”).
In a paragraph recounting the August 2018 meeting between Ganzi and Caruso, the Proxy
states that “Caruso notified the board of directors of the contents of this conversation during
his normal updates to the board of directors on corporate development activities.” Proxy
at 27.
22
Compl. ¶ 50.
23
Id. ¶ 48; see also id. ¶ 71 (listing the members of the Strategy Committee).
6
Company failed to meet expected revenue and earnings growth, if the Company did
not monetize Allstream, or if the Company’s communications about its strategic
initiatives became “murky.”24 In that same month, Caruso and Matt Steinfort,
Zayo’s Chief Financial Officer, were evaluating the possibility of a management
buyout. 25 On August 28, 2018, Steinfort informed a strategic counterparty interested
in acquiring the Allstream business segment that “we had discussed a management
buyout and that it had gained traction internally for a number of reasons and we were
likely to head down that path.”26 In late September, Caruso and Steinfort arranged
meetings with Zayo’s financial advisors, Goldman Sachs & Co. LLC (“GS”) and
J.P. Morgan Securities LLC (“JPM”). 27 On October 4, JPM sent leveraged-buyout
discussion materials to Caruso and Steinfort, which contemplated a $46 buyout
price. 28 Caruso did not send JPM’s presentation to the Board.29
On October 16, 2018, Caruso received a letter from Zimmer Partners, which
owned a significant number of Zayo shares. 30 The letter told Caruso that Zimmer
Partners had spoken with many other Zayo investors who had “lost faith in your
24
Id. ¶ 49.
25
Id. ¶ 43. This evaluation continued through October. Id. ¶¶ 43–47.
26
Id. ¶ 43.
27
Id. ¶ 46.
28
Id.
29
Id.
30
Id. ¶ 52.
7
ability to execute” and that “mutual fund and hedge fund investors are voting against
your performance and are showing a disturbing lack of confidence in
management.”31 The Strategy Committee acknowledged the letter at its November
5 meeting, and noted that “[i]nvestor angst is on the rise.”32 In a letter in January
2019, Zimmer made clear that it was not an activist investor.33
Zayo’s stockholders expressed wide support for Caruso and his leadership,
despite any rumblings from activists. At the 2018 annual stockholders meeting held
on November 6, Zayo stockholders re-elected Caruso, Gips, and Drake to three-year
terms. Caruso received 197,766,808 votes in favor of re-election and there were
5,671,177 withheld votes.34 Stockholders also approved a board proposal to amend
the Company’s certificate of incorporation to eliminate Zayo’s classified board
structure and to amend the certificate and bylaws to eliminate supermajority voting
requirements to amend the certificate and bylaws.35 Under those amendments, the
31
Compl. ¶ 52 (alterations omitted).
32
Id. ¶ 53.
33
Ex. 27.1.
34
Zayo Group Holdings, Inc., Current Report (Form 8-K) (November 6, 2018). The court
can take judicial notice of these results. DEL. R. EVID. 201; see In re Rural Metro Corp.
S’holders Litig., 2013 WL 6634009, at *7 (Del. Ch. Dec. 17, 2013); Wal-Mart Stores, Inc.
v. AIG Life Ins. Co., 860 A.2d 312, 320 n.28 (Del. 2004) (holding that a court may take
judicial notice of documents publicly filed with federal agencies, such as the SEC). The
advisory resolution to executive compensation was approved by a margin of better than 2
to 1. Zayo Group Holdings, Inc., Current Report (Form 8-K) (November 6, 2018). If
broker non-votes are eliminated, the margin was better than 3 to 1. Id.
35
Zayo Group Holdings, Inc., Current Report (Form 8-K) (November 6, 2018).
8
classified board structure would be fully dismantled by the 2021 annual meeting,
when Caruso would then be up for a one-year term. 36
C. Project Unleash Is Planned and Bidders Express
Interest.
In the fall of 2018, Zayo management was planning “Project Unleash,” a
restructuring plan that would split Zayo into two separate publicly traded entities.37
Management believed that the project would “unleash[] latent value” and could be
readily implemented by assigning each of Zayo’s standalone business segments to
one of the new entities.38 Caruso anticipated that the announcement of Project
Unleash would be “very positive news to the market,” and management expected
Project Unleash to take six to nine months to complete.39
Caruso presented Project Unleash to the Board on October 19, 2018. 40 He
recommended that Zayo publicly announce Project Unleash during the Company’s
upcoming earnings call on November 7 (the “November 7 Earnings Call”). 41 In a
draft presentation, Caruso indicated that after the Company announced Project
Unleash, it would be difficult to change course: “Once we start down this path, we
36
See id.
37
Compl. ¶ 54.
38
Id. ¶¶ 54–58.
39
Ex. 9; Compl. ¶ 59.
40
Compl. ¶ 60.
41
Id.
9
must finish or we’d have disappointed investors. So we better be committed.” 42 At
a Board meeting on November 6, 2018, JPM and GS opined that announced
separations are generally well-received by the market.43 The Board agreed that the
Company should publicly announce Project Unleash.44
On October 19, 2018, the same day he announced Project Unleash to the
Board, Caruso discussed indications of interest for a potential buyout. Earlier the
same day, Caruso spoke with Ganzi, who suggested that Digital Bridge, an affiliate
of Digital Colony, was interested in acquiring Zayo. Caruso sent an email to the
Board about his conversations with Ganzi:
Recall that Marc Ganzi of Digital Bridge approached me in the past re:
taking Zayo private. He did not offer a price or indicate he had financial
backing solidified. His approach required that I agree to be CEO. In a
conversation with Marc earlier today, he indicated he expects to make
a more formalized offer next week . . . . He also suggested my
willingness to be CEO would be required. He offered that I could also
be chairman, and that the syndicate consists of investors that know
Zayo and me well. 45
Caruso also informed the Board that Stonepeak Infrastructure Partners
(“Stonepeak”) had approached Caruso and would be meeting with him later that
42
Id.
43
Ex. 12 at ‘6300.
44
Ex. 11.
45
Compl. ¶ 61.
10
week. 46 Digital Colony ultimately led a group of successful bidders for the Company
denominated as “Consortium B.” 47 Stonepeak ultimately led a group of bidders
denominated “Consortium A.” 48
On November 6, 2018, Zayo’s then-Lead Independent Director, Philip
Canfield, resigned from the Board, enabling him and his private equity firm, GTCR
LLC, to join Consortium A. 49 That same day, Ganzi informed Caruso that Digital
Colony was putting together a fully financed proposal at $41 to $42.50 per share.50
Caruso reported Digital Colony’s preliminary, oral indication of interest to the Board
on the same day.51
D. Announcement of Project Unleash
Project Unleash was scheduled to be publicly announced during a quarterly
earnings call scheduled for November 7, 2018.52 Zayo’s earnings that quarter came
46
Id. ¶ 66.
47
Id. ¶ 65.
48
Id. ¶ 68. At the time, Caruso believed that Stonepeak was part of Ganzi’s syndicate for
Zayo. Id. ¶ 66; Ex. 9.
49
Compl. ¶ 68.
50
Id. ¶ 69.
51
Ex. 11 (minutes of a meeting of the Board dated November 6, 2018, stating that “Mr.
Caruso discussed with the Board a telephone call he received during the Board Meeting
from a private equity firm in which it made a directional, and noted to be not finalized,
offer to acquire the Company.”).
52
Compl. ¶ 72.
11
in below expectations. 53 Zayo’s financial advisor, JPM, recommended that Zayo
begin the call with the announcement of Project Unleash before addressing the
Company’s earnings. 54 JPM advised Steinfort that most strategic spin-off
announcements were standalone events, but that in the few precedential joint spin-
off/earnings announcements that JPM could find, the spin-off announcement had
come first.55 Steinfort forwarded JPM’s email to Caruso, noting that JPM’s
approach “makes sense,” because “this way you can lead with the future/exciting
part rather than having to go through all the results slides before you get to talk about
Unleash.” 56 Caruso told Steinfort that he wanted to “keep summary slide in place,
then I go through Unleash.” 57
Caruso began the quarterly earnings call on November 7 with the headline
numbers reflecting Zayo’s disappointing earnings.58 The Company had grown only
2%, missing its target of 6% to 8%.59 Revenue, EBITDA growth, EBITDA margin,
and unlevered free cash flow had all declined as well. 60 Caruso then discussed
53
Id.
54
Id.
55
Id.
56
Id. ¶ 73.
57
Id. ¶ 74.
58
Id. ¶ 76.
59
Id.
60
Id.
12
Project Unleash, stating that the spin-off would “unleash a lot of latent value,” and
that “[i]nvestors will be able to value each business separately based on their
respective strengths, their performance and the long-term prospects and it increases
the degrees of freedom for further consolidation under both platforms.” 61 Caruso
anticipated that implementation of Project Unleash would proceed smoothly because
“Zayo has long divided its business into segments that were pretty autonomous.” 62
Analysts were optimistic about Project Unleash. Nevertheless, the day after
the combined announcement of Zayo’s disappointing earnings and Project Unleash,
Zayo’s stock price fell over 25%, from $30.38 on November 7 to $22.56 on
November 8.63 On November 7, Ganzi emailed Caruso to congratulate him on the
announcement of Project Unleash, noting that the idea “could be far easier executed
if you are private.”64 Ganzi informed Caruso that he was working on getting Caruso
“a written proposal with the sources of funding identified.”65 Two days later, on
November 9, Stonepeak reached out and shared that it was “gliding toward”
submitting an offer.66 Caruso sent an email to the Board on November 9, saying:
61
Id. ¶ 77.
62
Id.
63
Id. ¶ 78.
64
Id. ¶ 79.
65
Id.
66
Ex. 13.
13
“Both Marc [Ganzi of Digital Colony] and Brian [McMullen of Stonepeak]
expressed agreement with the Project Unleash plan.”67 Caruso’s email to the Board
also noted Ganzi’s and McMullen’s indications that offers were forthcoming.68
E. The Sales Process Picks Up
On November 16, 2018, Consortium A delivered an initial indication of
interest in acquiring Zayo at $33 per share, approximately a 49% premium over the
previous day’s closing price.69 The Board met that same day to discuss the proposal
as well as strategic alternatives, including Project Unleash.70 Also appearing at the
meeting were attorneys from Skadden, Arps, Slate, Meagher & Flom LLP
(“Skadden”), who had been retained to advise the Board on a potential sale of the
Company.71 The Board concluded that Consortium A’s offer “substantially
undervalued the Company.”72 Shortly thereafter, on November 18, 2018,
Bloomberg published an article “describing potential private equity interest in the
Company.”73 The Board discussed the article and the news leak at a meeting later
67
Compl. ¶ 80.
68
Ex. 13.
69
Compl. ¶ 96; Proxy at 30.
70
Ex. 14.
71
Id.
72
Id.
73
Compl. ¶ 81.
14
that same day.74 On November 19, Consortium A made a revised indication of
interest to purchase Zayo at $34.50 per share. 75 The Board decided that it would not
respond immediately, but if Consortium A initiated contact, Consortium A was to
be told that the revised proposal still undervalued the Company.76
Stockholder activism grew after the Bloomberg article emerged. On
November 27, 2018, JANA Partners (“JANA”) contacted JPM to request a meeting
with Caruso. 77 JPM informed Caruso that JANA, as well as Elliott, “could clearly
be advocating that we sell the Company sooner rather than later.” 78 On December
3 and 4, Caruso met with Senator Investment Group (“Senator”) and Sachem Head
Capital Management (“Sachem Head”), both of which advocated for a sale of the
Company “in the low-to-mid $30s.”79 The Strategy Committee observed that
Sachem Head had “a very pointed message” that included “[a]bsent a deal, there is
likely to be a proxy fight that starts with pushing for management change.” 80
74
Id.; Ex. 15.
75
Proxy at 31.
76
Ex. 16.
77
Compl. ¶ 83.
78
Id.
79
Id. ¶ 84.
80
Id.
15
On December 7, 2018, Consortium A submitted an improved indication of
interest at $35 per share, subject to prompt access to due diligence. 81 The Board met
on December 9. The meeting minutes indicate that the Board discussed Consortium
A’s proposal and the prospect of running the Company on a standalone basis.82 The
Board concluded that the $35 per share offer warranted providing Consortium A
with due diligence, with the caveat that Consortium A should be told that “the board
had not agreed to do a transaction at $35/share.”83
On December 11, 2018, JPM provided the Board with a presentation
discussing Starboard Value (“Starboard”).84 JPM noted that Starboard had a history
of undertaking proxy fights, including campaigns that resulted in the replacement of
a CEO, and “will become increasingly adversarial if the company remains
unresponsive.”85
Caruso and others provided extensive management presentations to
Consortium A on December 13, 2018. 86 At a December 16 Board meeting, Caruso
informed the Board that there had not been any conversations with Consortium A
81
Id. ¶ 96. Prior to December 7, 2018, two different strategic acquirors contacted Zayo
about the possibility of a merger. Proxy at 31–33.
82
Ex. 19.
83
Compl. ¶ 96.
84
Id. ¶ 85.
85
Id.
86
Id. ¶ 96.
16
about “his continued employment with the Company following any transaction.”87
That same day, Consortium B provided an indication of interest at $36 to $38 per
share. 88 Caruso provided management presentations to Consortium B on December
20, 2018.89 Between December 16 and December 19, Zayo’s bankers reached out
to 18 additional potential strategic and financial acquirors at the direction of the
Board. 90
On December 19, 2018, Zayo management sought Board approval for
financial terms of the Company’s engagement of GS and JPM in the sale process.91
The engagement letters provided that the financial advisors would each be paid a fee
of about $3 million for their opinions on the Merger at the announcement of a
transaction,92 and $27.2 million more if Zayo was sold for at least $33 per share,
with a higher payout for a higher price93. The Board unanimously approved the
terms at a meeting on January 2, 2019. 94
87
Ex. 21. The Complaint does not mention that this meeting occurred, but Defendant
raised and discussed it in his opening brief, and Plaintiffs did not object, noting their
agreement to consider the § 220 production incorporated by reference into the Complaint.
