IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STEVEN H. BUSCH and LINDSEY )
LABATE, individually and on behalf of
)
others similarly situated, )
)
Plaintiffs, )
)
v. ) C.A. No. 2022-0346-NAC
)
WESTELL TECHNOLOGIES, INC., THE )
VOTING TRUST AGREEMENT DATED )
FEBRUARY 23, 1994, AMONG MR. )
PENNY, MR. SIMON AND CERTAIN )
MEMBERS OF THE PENNY FAMILY )
AND THE SIMON FAMILY, ROBERT C. )
PENNY III, ROBERT W. FOSKETT, )
KIRK BRANNOCK, SCOTT )
CHANDLER, TIMOTHY DUITSMAN, )
CARY WOOD, MARK ZORKO, and )
PATRICK J. MCDONOUGH, JR., )
)
Defendants. )
ORDER GRANTING DEFENDANTS’ PARTIAL MOTION
TO DISMISS THE VERIFIED CLASS ACTION COMPLAINT
WHEREAS:
1. Westell Technologies, Inc. (“Westell” or the “Company”) is a
“provider of ‘high-performance network infrastructure solutions.’” Docket Index
(“D.I.”) 1 (“Compl.”) ¶32.
2. Plaintiffs’ claims in this action concern an October 2020 transaction by
Westell whereby the Company effected a 1-for-1,000 reverse stock split followed
immediately by a 1,000-for-1 forward stock split (the “Transaction”). Id. ¶¶6–7.
Westell stockholders who owned fewer than 1,000 shares immediately prior to the
reverse stock split received $1.48 in cash for each share they owned at the effective
time of the reverse stock split. Id. ¶7. As a result, these cashed-out stockholders
were no longer stockholders of the Company following the Transaction. Id. ¶¶3, 9,
39. Following the completion of the Transaction, in October 2020, Westell took
steps to delist and deregister its Class A common stock. Id. ¶7.
3. In connection with the Transaction, the Company filed a Schedule 14A
on August 11, 2020 (the “Proxy Statement”). As explained in the Proxy Statement,
on March 27, 2020, the Company “received a notification from the Listing
Qualifications Department of The NASDAQ Stock Market that the bid price for the
Company’s Class A common stock had closed below the minimum $1.00 per share
for 30 consecutive trading days in conflict with the NASDAQ rules for continued
listing.” D.I. 15 (“Defs.’ OB”), Ex. B (“Proxy Statement”) at 17. 1 This notification
informed the Company that it had 180 calendar days to regain compliance. Id. The
Proxy Statement further provided that “[t]he primary purpose of the Transaction
[was] to enable the Company to reduce the number of record holders of its Class A
1
On a motion to dismiss, this Court may rely on documents incorporated by reference into,
or integral to, the Complaint. Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312,
320 (Del. 2004). In addition, at the “motion to dismiss stage, this Court may take judicial
notice of publicly available facts such as those contained in filings made with the SEC,”
like the Company’s Proxy Statement. Higher Ed. Mgmt. Gp., Inc. v. Mathews, 2014 WL
5573325, at *12 n.73 (Del. Ch. Nov. 3, 2014).
2
common stock below 300,” which was “the level at which SEC public reporting
[was] required, and to eliminate the expenses and time associated with being a public
company.” Compl. ¶36; Proxy Statement at 2.
4. The Proxy Statement also disclosed that a special committee of the
Company’s board of directors retained Emory & Co., LLC to provide a “fairness
opinion as to the cash payment to be paid in the Transaction.” Compl. ¶37; Proxy
Statement at 4.
5. On August 20, 2020, shortly after the Transaction was announced,
Plaintiffs served a books and records demand on the Company pursuant to 8 Del. C.
§ 220. Compl. ¶10.
6. Stockholders voted to approve the Transaction on September 29, 2020.
Compl. ¶38.
7. The effective date of the Transaction was October 1, 2020. Compl. ¶39.
8. According to Plaintiffs, the Company “paid $7.2 million to repurchase
approximately 4.9 million shares of the Class A common stock at a purchase price
of $1.48 per share.” Compl. ¶7.
9. Plaintiffs Steven H. Busch and Lindsey LaBate commenced this action
on April 19, 2022. Plaintiffs’ complaint asserts two direct causes of action for breach
of fiduciary duty and aiding and abetting breach of fiduciary duty. Compl. ¶¶52–61.
3
10. Plaintiffs allege, among other things, that the price paid to cash-out
stockholders in the Transaction was unfairly low. Compl. ¶56. Citing the Proxy
Statement, Plaintiffs allege that Westell is controlled by Defendants Robert C. Penny
III, Robert W. Foskett, and Patrick J. McDonough, Jr. as trustees of the Penny Trust.
Compl. ¶¶4, 15. Plaintiffs allege that Defendants caused Westell to undertake the
Transaction for self-dealing purposes. Compl. ¶¶54–56.
11. Plaintiffs bring this litigation as a putative class action. The Complaint
defines the “Class” simply as “all others similarly situated” with Plaintiffs. Compl.
at 1.2
12. Plaintiffs divide their proposed class into two subclasses, which they
refer to as the “LaBate Subclass” and the “Busch Subclass.” Compl. ¶¶8–9.
13. Plaintiffs define the “LaBate Subclass” as a putative subclass of former
Company stockholders who owned fewer than 1,000 shares of stock at the time of
the Transaction. Compl. ¶9. Plaintiff Lindsey LaBate is alleged to have owned
fewer than 1,000 shares of Westell Class A Common Stock and to have been cashed
out in the Transaction. Compl. ¶13.
14. Plaintiffs define the “Busch Subclass” as a putative subclass of
Company stockholders who owned more than 1,000 shares of stock at the time of
2
The “Class” is also defined to exclude Defendants and any persons related to or affiliated
with Defendants. Compl. ¶25.
4