Oral Arg. Tr. 91:9–14.
88
Compl. ¶ 97
89
Id.
90
Ex. 23 at ‘3125.
91
Compl. ¶ 98.
92
Proxy at 62, 68.
93
Compl. ¶ 98.
94
Ex. 25.
17
Also on December 19, Senator sent a letter to the Board blaming Caruso for
the Company’s results and demanding a sale of the Company.95 Senator stated that
Caruso “has not proven adept at running a public company” and that “shareholders
have lost confidence in [Caruso’s] leadership and capability to manage this business
in a public context.”96
On December 26, 2018, Caruso sent the Board a draft letter to investors stating
that Caruso intended to abandon Project Unleash and to “reposition our 2019
strategy as ‘Stay the Course.’” 97 The letter was never sent to investors. 98 On January
7, 2019, Caruso sent a presentation to the Board stating that a reason to avoid
implementing Project Unleash was that “[p]rivate equity interest” had “emerged
with own ideas.”99 Caruso explained to the Board that Zayo management had
changed course from implementing Project Unleash to reorganizing Zayo’s five
business segments into three segments: Colocation, Allstream, and a “Network” unit
consisting of the former Fiber Solutions, Transport, and Enterprise Networks
95
Compl. ¶ 86.
96
Id.
97
Id. ¶ 99.
98
Id.
99
Id. ¶ 101.
18
business segments. 100 This new configuration of assets had a comparable sum-of-
the-parts valuation as Project Unleash, ranging from $33.76 to $49.101
In a January 25, 2019 letter, Sachem Head advocated for a sale, citing
“management’s track record of poor execution” and expressing that “the public
market has lost faith in management.”102 On January 30, 2019, Senator expressed
to GS and JPM its frustration and concerns about Caruso. 103 The next day, Senator
sent Caruso an email, telling him: “In our view, a decision not to accept a reasonable
offer will likely result in shareholder actions to replace senior management if
execution doesn’t improve quickly.”104 Another investment firm, Avenir
Corporation, sent a letter to the Board, questioning Caruso’s ability to run a public
company and demanding that the Board find a solution.105
At a Strategy Committee meeting on February 5, 2019, management
presented an “Activist Update.” 106 The presentation noted that activist funds had
increased their stock ownership from 4% to 13% over the previous eight months,
100
Id. ¶ 102. Zayo implemented this new asset structure after it executed the Merger
Agreement with Consortium B. Id. ¶ 103.
Id. ¶ 108. Through May 7, 2019, Zayo’s financial advisors continued to model Project
101
Unleash, and they assigned it a value ranging from $36 to $46. Id. ¶ 109.
102
Id. ¶ 88.
103
Id. ¶ 89.
104
Id. ¶ 90.
105
Id. ¶ 93.
106
Id. ¶ 92.
19
and that the activists were focused on driving the Company towards a sales
process.107
Caruso stopped mentioning Project Unleash in public announcements.108 On
a February 7, 2019 earnings call, Zayo did not discuss Project Unleash and stated
that it was “evaluating multiple options.”109 The February 7 earnings call caused
confusion among Zayo’s analysts and investors. 110 Deutsche Bank cited the call’s
“mixed messaging” as contributing to investor confusion and Zayo’s stock’s “slight
underperformance.”111 Morningstar also attributed the confusion and “investor
angst” to the Company’s “reversal” and “vacillation,” noting that it did not “hear a
clear rationale behind [Zayo’s] decision.” 112 SunTrust stated that it “found the
conference call’s discussion around long-term strategy confusing.” 113
F. Consortium A and Consortium B Submit Bids
By January 2019, Consortium A sought to minimize competition for its bid
on Zayo. It attempted to lock up co-investment and financing sources, convince
others that they had a deal for Zayo cemented, and worked with press and
107
Id.
108
Id. ¶ 110.
109
Id.
110
Id. ¶ 111.
111
Id.
112
Id.
113
Id.
20
stockholder activists to create pressure for a deal. 114 At a meeting on January 13,
2019, the Board discussed “what appears to be a propaganda campaign by
Consortium A to claim they had [a] deal for the Company locked up.” 115 On January
14, 2019, JPM told Digital Bridge (i.e., Consortium B) that “there is still time for
them to get into the game if they start working ASAP.” 116 Digital Bridge responded
by saying that “the task of catching up to others is too daunting” and that it was “not
going to do further work.”117 On January 30, 2019, at a conference in Florida,
Caruso met separately with Ganzi and with a representative of EQT Fund
Management S.à r.l. (“EQT”), where he encouraged them to partner and make a bid
for Zayo.118
On February 4, 2019, Consortium A confirmed completion of due diligence
and revised its bid lower, from $35 to $31.50 per share. 119 At the Board’s meeting
on February 5–6, the Board discussed “the Company and its future standalone
prospects,” the revised offer, a potential sale of the Colocation business segment,
and strategies for getting re-engagement from other potential bidders, including
114
Id. ¶¶ 112–17.
115
Id. ¶ 115.
116
Id. ¶ 116.
117
Id.
118
Id. ¶ 128.
119
Id. ¶ 123.
21
Consortium B.120 As for Consortium A, the Board responded to the lower proposal
by accusing Consortium A of leaking information about the sale process to the press
and to stockholder activists, in violation of a confidentiality agreement.121 Caruso,
Spruill, and Zayo’s bankers discussed how to foster competition. In an email chain
between Caruso, Spruill (the Company’s Lead Independent Director), and the
bankers, the bankers recommended the following approach: “At its core, script to
[Consortium] A is ‘you are not $35, no next step . . .’ And script to [Consortium] B
is ‘you can win, how do we get you moving?’”122
On February 11, 2019, Caruso had a call with Ganzi. According to a summary
of the call that Caruso gave to the bankers and the Board’s Lead Independent
Director (Spruill), later that night, Ganzi was “interested in proceeding forward” and
showed “price enthusiasm in $34-36 range.” 123 Caruso said to Ganzi, “I can’t speak
for board on price, but [] they’ve shown willingness to engage at $35+ but not
willingness at lower prices.”124 The same week, Caruso conveyed this same
120
Ex. 32.
121
Compl. ¶¶ 124–25.
122
Ex. 34.
123
Compl. ¶ 130.
124
Id.; Ex. 33.
22
information about his call with Ganzi in a February 16 email to Zayo’s bankers,
management, Skadden, and Spruill.125
On February 20, Consortium A made a new bid at $32 per share.126 That same
day, Consortium B indicated that it was finalizing an offer of approximately $35 per
share. 127 The Board met on February 24 to discuss Consortium A’s new offer,
Consortium B’s anticipated offer, and the prospect of remaining a standalone
company while selling certain business segments. 128 After discussion with the
bankers and in consultation with Spruill, the Board authorized management to enter
into an exclusivity agreement with Consortium B, should the anticipated offer come
in at $35. 129
On February 26, Consortium B formally submitted its proposal to acquire
Zayo for $35 per share. 130 The parties entered into a 30-day exclusivity agreement,
with the option to twice extend exclusivity by 10 days so long as Consortium B
reaffirmed that it was committed to $35 per share. 131
125
Ex. 36.
126
Proxy at 42.
127
Compl. ¶ 131.
128
Ex. 38.
129
Id.
130
Compl. ¶ 132.
131
Id. ¶ 134.
23
In a March 21 call with Caruso and Steinfort, members of Consortium A, who
were aware of Zayo’s exclusivity agreement with Consortium B, tried to discuss the
possibility of their acquiring the Company independent of Consortium A. 132 Caruso
explained that he could not discuss the matter due to the exclusivity agreement and
ended the call.133 Consortium B was informed of this conversation on March 22, as
per the terms of the exclusivity agreement. 134
On March 28, Consortium B expressed that it wished to partner with Zayo’s
management team to ensure there was a capable management team in place
following any acquisition.135 Caruso responded that he would not discuss post-
closing retention of management unless authorized to do so by the Board.136
On April 4, in a letter to Zayo, Consortium B reaffirmed its offer of $35 per
share and exercised its right to extend the exclusivity period for ten days as per the
exclusivity agreement. 137 Consortium B similarly reaffirmed its offer and extended
the exclusivity period on April 14.138 On April 19, the Board discussed its options
in the event that Consortium B asked for a third extension of the exclusivity
132
Proxy at 44–45.
133
Id. at 45.
134
Id.
135
Id.
136
Id. at 45–46.
137
Id. at 46.
138
Id.
24
agreement.139 The Board determined that further extension of the exclusivity
agreement was unnecessary because the Company and Consortium B were “close
enough” to a deal.140
As negotiations continued, the exclusivity period lapsed. Consortium B asked
to extend its exclusivity agreement with Zayo, but the Company refused. 141 Instead,
on April 25, at the behest of Consortium B, the parties agreed to sign a letter
agreement where the parties agreed to continue to pursue the Merger in good faith
(the “Letter Agreement”). 142 The terms of the Letter Agreement also stated that the
Company would not enter into a definitive agreement, sign a letter of intent, or enter
into an exclusivity agreement with a party other than Consortium B. 143 The Letter
Agreement was set to expire on May 8, 2019.144
On April 26, the Board discussed Consortium B’s renewed request for an
exclusivity agreement. 145 The Board granted Caruso the authority to negotiate a
“limited restriction on the Company’s ability to seek alternative transactions” prior
to the Letter Agreement’s termination and to “otherwise expand the obligations”
139
Id. at 47.
140
Id.
141
Id.
142
Id.
143
Id.
144
Id.
145
Id. at 48.
25
under the Letter Agreement, if necessary. 146 That same day, Zayo and Consortium
B expanded the terms of the Letter Agreement so that, in addition to the previous
terms, Zayo could not divest any material assets outside the ordinary course of
business, initiate contact with another party regarding a potential acquisition of the
Company, or permit another party to speak with potential financial sponsors that
Consortium B had previously identified as potential co-investors. 147
G. Potential Sale of the Colocation Business
At the same time that it was running a sale process for the whole Company,
Zayo management was running a sale process for the Colocation business.148 A
February 24, 2019 management presentation to the Board showed that the
Colocation business was worth approximately $6 to $7 per share. 149 On April 10,
2019, Zayo received four bids for the Colocation business, with the highest coming
in at approximately $8 per share.150 On April 19, 2019, a management presentation
to the Board showed that the remaining business segments would be worth $27 to
146
Id.
147
Id.
148
Compl. ¶ 136.
149
Id. ¶ 137. The February 24 presentation valued the remaining business at $31 to $41
per share, for a total enterprise value of $37 to $48 per share. Id.
150
Id. ¶ 138.
26
$36 per share by year-end.151 The Board discussed the possible sale of the
Colocation business at its Board meetings on February 24 and March 22, 2019, as a
potential alternative to the acquisition proposals for the whole company.152
H. Consortium A Ups Its Offer but the Board Accepts the
Offer from Consortium B
On May 1, 2019, Consortium A increased its offer to $33.50 per share. 153 On
May 3, Caruso told Consortium B that Zayo had “received a written proposal from
another party” but that “this other proposal is extremely unlikely to impact our
transaction.”154 Caruso told Consortium B that Zayo was maintaining its
“commitment to prioritizing our resources to consummate the transaction with
you.”155 Consortium B responded by confirming its willingness to acquire Zayo at
$35 per share. 156
Also on May 3, 2019, along with confirming its willingness to engage in the
Zayo acquisition, Consortium B requested permission from the Board to “discuss
the terms of management’s continued investment in the Company and post-closing
151
Id. ¶ 139. The April 19 presentation valued the Colocation business at $6 to $8 per
share, for a total enterprise value of $33 to $44 per share. Id.
152
Proxy at 42, 45.
153
Compl. ¶ 141.
154
Id. ¶ 142.
155
Id.
156
Id.
27
management equity incentive arrangements” with Caruso and the senior
management team.157 Later that day, the Board’s Compensation Committee agreed
to permit Caruso and other senior executives to discuss potential management roles
with the Company and a potential equity rollover with Consortium B. 158 Following
the Compensation Committee’s approval, EQT and Ganzi reassured Caruso that they
were interested in having him continue as CEO. 159
At a Board meeting on May 7, 2019, JPM and GS presented their fairness
analyses. 160 The JPM presentation valued the whole company at $21.75 to $43.50
per share (based on trading multiples).161 The JPM presentation also contained two
sum-of-the-parts value ranges: $36 to $45.75 per share (based on trading multiples)
and $31.50 to $45.25 per share (based on transaction multiples). 162 Management’s
presentation to the Board on May 7 did not project standalone value for the Network
business, unlike in its previous presentations on February 24 and April 19.163 The
Board voted to approve the Merger at the May 7 meeting.164 At the May 7 meeting,
157
Proxy at 49.
158
Id.
159
Compl. ¶ 142; Proxy at 49–50.
160
Compl. ¶ 144.
161
Id.
162
Id.
163
Id. ¶ 145.
164
Id. ¶ 146.
28
the Board also discussed a proposed equity rollover by Zayo management.165 Board
member Kaplan reported that Caruso and Consortium B had not discussed Caruso’s
future employment or potential equity rollover before they struck the Merger deal
terms. 166 Zayo and Consortium B agreed to a termination fee of approximately $210
million, or 2.5% of equity value in the event that the transaction was not
consummated.167
Zayo publicly announced the Merger on May 8. 168 Later that day, Caruso
entered into a rollover letter agreement, whereby Caruso agreed to rollover
approximately $105 million of equity in the Company, representing approximately
30% of his Zayo holdings. 169
I. The Proxy
On June 26, 2019, Zayo issued the Proxy soliciting stockholder approval for
the Merger.170 Regarding activist investors, the Proxy stated that “on December 3
and 4, Mr. Caruso and the Company’s representatives met with certain activist
stockholders. Two activist stockholders encouraged the Company to consider
165
Ex. 44 at ‘6520.
166
Compl. ¶ 147; Ex. 44 at ‘6520. Plaintiffs contend that this statement was misleading,
pointing to Caruso’s and Ganzi’s discussions as early as July 2018. Pls.’ Ans. Br. 26.
167
Proxy at 108.
168
Compl. ¶ 146.
169
Id. ¶ 147; see Proxy at 50.
170
Compl. ¶ 148; Proxy at v.
29
strategic alternatives for the Company, including a sale of the Company in the low
to mid-$30 range.”171 The Proxy also mentioned the March 7, 2019 public letter
from Starboard urging the Company to sell.172 Regarding conversations between
Caruso and Ganzi, the Proxy stated that Caruso and Ganzi had a phone call on
February 20, 2019, in which “Ganzi provided an oral indication on behalf of
Consortium B that it would be in a position to make a proposal of $35.00 per share
of Company common stock.” 173 The Proxy also stated that Caruso refused to discuss
his ongoing role with Zayo until after Merger terms were agreed to, unless
authorized to do so by the Board. 174 Caruso signed the Proxy in his capacity as
Zayo’s CEO. 175 Zayo stockholders approved the Merger on July 26, 2019.176 The
Merger received overwhelming support, with 183,453,673 votes for the Merger,
148,273 against, and 139,766 abstentions. 177
J. Procedural History
After the announcement of the Merger, Plaintiffs made demands and filed
complaints to inspect Zayo’s books and records pursuant to 8 Del. C. § 220. Zayo
171
Compl. ¶ 149; Proxy at 33.
172
Compl. ¶ 149; Proxy at 44.
173
Compl. ¶ 151; Proxy at 42.
174
Compl. ¶ 154; e.g., Proxy at 27.
175
Compl. ¶ 155.
176
Ex. 2.
177
Zayo Group Holdings, Inc., Current Report (Form 8-K) (July 26, 2019)
30
produced nearly 10,000 pages and more than 1,400 documents to Plaintiffs,
including Caruso’s emails with Jan Vesely, a Partner of EQT 178 and a member of
Consortium B; Ganzi; Zayo’s bankers; former Lead Independent Director Canfield;
and director Gips.179
The Merger closed on March 9, 2020.180 On July 24, 2020, Plaintiffs filed
their Verified Class Action Complaint (the “Complaint”). The Complaint contains
just one count, alleging that Caruso breached his fiduciary duties as a director and
officer of Zayo.181 Defendant moved to dismiss the complaint on October 30, 2020.
After briefing on the motion, the Court heard oral argument on May 19, 2021.
II. ANALYSIS
On a motion to dismiss for failure to state a claim under Court of Chancery
Rule 12(b)(6):
(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
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.
178
Proxy at 39.
179
Def.’s Opening Br. 29.
180
Id.
181
Compl. ¶¶ 162–65 (Count I).
31
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (internal citations and
quotation marks omitted).182 The pleading standards are minimal. Central Mortg.
Co. v. Morgan Stanley Mortg. Cap. Hldngs. LLC, 27 A.3d 531, 536 (Del. 2011).
Nevertheless, “a trial court is required to accept only those ‘reasonable inferences
that logically flow from the face of the complaint’ and ‘is not required to accept
every strained interpretation of the allegations proposed by the plaintiff.’” In re Gen.
Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting Malpiede
v. Townson, 780 A.2d 1075, 1083 (Del. 2001)). “Moreover, a claim may be
dismissed if allegations in the complaint or in the exhibits incorporated into the
complaint effectively negate the claim as a matter of law.” Malpiede, 780 A.2d at
1083.
The Complaint contains a single count for breach of fiduciary duty against
Caruso as a director and officer of Zayo. Plaintiffs have not asserted claims against
any other Zayo director or officer. Under Delaware law, “[a] plaintiff need not allege
182
Despite this being a ruling on a motion to dismiss, the parties have utilized evidence in
their arguments that is outside of the pleadings, possibly triggering a motion for summary
judgment instead. See Del. Ch. Ct. R. 12(c). At oral argument, I asked Plaintiffs why they
did not argue that their motion should be converted into one for summary judgment. Oral
Arg. Tr. 90:5–9. The Parties acknowledged that they had an agreement as to incorporate
by reference any documents that were produced by Defendant under 8 Del. C. § 220, but
Plaintiffs could not recall if they had specifically agreed not to move for summary
judgment. Oral Arg. Tr. 90:10–91:14 (“I forget if it was based on . . . the terms of the
confidentiality agreement. . . . I’m guessing, I think, whether that was just fair under what
we agreed to.”).
32
that a majority of the board committed a non-exculpated breach . . . in order to state
a claim against a disloyal CEO.” In re Xura, Inc., S’holder Litig., 2018 WL
6498677, at *3 (Del. Ch. Dec. 10, 2018); accord In re Columbia Pipeline Grp., Inc.,
2021 WL 772562, at *51 (Del. Ch. Mar. 1, 2021). Zayo’s certificate of incorporation
contains an exculpatory provision pursuant to 8 Del. C. § 102(b)(7).183 As a result,
the claims in the Complaint may only survive to the extent that they are non-
exculpated. 184
“Delaware’s default standard of review is the business judgment rule.”
Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *25 (Del.
Ch. Apr. 14, 2017). Under the business judgment rule, the court will assess whether
the business decision “was rational in the sense of being one logical approach to
advancing the corporation’s objectives.” Id. (internal citations omitted). The
business judgment rule may be rebutted and a higher standard of review may apply.
If, at the pleading stage, the complaint alleges “facts supporting a reasonable
inference that there were not enough sufficiently informed, disinterested individuals
who acted in good faith when taking the challenged actions to comprise a board
majority,” the court will review the transaction under the entire fairness standard.
Id. at *26. Under the entire fairness standard, defendants must establish that the
183
Ex. 2, at Ex. 3.1, Art. 7.
184
In re Cornerstone Therapeutics Inc, S’holder Litig., 115 A.3d 1173 (Del. 2015).
33
transaction was objectively fair. Id. (citing Gesoff v. IIC Indus., Inc., 902 A.2d 1130,
1145 (Del. Ch. 2006)). Alternatively, if directors “are confronted with a change of
control transaction that presents the board with the opportunity to secure ‘the best
value reasonably available to the stockholders,’” the court will subject the
transaction to enhanced scrutiny under Revlon. Flannery v. Genomic Health, Inc.,
2021 WL 3615540, at *12 (Del. Ch. Aug. 16, 2021) (citing Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)). Under Revlon,
the court must assess the reasonableness of the directors’ efforts to secure the best
price available to the company’s stockholders. C & J Energy Servs., Inc. v. City of
Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1067 (Del. 2014).
Plaintiffs argue that the Merger is subject to entire fairness review. According
to Plaintiffs, even though Caruso does not own over 50% of the outstanding shares
of Zayo stock and this was not a controlling stockholder transaction, Caruso
harbored a conflict of interest because he sought to enrich himself personally through
the Merger. Plaintiffs contend that a majority of Zayo’s board of directors lacked
independence from Caruso, thus causing the Merger to be subject to entire fairness
review. 185 In the alternative, Plaintiffs argue that Caruso is liable for breach of his
fiduciary duty because the Board did not satisfy enhanced scrutiny under Revlon.186
185
Pls.’ Ans. Br. 41.
186
Id. at 28.
34
As a final matter, Plaintiffs argue that Caruso breached his fiduciary duties because
the Proxy issued in support of the Merger was materially misleading. 187 This
Opinion addresses each issue in turn.
A. The Complaint Pleads that Caruso Is Conflicted.
The first step in the analysis is to determine whether the Complaint contains
facts sufficient to support a reasonable inference that Caruso was a conflicted
fiduciary. The extent of Caruso’s conflicts of interest is relevant to Plaintiffs’
arguments that this transaction is subject to entire fairness or, in the alternative,
subject to the heightened standard of review set forth in Revlon. The question is
relevant to the entire fairness analysis because Plaintiffs allege that a majority of
Zayo’s Board was beholden to Caruso and furthered Caruso’s self-interests. If
Plaintiffs did not adequately allege that Caruso was conflicted or self-interested
during the transaction, the foundation of Plaintiffs’ theory falls apart. The question
of Caruso’s conflicts of interests is relevant to the Revlon analysis because it is
central to Plaintiffs’ claim that Caruso acted in a conflicted manner and that Zayo’s
Board did not adequately supervise him.
“Regardless of the underlying theory, the key in evaluating whether financial
interests gave rise to a disabling conflict is to look to the subjective intent of the
fiduciary. At the pleading stage, the question is whether it is reasonably conceivable
187
Id. at 46.
35
that the fiduciary was subjectively affected by the conflict at issue.” In re Mindbody,
Inc., 2020 WL 5870084, at *16 (Del. Ch. Oct. 2, 2020). Plaintiffs argue that Caruso
sought to maintain his job as the CEO of the Company, that he was under pressure
from activist stockholders who were displeased with his performance at Zayo, 188 and
that Caruso sought to enrich himself through obtaining equity in the post-acquisition
company.189
From the outset of their discussions, Ganzi indicated that he would require
Caruso staying on as CEO.190 Caruso informed the Board that Ganzi’s “approach
required that I agree to be CEO,” that Caruso’s “willingness to be CEO would be
required,” and that Ganzi offered that Caruso “could also be chairman.” 191 After
Caruso announced Project Unleash in November 2018, Ganzi reinforced his intent
188
Plaintiffs’ argument that Caruso faced a threat of losing his job due to activist pressure
is inconsistent with their contention that a majority of the Board was “subordinate to
Caruso’s status as a benefactor, investor, and the most prominent tech executive in the tech
hub of Boulder.” Pls.’ Ans. Br. 6. Caruso had just won re-election to a three-year term on
November 6, 2018. He was unopposed and received 197,766,808 of the votes cast. Zayo
Group Holdings, Inc., Current Report (Form 8-K) (November 6, 2018). If, as Plaintiffs
assert, six of the eight outside directors were subservient to Caruso, then Caruso’s position
was safe for at least two more years.
189
Pls.’ Ans. Br. 34.
190
Compl. ¶ 61.
191
Id.
36
to have Caruso stay at the helm of Zayo, when he congratulated Caruso and told
Caruso that Ganzi and his partners would “back you in a private setting.”192
In Mindbody, the court concluded that the CEO’s stated desire for near-term
liquidity and future employment with a favored bidder made it reasonably
conceivable that his interests conflicted with those of the public stockholders.
Mindbody, 2020 WL 5870084, at *19–20. In contrast, in In re Toys “R” Us, Inc.
S’holders Litig., the court determined that an acquiror’s direct message that its bid
was conditioned on the retention of key (but unspecified) members of management
did not give rise to a disabling conflict. 877 A.2d 975, 1003 (Del. Ch. 2005). The
well pleaded allegations here fall somewhere in between Mindbody and Toys “R”
Us. Procedurally, Mindbody was decided on a motion to dismiss, whereas Toys “R”
Us was on a motion for a preliminary injunction. For purposes of the pending
motion, I conclude that the Complaint alleges Caruso’s knowledge that Consortium
B required his continuation as CEO to create a pleading-stage inference that he
harbored personal interests that conflicted with those of the Zayo public
stockholders.
In doing so, however, I do not draw a pleading-stage inference that Caruso
labored under a cognizable threat from activist stockholder pressure to oust him as
192
Id. ¶ 79; see also id. (“I like your idea below, could be far easier executed if you are
private.”).
37
CEO. The mere threat of a proxy contest does not render a director conflicted. See
In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *12 (Del. Ch. Jan. 3, 2013).
Yet as the court observed in Rudd v. Brown, “[t]he threat of a looming proxy contest
might inform the inference of conflict at the pleading stage ‘when coupled with other
pled facts.’” 2020 WL 5494526, at *8 (Del. Ch. Sept. 11, 2020) (quoting In re
Tangoe, Inc. S’holders Litig., 2018 WL 6074435, at *14 (Del. Ch. Nov. 20, 2018)).
Plaintiffs’ assertion of conflict and misalignment of Caruso’s interests due to
activist pressure are not cognizable, even at the pleadings stage. There were no
allegations of a threatened proxy contest prior to the November 18, 2018 Bloomberg
article describing private equity interest in the Company. Although the Board and
its advisors monitored activist investor activity, there was no threat of a proxy
contest. Plaintiffs do not allege that the Board’s other directors ever exerted pressure
on Caruso or told him that his job was in jeopardy. Cf. In re Xura, Inc., S'holder
Litig., 2018 WL 6498677, at *13 (Del. Ch. Dec. 10, 2018) (CEO knew that the board
of directors, in addition to stockholders, was “displeased with his performance and
likely would remove him from office if a sale of the Company did not occur”).
Instead, they allege the opposite—that the Board was in his pocket. Even after some
stockholders sought to exert pressure to accept an offer in the low to mid $30s, they
did not launch a proxy contest or expressly threaten one. Indeed, a January 2019
38
letter to Caruso from Zimmer Partners, clearly stated, “We are not activists.”193
Nevertheless, it is reasonably conceivable under the well pleaded factual allegations
that Caruso was a conflicted fiduciary with respect to the Merger, based on his
prospective employment.194
B. Entire Fairness Review
Plaintiffs argue that the Merger is subject to entire fairness review because a
majority of Zayo’s Board was not independent from Caruso and placed his interests
above their fiduciary duties by approving the Merger.195 For a duty of loyalty claim
against Caruso to survive a motion to dismiss under this theory, the Complaint must
state facts creating a reasonable inference that a majority of the directors “(1) were
self-interested or not independent or (2) acted in bad faith.” Miramar Firefighters
193
Ex. 27.1. The letter is mistakenly dated January 25, 2018, as it was emailed on January
25, 2019. See Ex. 27.
194
Plaintiffs allege that Caruso was conflicted because, if he could arrange a sale of the
Company to a management-friendly private equity buyer, Caruso would be able to roll over
a significant portion of his equity. Pls.’ Ans. Br. 34. The Complaint contains no well-
pleaded allegations that Caruso reached any agreement to roll over his equity during the
Merger negotiations or any other facts that would tend to demonstrate that Caruso acted in
a conflicted manner as a result of his hopes of securing equity in the Company after its
acquisition. See Compl. ¶ 147 (alleging that Caruso entered into a rollover letter agreement
the day after the Board voted to approve the Merger); City of Warren Gen. Emps.’ Ret. Sys.
v. Roche, 2020 WL 7023896, at *13 (Del. Ch. Nov. 30, 2020). Nor do Plaintiffs allege that
Caruso engaged in such discussions concerning an equity rollover absent Board authority.
Cf. Ex. 41 (Caruso confirming at an April 26, 2019 Board meeting that there had been no
discussion between management and Consortium B regarding an equity rollover).
195
See Pls.’ Ans. Br. 41–46.
39
Pension Fund v. AboveNet, Inc., 2013 WL 4033905, at *3 (Del. Ch. July 31, 2013)
(citing Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239–40 (Del. 2009)).
The Complaint does not allege that a majority of the Board was self-interested
in the Merger. Thus, the relevant inquiry is one of director independence. The entire
fairness standard applies where the board of directors lacks an independent majority
when approving a transaction. Frederick Hsu Living Tr. v. ODN Holding. Corp.,
2017 WL 1437308, at *26 (Del. Ch. Apr. 14, 2017). To make this determination, “a
court counts heads” and conducts a “director-by-director analysis.” Id. The court
starts from the presumption that directors are independent. See id. To overcome the
presumption that a director is independent, a plaintiff must plead facts demonstrating
that a director is “loyal to, beholden to, or otherwise influenced by an interested
party” in order to establish a reason to doubt whether the director is capable of
objectively judging the matter in question. Id.
A director may be beholden to an interested party through “personal or other
relationships,” In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 938–39 (Del. Ch.
2003) (internal quotations omitted), but “[a]llegations of mere personal friendship
or a mere outside business relationship, standing alone, are insufficient to raise a
reasonable doubt about a director’s independence.” Beam ex rel. Martha Stewart
Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004).
Our law is clear that mere allegations that directors are friendly with,
travel in the same social circles, or have past business relationships with
40
the proponent of a transaction or the person they are investigating, are
not enough to rebut the presumption of independence. Rather, the
Supreme Court has made clear that a plaintiff seeking to show that a
director was not independent must meet a materiality standard, under
which the court must conclude that the director in question’s material
ties to the person whose proposal or actions she is evaluating are
sufficiently substantial that she cannot objectively fulfill her fiduciary
duties.
In re MFW S’holders Litig., 67 A.3d 496, 509 (Del. Ch. 2013) (footnotes omitted),
aff’d sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). The court
must “consider all the particularized facts pled by the plaintiffs about the
relationships between the director and the interested party in their totality and not in
isolation from each other, and draw all reasonable inferences from the totality of
those facts in favor of the plaintiffs.” Delaware Cty. Empls. Ret. Fund v. Sanchez,
124 A.3d 1017, 1019 (Del. 2015). But the allegations must be sufficient to
demonstrate a “substantial reason” to find that a director cannot “mak[e] a decision
with only the best interests of the corporation in mind.” In re Oracle Corp. Deriv.
Litig., 824 A.2d at 938 (internal quotations omitted) (emphasis in original).
Zayo’s Board consists of nine directors. As discussed above, the court
assumes that Plaintiffs have adequately alleged a pleadings-stage inference that
Caruso was conflicted. If a majority of the directors could not have placed the
interests of Zayo’s stockholders above Caruso’s personal interests in approving the
Merger, it is possible that the entire fairness standard would apply to the transaction.
To raise the standard of review to entire fairness, Plaintiffs must plead that at least
41
four other directors were sufficiently loyal to or beholden to Caruso. 196 It is not
enough to merely allege that the Board went along with Caruso’s plan or succumbed
to his desire to steer the sale of the Company to a private equity buyer. Miramar,
2013 WL 4033905, at *3. In their briefing and at oral argument, Plaintiffs focused
their argument on six directors: Drake, Kaplan, Rottenberg, White, Gips, and Spruill.
Plaintiffs make no allegations that call into question the independence of
Connor or Morris. Thus, Plaintiffs must allege that four of the other six outside
directors were not independent of Caruso. As discussed herein, the Complaint does
not adequately allege that a majority of the directors were not independent, let alone
under Caruso’s control.
1. Drake.
Drake joined the Board on November 7, 2018. 197 Drake is a prominent
Boulder entrepreneur, and Caruso’s family foundation was an early investor in
Drake’s company. Drake’s company was an early member of the Blackstone
Entrepreneurs Network, for which Caruso sat on the steering committee and to
which Zayo donates. In November 2019, Drake was the featured entrepreneur at
Silicon Flatirons, of which Zayo and Caruso are lead sponsors. Drake and Caruso
196
Plaintiffs do not argue that any directors had a conflict of interest independent of their
relationship with Caruso.
197
The following facts are alleged in paragraphs 21–22 of the Complaint.
42
live within one mile of each other. Their children attended the same high school and
played sports together. Drake’s two sons and Caruso’s son all attended the Miami
University of Ohio (Drake’s alma mater), and their families have traveled together
on college-related trips on Caruso’s charter plane. The family members’ social
media accounts display their connections, including in group photos.198 Zayo and
Caruso donate to the nonprofit at which Drake’s wife works, and Drake’s elder son
has worked for Zayo since graduating college in 2017.
Based on these allegations, it is reasonably conceivable that Drake could not
act independently in evaluating the Merger. Drake’s and Caruso’s personal
connections go beyond moving in the same social circles, living in the same school
district, or being Facebook friends. 199 Their families take trips together on a private
plane chartered by Caruso, and their children publicly hold themselves out on social
media to be as close as family. The extent and nature of these connections are
“suggestive of the type of very close personal relationship that, like family ties, one
would expect to heavily influence a human’s ability to exercise impartial judgment.”
198
In addition to frequent comments on each other’s posts, the background cover photo for
Caruso’s son is a group photo of the Caruso and Drake siblings. Compl. ¶ 22. Caruso’s
son’s comment on the photo is “Oh the classic Fam.” Id.
199
Cf. Beam, 845 A.2d at 1051–52 (“Mere allegations that they move in the same business
and social circles, or a characterization that they are close friends, is not enough to negate
independence for demand excusal purposes.”).
43
Sandys v. Pincus, 152 A.3d 124, 130 (Del. 2016) (finding that a director was not
independent from the CEO, where their families co-owned a private airplane).
Defendants argue that Sandys is factually distinguishable from this case
because it involved “unusual facts.”200 In Sandys, the Supreme Court held that co-
ownership of a private plane between directors was an “unusual fact” evidencing
that the two were “extremely close.” 201 In Sandys, the Supreme Court observed that
sharing a private plane required “close cooperation . . . which [was] suggestive of
detailed planning indicative of a continuing, close personal friendship.” Sandys, 152
A.3d at 130. Here, Plaintiffs allege facts that support a reasonable inference that
Drake’s and Caruso’s families are close: their children attended the same high
school; members of the Drake and Caruso families are connected on social media
and comment on each other’s social media pages; members of the families have
traveled together on a private plane that Caruso chartered for personal and business
travel; and in one social media post, one of the children characterizes a group photo
of the Drake and Caruso children as a single, “classic [f]am[ily]”.202 In addition,
Drake’s son was working for Zayo, where Caruso is CEO. Together, these
allegations are sufficient to allege that Caruso and Drake have a “continuing, close
200
Def’s. Reply Br. 5 n.4 (citing Sandys, 152 A.3d at 130).
201
Id. (citing Sandys, 152 A.3d at 130).
202
Compl. ¶ 22.
44
personal friendship” that often involves “detailed planning,” just as in Sandys.
Sandys, 152 A.3d at 130; see Cal. Pub. Empls.’ Ret. Sys. v. Coulter, 2002 WL
31888343, at *9 (Del. Ch. Dec. 18, 2002) (“[I]t is a reasonable inference from the
alleged particularized facts that the combination of relationships between Coulter
and Mandigo, along with Coulter’s position as CEO of the company that employs
Mandigo’s son, would be sufficiently material to preclude Mandigo from being able
to consider demand without improper considerations intervening.”). The Complaint
alleges facts from which it is reasonably conceivable that Drake would place
Caruso’s interests first when determining whether to approve the Merger.
2. Kaplan.
Kaplan joined the Board in 2017. 203 He has been a professor at the University
of Chicago Booth School of Business (“Chicago Booth”) since Caruso was a student
there, and he is the faculty director of the Polsky Center. Between 2015 and 2018,
Caruso’s family foundation has donated approximately $350,000 to Chicago Booth,
and Caruso has also caused Zayo to donate to Chicago Booth. In 2017 and 2018,
Caruso served as a judge in the Polsky Center’s New Venture Challenge, and he
invested a total of $125,000 with top competitors. On Kaplan’s director
questionnaire for 2019, Kaplan acknowledged that Caruso’s and Zayo’s
203
The following facts are alleged in paragraph 19 of the Complaint.
45
contributions to Chicago Booth would affect Kaplan’s ability to exercise
independent judgment in making decisions about executive compensation.
Kaplan’s own acknowledgement of his lack of independence as to executive
compensation is sufficient to cast doubt on his ability to exercise independent
judgment with respect to the Merger. Although Kaplan completed the 2019 director
questionnaire after approving the Merger, it is reasonably inferable that he would
labor under Caruso’s influence when later voting for the Merger, particularly when
the events cited as calling into question his independent judgment (i.e., Caruso’s
donations to Chicago Booth) occurred prior to Merger negotiations. Plaintiffs have
adequately alleged that Kaplan was not independent from Caruso with respect to the
Merger. 204
3. Rottenberg
Rottenberg joined the Board in 2014.205 She has earned over $1,269,000 as a
director of Zayo. Rottenberg is the co-founder and CEO of Endeavor, a global
nonprofit that supports and co-invests in high-impact entrepreneurs. In 2015, Caruso
co-hosted a ticketed event in Boulder promoting Rottenberg’s new book. In 2017,
204
Caruso’s counsel conceded this point at oral argument. Oral Arg. 19:16–20:22 (“I don’t
have an answer for why [Kaplan] listed on his director questionnaire that he shouldn’t be
involved in compensation. . . . [W]e’ve let that one go.”).
205
The following facts are alleged in paragraph 18 of the Complaint.
46
Caruso’s family foundation invested in an Endeavor fund. In 2019, Caruso assisted
in launching, funding, and chairing the board of Endeavor’s new Colorado chapter.
In some circumstances, an interested individual’s support of a nonprofit
associated with a director can serve as a basis for adequately alleging that the director
lacks independence from the supporter. In Cumming ex rel. New Senior Inv. Grp.,
Inc. v. Edens, the plaintiff alleged that a director of a company, who was also
employed in a leadership position at a nonprofit, lacked independence from the
company’s CEO, whose family foundation made substantial contributions to the
nonprofit and whose wife was a longtime member of the nonprofit’s board of
directors. 2018 WL 992877, at *14 (Del. Ch. Feb. 20, 2018). The CEO’s daughter
had promoted the nonprofit on national television, and the CEO had publicly
provided hands-on support of the nonprofit’s humanitarian aid efforts. Id. The
plaintiff also alleged that the director derived over half of her annual income from
service on multiple boards, as facilitated by the CEO. Id. Under those
circumstances, “[w]hen the [CEO’s] family’s ties to [the nonprofit] are coupled with
the substantial and clearly material director fees [the director] received from service
on boards at the behest of [the CEO],” the Court concluded that there was reason to
doubt the director’s independence from the CEO. Id. at *15.
The allegations in this case are not sufficient to impugn Rottenberg’s
independence. First, the Complaint does not allege the amount of any contribution,
47
donation, or sponsorship from Caruso or his family foundation to Rottenberg or her
nonprofit. Hence, the allegations that Caruso has supported Rottenberg’s nonprofit
are not nearly as strong as the allegations in Cumming. Unlike the facts in Cumming,
Plaintiffs do not allege that Rottenberg draws a material percentage of her income
based on her relationship with Caruso. There is no well-pleaded allegation that
Rottenberg’s annual director fees—$200,000 for service on Zayo’s board of
directors—make up a large percentage of her income or that they are otherwise
material to her. 206 Nor do Plaintiffs deny that Rottenberg received her fees entirely
in Zayo stock,207 which would tend to align her interests in maximizing the deal
consideration for all stockholders. See LC Capital Master Fund, Ltd. v. James, 990
A.2d 435, 452 (Del. Ch. 2010) (recognizing the view that independent directors who
own a “meaningful, long-term common stock stake [is] a useful thing” so as to “align
the[ir] interests” with those of common stockholders). Plaintiffs have not alleged
facts sufficient to draw a reasonable inference that Rottenberg would lose her
director fees if she did not protect Caruso’s interests. Caruso owned only 3.6% of
206
See In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *17 (Del. Ch. Mar. 19, 2018)
(“[A]bsent a showing of materiality, the threat of losing director fees is ordinarily not
enough to impugn a director’s independence.”); In re TriQuint Semiconductor, Inc.
S’holders Litig., 2014 WL 2700964, at *3 (Del. Ch. June 13, 2014) (“[T]he mere fact that
the directors receive fees for their service is not enough to establish an entrenchment
motive.” (internal quotations omitted)).
207
See Oral Arg. Tr. 95:19–23.
48
Zayo’s stock. Plaintiffs do not allege that Caruso could have removed Rottenberg
as a director.
Caruso’s other miscellaneous connections with Endeavor and Rottenberg are
not sufficient to undermine Rottenberg’s ability to fulfill her fiduciary duties to the
Company. Caruso’s support of Rottenberg’s book, his investment in her fund, and
his assistance with the Colorado chapter of her organization do not support a
reasonable inference that Rottenberg was not independent of Caruso. Plaintiffs have
not adequately alleged that Caruso’s leadership of the Colorado chapter of
Rottenberg’s global nonprofit or his donation to the nonprofit are material to
Rottenberg. There is no allegation supporting a reasonable inference that Caruso
would withdraw his support of Endeavor if Rottenberg voted against the Merger.
Plaintiffs have therefore not adequately alleged that Rottenberg is beholden to
Caruso or was otherwise incapable of independently evaluating the merits of the
Merger.
4. White
White joined the Board in 2017.208 White previously served as a board
member of the National Center for Women & Information Technology, a nonprofit
based in Boulder. Caruso and Zayo were donors to the nonprofit. White and Caruso
were both judges for the Polsky Center’s New Venture Challenge.
208
The following facts are alleged in paragraph 20 of the Complaint.
49
These allegations do not create a reasonable inference that White lacked
independence from Caruso.209 There are no allegations as to the amount of any
donation or when it was made. Nor are there any allegations that White solicited
those donations or how they could have been material to her. It is not a reasonable
inference that Caruso’s unspecified donations to a nonprofit on which White served
as a board member and their having served as judges at the Polsky Center program
rendered her beholden to Caruso or undermine White’s ability to independently
evaluate the merits of the Merger.
5. Gips
Gips joined the Board in 2013.210 Caruso has described Gips as a “mentor of
sorts.” 211 Gips and Caruso were colleagues during Caruso’s tenure from 1998 to
2003 at Level 3 Communications. 212 Level 3 Communications crashed when the
telecom bubble burst, and Caruso was forced to leave. In 2008, Caruso wrote that
209
Plaintiffs argued that White was not independent at oral argument, but did not make any
substantive argument in their briefing that White was not independent. See Pls.’ Ans. Br.
41–46 (section detailing Plaintiffs’ allegations regarding why five of the six Board
members mentioned in the Complaint cannot be independent, absent any discussion of
White); see also id. 7 (only observing that “White and Caruso both served as judges for the
entrepreneurial challenge at Chicago Booth”). The Complaint does not allege when White
served as a judge for the New Venture Challenge, whether she and Caruso were judges at
the same time, or how their serving as judges for that program rendered White beholden to
Caruso or unable to act independently of him.
210
Compl. ¶ 17.
211
Id.
212
Id.
50
Gips helped him by introducing him to Columbia Capital, a private equity firm, and
that they had stayed in regular contact “from both a social and business
standpoint.”213
These allegations are not sufficient to demonstrate that Gips is not
independent from Caruso. They were colleagues 20 years ago and Gips provided
Caruso an introduction to a private equity firm. These are the kinds of “[m]ere
allegations that they move in the same business and social circles” or
“characterization[s] that they are close friends” that the Supreme Court found
insufficient to overcome the presumption that directors are independent fiduciaries.
Beam, 845 A.2d at 1051. Though Caruso has described Gips as a “mentor of
sorts,” 214 this rather ambivalent statement does not support a reasonable inference
that Gips was beholden to Caruso or that he could not impartially consider the
Merger. The Complaint does not plead facts sufficient to impugn Gips’s
independence.
6. Spruill
Spruill joined the Board on November 7, 2018 and was named Lead
Independent Director.215 At the time of his Board appointment, Spruill was CFO of
213
Id.
214
Compl. ¶ 17.
215
The following facts are alleged in paragraphs 21 and 23 of the Complaint.
51
SendGrid, Inc., a publicly traded technology company. Prior to working at
SendGrid, Spruill was a director of Boulder-based Rally Software. SendGrid
received initial funding from Techstars Boulder Accelerator, and SendGrid and
Rally Software were both funded by the Foundry Group. In mid-October 2018,
SendGrid was sold for approximately $2 billion, and the transaction closed on
February 1, 2019. In March 2019, Spruill joined the board of Denver-based Ping
Identity Holdings, and in July 2019, Spruill became CEO of Boulder-based
DigitalOcean.
Most of these entities have some connection to Caruso: Zayo donates to
Techstars, and Caruso is allegedly close to key figures at Techstars and the Foundry
Group. SendGrid, Ping Identity, and Techstars are all part of the Blackstone
Entrepreneurs Network, where Spruill is a member and Caruso sits on the steering
committee. Additionally, Spruill and Caruso live within one mile of each other and
are members of the Boulder Country Club.
The alleged connections between Caruso and Spruill’s employers are
insufficient to undermine Spruill’s independence. The various connections that
Plaintiff draws between companies affiliated with Caruso and Spruill are too
attenuated to support a reasonable inference that Caruso could exert influence over
Spruill to the extent that Spruill lacks independence from him.
52
Plaintiffs allege that the acquisition of SendGrid in 2019 meant that Spruill
“likely would be looking for a new tech opportunity in Boulder,” 216 and that Spruill
would not oppose a Caruso-friendly buyout “[g]iven Caruso’s prominence in the
tight world in which Spruill was likely looking for a new position.” 217 Plaintiffs
analogize this situation to In re Oracle Corp. Deriv. Litig., 2018 WL 1381331 (Del.
Ch. Mar. 19, 2018). In Oracle, a director had publicly stated that she was trying to
become the CEO of a large technology company. In re Oracle Corp. Deriv. Litig.,
2018 WL 1381331, at *18 (Del. Ch. Mar. 19, 2018). The court ultimately found that
the director was not capable of independently evaluating a litigation demand against
two Oracle officers, including its cofounder and largest stockholder, Larry Ellison.
Id. The court reasoned that “[g]iven Oracle’s prominence in the technology arena,
it is reasonable to infer that [the director’s] career ambitions would weigh heavily
on her if she were asked to consider suing [the CEO], who continues to wield
outsized influence at the company.” Id. But that was just part of the basis for
concluding there was reason to doubt the director’s independence. Instead, the court
determined that there existed a “constellation of facts that, taken together, create[d]
reasonable doubt” about the director’s ability to objectively consider a derivative
demand to institute litigation. Id. Those other facts included that: (1) the director
216
Compl. ¶ 23.
217
Pls.’ Ans. Br. 46.
53
sat on the boards of two companies that had significant relationships with Oracle;
(2) the director publicly stated that “people do what they think the CEO wants, even
if they know it’s wrong”; (3) the board determined that the director was no longer
independent under the NYSE’s listing standards; and (4) the director “would face
the potential loss of her lucrative directorship if she agreed to sue Ellison.” Id. In
addition, one of the two officers that were the subject of the demand had publicly
stated that he was close friends with the director. Id.
The allegations as to Spruill come nowhere close to those that influenced the
court in Oracle. Spruill was a former mergers and acquisitions banker and had most
recently been the CFO of a public company. 218 The factual allegations do not create
a reasonable inference that Spruill needed Caruso to find new employment, that
Caruso had any influence on Spruill’s subsequent employment, that Spruill faced the
loss of his board seat if he did not vote for the Merger, or that Spruill would not act
independently of Caruso. The allegations that Spruill and Caruso live within one
mile of each other and are members of the same country club, without more, are the
sort of “thin social-circle friendship” allegations that do not support a reasonable
inference that a director lacks independence. Sanchez, 124 A.3d at 1022. Even
considering their social proximity in conjunction with their business connections,
218
Compl. ¶ 23.
54
the Complaint does not adequately allege that their ties were sufficiently substantial
to render Spruill incapable of exercising his independent judgment with respect to
the Merger.
***
For the foregoing reasons, Plaintiffs have not adequately alleged that a
majority of Zayo’s nine-member Board was interested, lacked independence from
Caruso, or acted in bad faith in approving the Merger. Because the Complaint falls
short of disqualifying a majority of the Board, entire fairness is not the applicable
standard of review. Frederick Hsu Living Tr., 2017 WL 1437308, at *26.
C. The Revlon Theory
In the alternative to their entire fairness theory, Plaintiffs allege that Caruso
breached his fiduciary duties in connection with the Merger because the Board’s
process did not satisfy enhanced scrutiny under Revlon and its progeny. The Merger
was a sale of Company for cash, and it is therefore presumptively subject to
enhanced scrutiny under Revlon.219
Under the Revlon standard, a director “must focus on one primary objective—
to secure the transaction offering the best value reasonably available for the
stockholders—and they must exercise their fiduciary duties to further that end.”
219
In re Mindbody, Inc., 2020 WL 5870084, at *13 (“The cash-for-stock Merger was a
final-stage transaction presumptively subject to enhanced scrutiny under Revlon”).
55
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015) (quoting
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del. 1993)).
“Although the Revlon doctrine imposes enhanced judicial scrutiny of certain
transactions involving a sale of control, it does not eliminate the requirement that
plaintiffs plead sufficient facts to support the underlying claims for a breach of
fiduciary duties in conducting the sale.” Malpiede v. Townson, 780 A.2d 1075,
1083–84 (Del. 2001). It is well established that “there is no single blueprint that a
board must follow to fulfill its duties, and a court applying Revlon’s enhanced
scrutiny must decide whether the directors made a reasonable decision, not a perfect
decision.” C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation
Emps.’ Ret. Trust, 107 A.3d 1049, 1067 (Del. 2014) (internal quotations omitted)
(emphasis in original). Revlon thus requires the court to “examine whether a board’s
overall course of action was reasonable under the circumstances as a good faith
attempt to secure the highest value reasonably available.” Id. at 1066 (citing
Paramount Commc’ns, 637 A.2d at 41; Unitrin Inc. v. American Gen. Corp., 651
A.2d at 1385–86 (Del. 1995)). The court must assess “the information on which the
directors based their decision” and “the reasonableness of the directors’ action in
light of the circumstances then existing.” Paramount Commc’ns, 637 A.2d at 45.
Proving unreasonable action often requires “evidence of self-interest, undue
favoritism or disdain towards a particular bidder, or a similar non-stockholder-
56
motivated influence that calls into question the integrity of the process.” In re Del
Monte Foods Co. S’holders Litig., 25 A.3d 813, 831 (Del. Ch. 2011).
Revlon does not impose a new duty on directors. Fiduciary defendants who
are subject to enhanced scrutiny must demonstrate that their “motivations were
proper and not selfish” and that “their actions were reasonable in relation to their
legitimate objective.” Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786, 810
(Del. Ch. 2007). “The reasonableness standard permits a reviewing court to address
inequitable action even when directors may have subjectively believed that they
were acting properly.” Del Monte Foods, 25 A.3d at 830–31. This standard,
however, is not a license for a court to substitute a director’s judgment with that of
its own. In re Columbia Pipeline Grp., Inc., 2021 WL 772562, at *31 (Del. Ch. Mar.
1, 2021).
Plaintiffs frame this as a “paradigmatic Revlon claim” where a “conflicted
fiduciary . . . tilts the sale process toward his own personal interests in ways
inconsistent with maximizing stockholder value” while being “insufficiently
checked by the board.” Mindbody, 2020 WL 5870084, at *13. The Complaint’s
allegations that Caruso was conflicted does not, alone, require denial of his motion
to dismiss. Under Delaware law, “[t]here is nothing inherently wrong with a Board
delegating to a conflicted CEO the task of negotiating a transaction.” City of Ft.
Myers Gen. Empls.’ Pension Fund v. Haley, 235 A.3d 702, 721 n.69 (Del. 2020). If
57
a board of directors does so, however, Delaware law is concerned with the possibility
that the conflicted fiduciary could disable the board’s ability to oversee negotiations.
Thus, the Delaware Supreme Court has recognized that a plaintiff can state a claim
under Revlon by pleading that a conflicted fiduciary failed to disclose “critical
information” to the board or that the board failed to oversee a conflicted fiduciary
sufficiently throughout the sale process. Kahn v. Stern, 183 A.3d 715 n.4 (Del. 2018)
(TABLE); Haley, 235 A.3d at 721 n.69 (Del. 2020); accord Rudd v. Brown, 2020
WL 5494526, at *7 n.63 (Del. Ch. Sept. 11, 2020).
Together, Kahn and Haley articulate two ways in which a conflicted
fiduciary’s conduct during transaction negotiations gives rise to a claim for breach
of fiduciary duty under Revlon. The first circumstance arises where the conflict or
other critical information was not adequately disclosed to the Board. This is
frequently referred to as a “fraud on the board” claim. For example, in Mills
Acquisition Co. v. Macmillan, Inc., the court held that management’s financial
advisor, in the presence of complicit officers who were on the buy-side of the
transaction, misled the board about the bidding process:
Wasserstein falsely claimed that the advisors had conducted “a level-
playing field auction where both parties had equal opportunity to
participate.” Additionally, in answer to questioning, Wasserstein
mistakenly assured the board that he had been the “only conduit of
information” during the process and, falsely, that both parties had
received identical information during the auction. Despite the obvious
untruth of these assertions, [two conflicted officers] remained silent,
knowing also that Evans had clandestinely, and wrongfully, tipped
58
Maxwell's bid to KKR.
559 A.2d 1261, 1277 (Del. 1989). The Court described the officers’ knowing silence
about the tip as “a fraud upon the board.” Id. at 1283; see also FrontFour Capital
Group LLC v. Taube, 2019 WL 1313408, at *26 (“In the events leading up to the
Proposed Transactions, the Taube brothers created an informational vacuum, which
they then exploited.”). To proceed under that theory, the plaintiff must “allege that
[the officer was] acting out of self-interest and [the officer] deceived the rest of the
board into approving the transaction.” City of Miami Gen. Emps. and Sanitation
Emps. Ret. Trust v. Comstock, 2016 WL 4464156, at *19 (Del. Ch. Aug. 24, 2016),
aff’d, 158 A.3d 885 (Del. 2017) (TABLE).
Plaintiffs here, however, concede that they are not asserting a fraud on the
board theory. 220 Instead, they contend that Caruso was a conflicted fiduciary in this
transaction and there was inadequate board oversight of his conduct. Thus, as the
theory goes, the Board did not satisfy its fiduciary duties under Revlon and,
therefore, Caruso is liable for breach of the duty of loyalty. 221 This claim implicates
the second circumstance addressed by Haley and Kahn. Haley, 235 A.3d at 721
220
Oral Arg. Tr. 49:21–50:15, 56:12–14.
221
This opinion does not address the question of whether a board’s failure to properly
oversee a conflicted officer during the sale process gives rise to a direct claim against the
officer, if the conflict is fully disclosed and the officer does not conceal material
information from the board.
59
n.69. In articulating the standard, the Supreme Court in Haley discussed RBC
Capital Markets LLC, v. Jervis, 129 A.3d at 831, 850–57. RBC affirmed this court’s
findings that the board failed to oversee a special committee appointed to consider a
merger proposal, failed to become informed about strategic alternatives and about
potential conflicts faced by advisors, and approved the merger without adequate
information. RBC, 129 A.3d at 831, 850–57. As the Court noted: “While a board
may be free to consent to certain conflicts, . . . directors need to be active and
reasonably informed when overseeing the sale process, including identifying and
responding to actual or potential conflicts of interest.” Id. at 855.
Plaintiffs therefore seek to establish their fiduciary duty claim against Caruso
through allegations that the Board’s management of Caruso did not satisfy enhanced
scrutiny. Oral Arg. Tr. 50:7–11 (arguing that “a Revlon claim is adequately pled
because there was no active board oversight of unreasonable, selfish, self-seeking
conduct by a conflicted CEO, and that combination of facts calls into question the
integrity of the sale process”). As this court recently observed, however:
[T]o elevate the standard of review for a paradigmatic Revlon claim, an
interested officer must be more than overweening; he must be
fraudulent or outright manipulative. The board must be more than
supine; it must be deceived and permit that deception. And the
deception must affect the outcome. To raise the standard of review on
any less risks swallowing enhanced scrutiny in every paradigmatic
Revlon case.
60
In re Pattern Energy Grp. Inc. S’holders Litig., 2021 WL 1812674, at *34 (Del. Ch.
May 6, 2021).
1. When did Enhanced Scrutiny Attach?
The parties appear to agree that enhanced scrutiny under Revlon was triggered
in November 2018, but they disagree as to the precise date. Plaintiffs argue that
Caruso triggered the Board’s duties under Revlon “on or before” November 7,
2018. 222 Plaintiffs contend that Caruso put the Company in play and invited bids
when he announced Project Unleash during the November 7 Earnings Call because
it “functioned as an active solicitation of bids.”223 Defendant argues that any duties
under Revlon were not triggered until the Board received a formal proposal from
Consortium A on November 16, 2018. 224
Ordinarily, it is the board that causes the company to initiate an active sale
process, thus triggering Revlon. There are instances, however, in which “other
corporate actors can take action that implicates enhanced scrutiny.” Columbia
Pipeline, 2021 WL 772562, at *38. For example, in McMullin v. Beran, a
controlling stockholder’s actions in unilaterally initiating, structuring, and
negotiating the sale of the company implicated Revlon. 765 A.2d 910, 919, 924
222
Pls.’ Ans. Br. 30.
223
Id. 31.
224
Def.’s Opening Br. 39.
61
(Del. 2000). In RBC, the Court agreed with this court’s determination that the
initiation of the sale process occurred when the Chief Executive Officer, who chaired
a special committee charged with considering strategic alternatives, retained an
investment bank which believed that its charge was to sell the company. Several
months later, the board adopted resolutions stating that it ratified any and all actions
taken by the special committee. The Supreme Court held that “these unusual facts”
supported this court’s factual finding that Revlon was triggered before the board
authorized selling the company. RBC, 129 A.3d at 852–53. In doing so, however,
the Supreme Court did not depart from its decision in Lyondell Chem. Co. v. Ryan,
where it concluded that “[t]he time for action under Revlon did not begin until . . .
the directors began negotiating the sale of Lyondell.” 970 A.2d, 235, 242 (Del.
2009); see RBC, 129 A.3d at 852.
Plaintiffs also rely on Columbia Pipeline. In that case, the court held that it
was reasonably conceivable that Revlon was triggered when the company’s chief
financial officer, without board authorization: (1) emailed 190 pages of confidential
documents to an officer of the acquiror; (2) handed him talking points on how the
acquiror could convince the target board to agree to a deal without putting the target
in play, thus avoiding a competitive auction; (3) told him that the acquiror would be
unlikely to face competition because the target had eliminated the competition; and
(4) invited a bid. 2021 WL 772562, at *6–7, 39.
62
The allegations of the Complaint do not create a reasonably conceivable
inference that Caruso’s conduct on November 7, 2018 triggered enhanced scrutiny.
Even if Caruso’s combined earnings and Project Unleash announcement put Zayo
“in play” as Plaintiffs allege, that does not trigger Revlon. See RBC, 129 A.3d at
852 (reiterating that “enhanced scrutiny did not arise simply because the company
was in play”) (cleaned up) (quoting Lyondell, 970 A.2d at 242). Caruso did not
disclose confidential corporate information designed to give a bidder a competitive
advantage in acquiring the company as was the case in Columbia Pipeline. Nor did
he time, structure, and negotiate the entire transaction with a favored bidder as in
McMullin. And there are no unusual facts such as in RBC where the board ratified
prior conduct. Instead, the allegations establish a pleadings-stage inference that
Revlon was not triggered until November 16, 2018 at the earliest, when the Board
received the first indication of interest from Consortium A. Nevertheless, even
assuming that enhanced scrutiny applies to all events on and after November 7, 2018,
the result is the same.
2. Caruso Did Not Breach His Fiduciary Duties Under
Revlon.
Plaintiffs’ Complaint does not state a claim that Caruso breached his fiduciary
duties due to a failure of the Board to oversee him as a purportedly conflicted
fiduciary. As discussed above, a majority of Zayo’s Board was disinterested and
independent from Caruso. Zayo’s Board therefore had no incentive to fail to oversee
63
Caruso. Plaintiff does not dispute that Zayo’s Board was fully informed of Caruso’s
purported conflicts of interest. It is not disputed that the Board confirmed that there
were no unauthorized discussions regarding whether Caruso would continue with
the Company after the transaction.225 It is also undisputed that Zayo’s Board, with
the assistance of financial and legal advisors, conducted a six-month public sales
process, accepted the highest price offered by any bidder, and negotiated a
termination fee of approximately 2.5% of equity value to permit the emergence of a
superior offer for the ten months between signing and closing. See C & J Energy
Servs., 107 A.3d at 1067 (holding that Revlon “permit[s] a board to pursue the
transaction it reasonably views as most valuable to stockholders, so long as the
transaction is subject to an effective market check under circumstances in which any
bidder interested in paying more has a reasonable opportunity to do so.”).
Cast against this background, Plaintiffs’ claim that the Board failed to manage
Caruso’s conduct is distillable to a few primary events that, according to Plaintiffs,
unreasonably caused the Company to be sold to Consortium B at less than the highest
available price. According to Plaintiffs, Caruso breached his duties by ignoring the
advice of his CFO and JPM regarding the order of presentations on the November 7
Earnings Call, causing the Company to enter into contingency fee arrangements with
225
See, e.g., Proxy at 48, 49.
64
JPM and GS, and by informing Ganzi that Zayo’s Board would be willing to engage
at $35 per share.
For the following reasons, these specific events do not amount to a claim that
Caruso breached his fiduciary duties. Nor do they create a reasonable inference that
the Board failed to oversee Caruso during the sale process in a manner that rendered
it unreasonable or that Caruso disabled the Board to further his own self-interests.
3. November 7 Earnings Call
Plaintiffs take issue with Caruso’s organization of the November 7 Earnings
Call. JPM suggested that he begin the call with the announcement of Project Unleash
and to follow that announcement with news of the disappointing earnings.226 JPM
advised Steinfort, Zayo’s CFO, that “a few precedent joint spin/earnings
announcements” indicated that strategic spin-off announcements preceded the
earnings review or were standalone events. 227 Steinfort forwarded JPM’s email to
Caruso and agreed with JPM’s suggestion because, otherwise, analysts might be
“impatient” with Caruso “going through results waiting for you to get to strategic
part.” 228 Caruso, however, chose to lead with a summary of the earnings results
before introducing Project Unleash, telling Steinfort: “keep summary slide in place,
226
Compl. ¶ 72.
227
Id.
228
Id. ¶ 73.
65
then I go through Unleash.” 229 Caruso ultimately began the call with the news that
Zayo had missed its earnings by 4% to 6%, 230 its second quarterly miss in a row.
Zayo’s stock price fell over 25% following the call.231 Plaintiffs surmise that Caruso
rejected JPM’s and Steinfort’s advice with the purpose of dropping the stock price
and facilitating the Merger. Plaintiffs argue that, “not coincidentally,” the
disappointing earnings call got positive feedback from private equity bidders.232
Plaintiffs allege that “Zayo was soon in play.” 233
Under some situations, a fiduciary may breach his fiduciary duty by using
public announcements to manipulate the company’s stock price, thereby driving the
company towards a sale. In Mindbody, after receiving an indication of interest from
his preferred acquiror, the company’s CEO sought “a creative way” to guide
expectations on an upcoming earnings call, and lowered revenue guidance by $1 to
$3 million. Mindbody, 2020 WL 5870084, at *20–21. The CEO made the
announcement in spite of management’s internal sentiment that the company was on
track to hit its forecasts, which turned out to be correct. Id. at *20. The court in
229
Id. ¶ 74.
230
Id. ¶ 76.
231
Id. ¶ 78.
232
Pls.’ Ans. Br. 37.
233
Compl. ¶ 81.
66
Mindbody found that it was reasonably conceivable that the CEO “provided lower
guidance for reasons unrelated to business expectations.” Id.
The Complaint here does not allege facts sufficient to support a reasonable
inference that Caruso breached his fiduciary duties through the November 7
Earnings Call. Plaintiffs do not allege that Caruso knowingly presented inaccurate
information or that Project Unleash was a sham designed to generate acquisition
interest. 234 Instead, Plaintiffs argue that Caruso structured the November 7 Earnings
Call in a manner designed to tank the stock price and generate private equity interest
in acquiring Zayo. That argument is too speculative to credit. It is not a reasonable
inference that the order of Caruso’s presentation caused a decline in Zayo’s stock
price more than if he had presented the information in a different order. It is likewise
not a reasonable inference that the order of Caruso’s presentation generated more
acquisition interest than if he had organized his presentation differently, or even if
he had done so on separate days. It is therefore not a reasonable inference that
Caruso engineered the order of the presentation to generate private equity interest.
This case is not like Mindbody. Plaintiff does not argue that the substance of
Caruso’s presentation on November 7 contained any element of deceit. The
November 7 Earnings Call is not analogous to the announcement in Mindbody
234
See Compl. ¶¶ 71–80.
67
because, in Mindbody, the court could reasonably infer that a conflicted CEO who
lowers earnings guidance in spite of more optimistic internal projections
intentionally caused the company’s stock price to fall. Merely changing the order
of a presentation cannot reasonably be inferred to have the same effect. And even
assuming enhanced scrutiny attached at this date, it strains credulity to suggest that
the Board should have micromanaged the order of Caruso’s presentation.
4. Contingency Fees
Plaintiffs argue that Caruso “caused Zayo to retain financial advisors on terms
that assumed a sale of the Company.”235 Plaintiffs take issue with the financial terms
of the engagement letters with GS and JPM because they have contingency
payments. The engagement letters provided that GS and JPM would earn $27.2
million if Zayo sold for $33 per share, and they would earn more if Zayo sold at a
higher price. 236
Plaintiff has not alleged that Caruso caused the Company to enter into the
engagements with GS and JPM pertaining to a possible sale of the Company.237 The
Complaint alleges that “Zayo management sought Board approval of the financial
235
Pls.’ Ans. Br. 2.
236
Compl. ¶ 98.
GS and JPM had been performing investment banking advisory services for the
237
Company prior to the sale process. See id. ¶ 46.
68
terms of the Company’s engagement of GS and JPM.”238 The Board approved those
terms at a subsequent meeting. 239 There is nothing inherently wrongful about the
contingency fee arrangement at issue in this action.240 See In re Alloy, Inc., 2011
WL 4863716, at *11 (Del. Ch. Oct. 13, 2011) (observing that contingent fees are
routine, “reduce the target’s expense if a deal is not completed,” and may
“incentivize the financial advisor to focus on the appropriate outcome”) (internal
citations omitted). There is no allegation that Caruso circumvented the Board or
238
Id. ¶ 98.
239
Ex. 25.
240
Plaintiffs cite to a list of cases for the proposition that “Delaware law recognizes the
corrupting incentives created by contingent financial advisory fees.” Pls.’ Ans. Br. 39; id.
n.5. But each of those cited cases does not stand for this general proposition on its own
and either discussed contingency fees in a different context to that of a Revlon claim or was
accompanied by a distinguishable set of facts. Here, there are no allegations that JPM or
GS manipulated the inputs of their analyses to “make the price . . . look fair.” See In re El
Paso Pipeline Partners, L.P. Deriv. Litig., 2015 WL 1815846, at *24 (Del. Ch. Apr. 20,
2015) (finding multiple instances where the financial advisor “manipulated” the inputs
used in its analysis). Nor was this a transaction where the financial advisors’ contingency
fees were structured on an all-or-nothing basis, so that they were only paid if the Merger
was approved. Proxy at 62 (“[f]or services rendered . . . the Company [] agreed to pay
[JPM] . . . approximately $30,000,000, $3 million of which was payable following delivery
of [JPM’s] opinion and the remainder of which [was] contingent . . . upon consummation
of the transaction[]”), 68 (same for GS); see In re El Paso Corp. S’holder Litig., 41 A.3d
432, 442 (Del. Ch. 2012) (discussing how financial advisor’s advice was “more
questionable” based on $35 million or nothing contingency fee); see also In re Tele-
Commun., Inc. S’holders Litig., 2005 WL 3642727, at *10 (Del. Ch. Dec. 21, 2005)
(significantly higher contingency fee for financial advisor of $40 million in 1999). This is
also not a question of materiality for an alleged disclosure violation. See IRA Tr. FBO
Bobbie Ahmed v. Crane, 2017 WL 7053964, at *20 (Del. Ch. Dec. 11, 2017) (implying
that in the disclosure context, contingency is likely necessary, but not sufficient, in order
for the failure to disclose a financial advisor’s fee to constitute a material omission).
69
unilaterally acted to influence the bankers in a way that would taint the sales process.
Nor is there any allegation that GS or JPM concealed any information from or misled
the Board.
5. The Alleged Tip to Ganzi
Plaintiffs allege that Caruso tilted the sales process towards a management-
friendly buyout, and a buyout with Ganzi in particular, when he conveyed to Ganzi
the price at which Consortium B could obtain exclusivity. In a conversation between
Caruso and Ganzi on February 11, 2019, Ganzi indicated that Consortium B had
“price enthusiasm in the $34-36 range.” 241 Caruso replied that he “can’t speak for
board on price, but that they’ve shown willingness to engage at $35+ but not
willingness at lower prices.” 242 Earlier that day, the Company’s bankers and the
Board’s Lead Independent Director had instructed Caruso to tell Consortium A that
the Board would not accept a bid below $35, but the instruction regarding
Consortium B was simply that Caruso should encourage Consortium B to re-
engage. 243
Caruso’s discussion with Ganzi regarding the price at which the Company
would “engage” is distinguishable from the cases that Plaintiffs invoke concerning
241
Compl. ¶ 130.
242
Id.; Ex. 33.
243
Ex. 34.
70
a faithless “tip” to serve a fiduciary’s own self-interests. In Firefighters’ Pension
Sys. of City of Kansas City, Missouri Tr. v. Presidio, Inc., the board’s financial
advisor tipped a financial buyer about the details of a competing strategic buyer’s
bid, including price, and did not disclose it to the board. 251 A.3d 212 (Del. Ch.
2021). The tip led the financial buyer to outbid the strategic bidder by a dime,
impose a short deadline to respond, and demand an increased termination fee. The
tip brought the sale process to an end. The court concluded that concealment of the
tip from the board precluded efforts to neutralize the tip and facilitate an active
bidding contest. Id. at 269. Further influencing the result in that case was the target
CEO’s agreement to post-acquisition employment with the financial buyer and an
agreement to roll over more than half of his equity into equity in the acquired
company. This made the CEO a “net buyer,” thus aligning his interest with that of
the acquiror to “pay[] as little as possible.” Id. at 268 n.14.
Vice Chancellor Laster found the tip in Presidio to be similar to that in
Macmillan, where members of company management tipped KKR, one of the
participants in the sale process, by providing the specific price of a competing
bidder’s offer. Id. at 268–69. KKR then used that information to formulate its next
bid and to demand additional protections. As in Presidio, the tip to KKR had been
71
withheld from the target board, and the two executives that tipped KKR were
participants in the buyout. 244
Unlike in Macmillan, Consortium B was not tipped as to “every crucial
element of [Consortium A’s] bid.” 559 A.2d at 1283. There is no allegation that
Caruso told Consortium B any details of Consortium A’s bid, which at the time of
that communication on February 11, 2019, was $31.50. Plaintiffs contend that
Caruso should have told Ganzi that the Board would be disinclined to accept
anything below its prior anticipated range of $36–$38. 245 Perhaps so, but that is
merely a disagreement over tactics. The Board wanted Consortium B to re-engage
and create a competitive sale process. Unlike in Presidio and Macmillan, it was not
the type of information that revealed a competing bidder’s price or other deal terms
and there is no allegation that it led Consortium B to make a short-fuse offer or
propose onerous deal protections that would place any other bidder at a material
disadvantage. When Consortium B submitted its indication of interest at $35 per
share and sought exclusivity, the Board agreed, but it also extracted Consortium B’s
244
Mills Acq. Co. v. Macmillan, Inc., 1988 WL 108332, at *5 (Del. Ch. Oct. 18, 1988)
(“Under KKR’s bid, several of Macmillan’s senior managers would be offered the
opportunity to acquire 20% of the equity of the KKR-controlled entity that was to serve as
the acquisition vehicle.”); id. at *8 n.13 (indicating that the two Macmillan executives “and
other members of senior management would be equity owners in the new KKR-controlled
company”).
245
Pls.’ Ans. Br. 40.
72
commitment that any extension of exclusivity would be conditioned on not lowering
its $35 price.
Furthermore, unlike in Presidio and Macmillan, there is no allegation that
Caruso concealed any information from the Board. Cf. Presidio, 251 A.3d at 269
(“It is reasonable to infer that by not telling the Board about its tip to BCP, LionTree
prevented the Board from taking action to neutralize the effect of the tip and facilitate
an active bidding contest.”); Macmillan, 559 A.2d at 1279 (“Given th[e] finding [that
the two management directors were participants in the buyout, their] deliberate
concealment of material information from the Macmillan board must necessarily
have been motivated by an interest adverse to Macmillan's shareholders.”). As
Plaintiffs acknowledged, Caruso informed Spruill, Steinfort, and the bankers the
following day of his conversation with Ganzi. There is, therefore, no reasonable
inference that Caruso was covertly seeking to tilt the bidding process in favor of
Consortium B by disclosing the lowest price that the Board would be willing to
accept.
It is also not reasonable to infer that Caruso’s discussion with Ganzi
effectively ended the sales process. At oral argument, Plaintiffs’ counsel argued that
Caruso’s discussion with Ganzi ended price negotiations, claiming that as a result of
the discussion, “any other options have been taken out of the board’s hands. It’s just
yes or no, 35, because that’s the magic number that Caruso told Consortium B, and
73
that’s—that’s the only bid in town.”246 This argument fails because Zayo’s Board
remained free to continue to negotiate with Consortium B, including by rejecting an
offer for $35 per share. There is no allegation that Consortium B had delivered an
offer that would be withdrawn if not accepted in an inordinately short period. Cf.
Macmillan, 559 A.2d at 1269. There is no well-pleaded allegation indicating that
Caruso disabled the Board in any fashion through the February 11 conversation,
including by bringing an active bidding process to a close. To the contrary,
Consortium A remained interested up until the signing of the Merger Agreement,
but did not submit a higher offer. 247 There is also no allegation supporting a
reasonable inference that Caruso put off any bidder willing to offer a higher price in
favor of Consortium B. See In re Netsmart Tech., Inc. S’holders Litig., 924 A.2d
171, 194 (Del. Ch. 2007) (“There is no evidence in the record that any bidder was
ever put off the hunt by Conway because of his self-interest.”).
Because the Board was fully informed and remained free to act, I cannot
reasonably infer that Caruso’s discussion with Ganzi constituted a breach of his
obligation to “secure the transaction offering the best value reasonably available for
the stockholders,” RBC, 129 A.3d at 849, or that the Board failed to oversee his
conduct. The Complaint does not allege facts from which it is reasonably
246
Oral Arg. Tr. 82:15–19.
247
See Proxy at 48–52.
74
conceivable that the Board demonstrated self-interest, undue favoritism, or disdain
toward a particular bidder or that it harbored a “non-stockholder-motivated influence
that calls into question the integrity of the process.” Del Monte Foods, 25 A.3d at
831. Therefore, the Complaint does not allege facts to support a breach of fiduciary
duty claim based on a failure of the Board to oversee Caruso’s conduct during the
sale process.
D. Disclosure Claims
The Complaint alleges that Caruso breached his fiduciary duty in his
capacity as an officer by approving a materially misleading Proxy. “‘Under
Delaware law, when directors solicit stockholder action, they must disclose fully and
fairly all material information within the board’s control.’” In re Baker Hughes Inc.
Merger Litig., 2020 WL 6281427, at *12 (Del. Ch. Oct. 27, 2020) (quoting In re
Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *9 (Del. Ch. Jan. 5, 2017));
accord City of Warren Gen. Empls.’ Ret. Sys. v. Roche, 2020 WL 7023896, at *18.
The Delaware Supreme Court has explicitly held that “corporate officers owe
fiduciary duties that are identical to those owed by corporate directors.” Gantler v.
Stephens, 965 A.2d 695, 708 (Del. 2009). Thus, corporate officers may breach their
fiduciary duties to the extent they are involved in preparing a proxy statement that
contains materially misleading disclosures or omissions. In re Hansen Med., Inc.
S’holders Litig., 2018 WL 3025525, at *11 (Del. Ch. June 18, 2018) (holding that a
75
complaint stated a claim against an officer for violation of the fiduciary duty of
disclosure and noting that directors and officers of a corporation generally owe the
same fiduciary duties); see also Baker Hughes, 2020 WL 6281427, at *15–16;
Roche, 2020 WL 7023896, at *18; Morrison v. Berry, 2019 WL 7369431, at *25,
*27 (Del. 2018).
Caruso was Zayo’s CEO during the sale process and played an integral role
during the Merger negotiations.187 The Complaint alleges that Caruso signed the
Proxy in his capacity as Zayo’s CEO.248 See Roche, 2020 WL 7023896, at *18
(holding CEO could be liable for breach of the duty of care for a misleading proxy
disclosure where he was involved in the negotiation of the merger and signed the
proxy); Baker Hughes, 2020 WL 6281427, at *15–16 (same); Hansen Med., 2018
WL 3025525, at *11 (“Vance affixed his signature to the Proxy in his capacity as
President and CEO and presented the information to the stockholders for their
consideration. This means he may be liable for material misstatements in the Proxy
in his capacity as an officer [and] as a director.”). Therefore, the Complaint alleges
facts from which it can reasonably be inferred that Caruso was involved in preparing
the disclosures in the Proxy in his capacity as an officer of Zayo.
In a request for stockholder action, directors have a duty to disclose fully and
248
Compl. ¶155.
76
fairly all material facts within their control bearing on the request. Stroud v. Milliken
Enters., Inc., 552 A.2d 476, 480 (Del. 1989). A corporate fiduciary may violate a
duty of disclosure if she “mak[es] a materially false statement,” “omit[s] a material
fact,” or “mak[es] a partial disclosure that is materially misleading.” Pfeffer v.
Redstone, 965 A.2d 676, 684 (Del. 2009) (internal quotations omitted). “To state a
claim for breach by omission of any duty to disclose, a plaintiff must plead facts
identifying (1) material, (2) reasonably available (3) information that (4) was omitted
from the proxy materials.” Id. at 686. “An omitted fact is material if there is a
substantial likelihood that a reasonable shareholder would consider it important in
deciding how to vote.” Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)
(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)) (internal
quotations omitted). “[T]here must be 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.” Id. at 944
(quoting TSC Indus., 426 U.S. at 449).
1. Stockholder Activism
With respect to stockholder activism, the Proxy discloses that: Company
representatives met with activist stockholders, two of which “encouraged the
Company to consider strategic alternatives”; 249 the Board discussed “recent activist
249
Proxy at 33.
77
[] activity” and how to “engag[e] with activist[s]”; 250 Caruso was concerned that
Consortium A was having conversations with activists, in part, to pressure the
Board;251 and the Company received multiple letters from activists252. Plaintiffs
assert that this disclosure omitted material information. Plaintiffs argue that the
Proxy should have stated that it was likely that a proxy contest would be brought by
activist stockholders if Zayo was not sold. 253 Plaintiffs point to Sachem Head’s
January 25, 2019 letter to the Board and Senator’s January 31, 2019 email to Caruso,
both urging the Board to accept a reasonable bid. 254 In support of their argument,
Plaintiffs point to In re Xura, Inc., S’holder Litig., 2018 WL 6498677 (Del. Ch. Dec.
10, 2018), which involved an activist stockholder’s threat to replace an officer. In
Xura, the CEO “knew that both the Board and stockholder activists were displeased
with his performance and likely would remove him from office if a sale of the
Company did not occur.” Id. at *13. In Xura, “[m]ajor stockholders . . . openly
questioned” the CEO's performance. Id. at *8. These threats were concrete: in Xura,
the stockholder plaintiff had declared that it “intended to launch a proxy contest”
and “made clear to both [the CEO] and the Board its view that Xura should find a
250
Id. at 37, 41.
251
Id. at 38.
252
Id. at 40, 44.
253
Pls.’ Ans. Br. 49.
254
Id. at 49–50; Ex. 28; Compl. ¶ 90.
78
new CEO.” Id. The Chairman of Xura “privately advised [the CEO] that the Board
was considering major changes if there was no deal, including changes at . . . the
highest ranks of management.” Id.
The letter from Sachem Head to the Board states that proxy action would be
one of many options available to stockholders, if the Board rejected a credible bid
for Zayo (i.e., in the “low-to-mid 30s”): “If the Board rejects such an offer . . . ,
shareholders will be forced to consider any and all options (including proxy action)
to preserve the value of their investment.”255 Senator’s email is also less specific
than the communications in Xura. Senator’s email states: “In our view, a decision
not to accept a reasonable offer will likely result in shareholder actions to replace
senior management if execution doesn’t improve quickly.” 256 The Sachem Head
letter and Senator email are far more general than the concrete threats in Xura, and
they were not backed by the Board, as was the case in Xura. As noted above, the
Proxy recounts external meetings and communications that Zayo had with activist
255
Ex. 28 at 3.
256
Compl. ¶ 90.
79
stockholders,257 internal discussions regarding activists,258 and communications with
potential buyers concerning activist stockholders.259 These disclosures were not
materially misleading and did not reflect material omissions about the activist
pressures confronting Zayo.
2. Directors’ Independence
The Proxy refers to the directors on Zayo’s Board other than Caruso as the
“Company’s independent directors.” Plaintiffs contend that the Proxy was,
therefore, “materially misleading if any of the outside directors [were] not
independent.”260 Plaintiffs further argue that the Proxy should have disclosed any
potential conflict of interest for each of Zayo’s directors. 261 Plaintiffs’ argument is
based on a flawed reading of the Proxy. In its first reference to the “independent
257
Proxy at 33 (“Mr. Caruso and the Company’s representatives met with certain activist
stockholders.”), 40 (“the Company received a letter from an activist shareholder” and
another letter from a “second activist shareholder”), 44 (“the activist shareholder, Starboard
Value, released a public letter urging the Company to sell”).
258
Id. at 37 (“The board of directors also discussed recent activist shareholder activity.”),
41 (“a representative of Skadden discussed with the board of directors potential approaches
to engaging with activist stockholders”).
259
Id. at 38 (Caruso indicating to a bidder’s representative that “he was concerned that . . .
conversations with shareholder activists . . . were part of an effort to lower the price and
put pressure on the board of directors”), 41 (“representatives of Skadden, [JPM] and [GS]
had a call with representatives of Consortium A to convey the board of directors’ message
that leaks . . . to activist stockholders were unacceptable”), 42 (Caruso noting to a
representative of Consortium A that “the Company would have to defend itself if leaks and
related activist pressure ended up causing the Company further damage”).
260
Pls.’ Ans. Br. 52.
261
Id. at 52–53.
80
directors,” the Proxy states that, “during a meeting of all of the directors of the board
of directors other than Mr. Caruso, whom we refer to as the Company’s independent
directors, Phil Canfield voluntarily resigned from the board of directors.”262
The references to the directors other than Caruso as the “Company’s
independent directors” in the Proxy are not materially misleading. In context, the
reference to the “Company’s independent directors” refers to the directors other than
Caruso—i.e., the Company’s outside directors. Plaintiffs complain that use of the
defined term “independent” is misleading because certain directors had relationships
with Caruso, but as the term is used in the Proxy, a reasonable stockholder would
not assume that an “independent” director would be “independent” from Caruso.
The Proxy clearly and unambiguously uses the term “independent” to define non-
employee or outside directors.
3. Caruso’s Conversations with Ganzi
Plaintiffs contend that the Proxy did not disclose two significant exchanges
between Caruso and Ganzi. Those communications occurred on February 11, 2019
and October 19, 2018.
i. The February 11 Discussion
Plaintiffs argue that the Proxy should have disclosed Ganzi’s February 11,
2019 statement to Caruso that Consortium B had “price enthusiasm” in the range of
262
Proxy at 29 (emphasis added).
81
$34–$36 per share and Caruso’s response that, while he could not speak for the
Board on price, the Board had “shown willingness to engage at $35+ but not
willingness at lower prices.”263 Plaintiffs argue that failing to disclose this
information was an improper partial disclosure. According to Plaintiffs, because the
Proxy discloses that Consortium B provided an indication of interest for $36 to $38
per share on December 16, 2018,264 and that Ganzi provided an oral indication of
interest at $35 per share on February 20, 2019, 265 it was necessary to disclose the
February 11 discussion.
“Once defendants travel[] down the road of partial disclosure of the history
leading up to the Merger . . . they ha[ve] an obligation to provide the stockholders
with an accurate, full, and fair characterization of those historic events.” Arnold v.
Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1280 (Del. 1994). Thus, “the
disclosure of even a non-material fact can, in some instances, trigger an obligation
to disclose additional, otherwise non-material facts in order to prevent the initial
disclosure from materially misleading the stockholders.” Zirn v. VLI Corp., 681
A.2d 1050, 1056 (Del. 1996). The Proxy contains a thorough recounting of the
negotiation process, but it omits Ganzi’s price enthusiasm in the $34 to $36 range
263
Compl. ¶¶ 130, 151; Ex. 33 (email chain from Caruso recounting call with Ganzi to
Spruill and others dated February 11, 2019).
264
Proxy at 35.
265
Id. at 42.
82
and Caruso’s suggestion to Ganzi that the Board was only willing to engage at
“$35+.”266 Having partially disclosed the negotiation history between Consortium
B and Zayo, including Consortium B’s first indication of interest at $36–$38 and
Ganzi’s $35 offer on February 20, a disclosure of the pricing discussion on February
11 was necessary to provide an “accurate, full, and fair characterization of those
historic events” to stockholders. See Morrison, 191 A.3d at 283 (quoting Arnold,
650 A.2d at 1280). Without that information, Zayo’s stockholders did not know that
Caruso’s statement to Ganzi that the Board had shown “willingness to engage at
$35+” became the price that Consortium B offered on February 20 and that Ganzi
had communicated a price range up to $36 shortly before February 20 to Caruso. It
is reasonably conceivable that this information would have “altered the ‘total mix’
of information available” to a reasonable stockholder, and it would have been
important to a reasonable stockholder when voting on the Merger.
Caruso was directly involved in that exchange with Ganzi and documented it
twice in emails to the Company’s financial advisors and the lead independent
director. He also signed the transmittal letter for the Proxy. Under these facts, the
Complaint alleges a claim that Caruso breached his duty as an officer, which is not
subject to exculpation.
266
See Ex. 33.
83
ii. The October 19 Discussion
Plaintiffs claim that it was materially misleading for the Proxy to exclude the
conversation that Caruso had with Ganzi on October 19, when Ganzi expressed that
his approach to take Zayo private “required” that Caruso agree to be CEO. 267 The
Proxy is not materially misleading in this respect. The Proxy discloses a
conversation between the Board and Caruso the same day, where Caruso reminded
the Board of Ganzi’s indication of interest in acquiring Zayo “and partnering with
the Company’s current management team.” 268 The Proxy does not use the word
“require,” but the Proxy discloses that Ganzi’s interest in an acquisition was coupled
with his desire to work with Zayo’s management post-acquisition. As important, on
three later occasions, the Proxy discloses that Ganzi or Consortium B indicated to
Caruso or the Board that management’s continuing involvement would be necessary
if their bid was selected. The Proxy discloses that: (1) on February 12, Ganzi told
Caruso that the “continuing involvement of the Company’s management team would
be expected,”269 (2) on March 28, Ganzi told Caruso and a representative from GS
that Consortium B “needed to partner with management to ensure that there was a
capable management team in place following the acquisition,” 270 and (3) on May 3,
267
Compl. ¶ 154.
268
Proxy at 27 (emphasis added).
269
Id. at 41.
270
Id. at 45.
84
Consortium B’s confirmation letter to the Board stated that “in order to finalize the
arrangements around the Company’s acquisition” it was “requesting permission to
discuss the terms of management’s continued investment in the Company and post-
closing management equity incentive arrangements” with Caruso and senior
management271. Taken together, these disclosures would have apprised a reasonable
stockholder that from the outset Ganzi and Consortium B sought to work with
Caruso and senior management of Zayo post-closing.
4. Valuations of Strategic Alternatives
Plaintiffs contend that there were three sets of valuation facts that the Proxy
should have disclosed: (1) in April 2019, Zayo management believed the Network
business would be worth $27–$36 per share by the end of 2019; (2) Zayo received
an offer to buy the Colocation business with a range as high as $8 per share; and (3)
Zayo management had previously made a “detailed assessment” that Zayo was
worth $48.19 per share on a sum-of-the-parts basis when it was considering Project
Unleash. 272
The Proxy disclosed alternatives that the Board considered, including Project
Unleash 273 and a sale of the Company’s Colocation business 274. Zayo disclosed to
271
Id. at 49.
272
Compl. ¶¶ 152–53.
273
E.g., Proxy at 27–28. The Proxy refers to Project Unleash as the “Separation.”
274
Id. at 36.
85
stockholders more than once that it had considered alternatives to a sale of the entire
Company,275 and it was not required to provide valuations for Project Unleash. A
board is not required to disclose “the panoply of possible alternatives to the course
of action it is proposing.” In re 3Com S’holders Litig., 2009 WL 5173804, at *6
(Del. Ch. Dec. 18, 2009); see also Neustadt v. INX, Inc., C.A. No. 7017-VCG, at 30–
31 (Del. Ch. Dec. 16, 2011) (TRANSCRIPT) (declining to require disclosure of “details
of transactions that might have been”). Even if Zayo had continued to pursue Project
Unleash, “Delaware courts repeatedly have held that management’s failure to inform
stockholders of other strategic alternatives it was considering at the time of the
transaction in question is not a breach of fiduciary duty.” IRA Trust FBO Bobbie
Ahmed v. Crane, 2017 WL 7053964, at *14 (Del. Ch. Dec. 11, 2017). In IRA Trust,
after a stockholder vote approving of a reclassification of shares, the plaintiffs
alleged that the proxy statement should have disclosed alternatives that were
previously presented to the company’s board of directors. Id. at *13. There, in
ruling that there was no disclosure violation, the court reasoned that it was the
responsibility of the board of directors to weigh possible alternatives, not that of the
stockholders, who were only asked to consider the merits of the reclassification. Id.
at *14. As in IRA Trust, Zayo’s stockholders were not being asked to consider
275
E.g., id. at 33, 34, 42.
86
Project Unleash as an alternative to the Merger; they were just asked to vote on the
Merger.
The Proxy was also not required to disclose the granular and additive details
that Plaintiffs seek to require. See 3Com, 2009 WL 5173804, at *6; see also In re
OPENLANE, Inc., 2011 WL 4599662, at *12 (Del. Ch. Sept. 30, 2011) (rejecting
the need for a “play-by-play” disclosure regarding negotiations (internal quotations
omitted)). The Proxy describes numerous analyses from JPM and GS. As an
example, the Proxy discloses that JPM conducted a discounted cash flow analysis
indicating an implied per share equity value range from $32 to $51, which
encompasses the sum-of-the-parts value that Plaintiffs argue should have been
disclosed. 276 Plaintiffs do not dispute that the Proxy fairly and accurately described
the valuation analyses that GS and JPM presented to the Zayo Board and the
projections upon which those analyses relied. In 3Com, the plaintiffs argued that a
proxy statement for a merger should have disclosed the value of the company’s
“three distinct operating segments.” 2009 WL 5173804, at *5. The court held that
this disclosure was unnecessary because the plaintiffs had not alleged that the
acquiror used information regarding the separate operating segments while
developing its bid. Id. Here, like in 3Com, Plaintiffs have not alleged that Ganzi or
Proxy at 60. JPM also provided a valuation of $27.25–$48.25 per share, id. at 62, while
276
GS provided a valuation at $30.18–$51.47 per share, id. at 67.
87
Consortium B utilized a sum-of-the-parts analysis in formulating their bid. Instead,
they allege that Caruso “guided” Consortium B to its bid.277 “So long as the proxy
statement, viewed in its entirety, sufficiently discloses and explains the matter to be
voted on, the omission or inclusion of a particular fact is generally left to
management’s business judgment.” Id. at *1.
Plaintiffs rely on Gilmartin v. Adobe Res. Corp., 1992 WL 71510 (Del. Ch.
Apr. 6, 1992), but Gilmartin is readily distinguishable. In Gilmartin, this court held
that a proxy statement that omitted the misgivings of two board members regarding
the timing of the sale of a company was materially misleading. Gilmartin, 1992 WL
71510, at *11. There, the proxy statement only stated that the board members
unanimously recommended that the stockholders vote for the merger and that the
board believed that the terms of the merger were in the best interests of the company
and its stockholders. Id. The court reasoned that the proxy statement gave the
inaccurate impression that each board member believed that this was an appropriate
time for a sale. Id. Like in Gilmartin, this merger was approved by a unanimous
board vote. But unlike in Gilmartin, Plaintiffs have not alleged that there were any
members of Zayo’s Board or its management who expressed any reservations about
the Merger. There are no well-pleaded allegations that any directors or officers of
Pls.’ Ans. Br. 47; see also Compl. ¶¶ 130–32, 151; Pls.’ Ans. Br. 40 (suggesting that
277
Consortium B’s bid was a product of Caruso’s February 11 conversation with Ganzi).
88
Zayo subjectively believed that it was not a good time to sell the Company. This
case is not similar to Gilmartin, and Plaintiffs’ arguments that additional valuation
information should have been disclosed fail.
***
Caruso argues that the motion to dismiss must be granted under Corwin v.
KKR Financial Holdings. LLC, 125 A.3d 304, 312–14 (Del. 2015), because the
Merger was approved by a fully informed, uncoerced vote of disinterested
stockholders. As discussed above, Plaintiffs have stated a claim that the Proxy
contained a material omission regarding the February 11 discussion between Ganzi
and Caruso. Caruso therefore has not established that the stockholder vote
approving the Merger was fully informed. Accordingly, the Complaint is not subject
to dismissal under the business judgment rule as a result of the stockholder vote
approving the Merger. Corwin, 125 A.3d at 312 (“the doctrine applies only to fully
informed, uncoerced stockholder votes”); accord Baker Hughes, 2020 WL 6281427,
at *14.
III. CONCLUSION
For the foregoing reasons, Defendant’s motion to dismiss is granted in part
and denied in part.
IT IS SO ORDERED.
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Teamsters Local 237 Additional Security Benefit Fund v. Dan Caruso
Combined Opinion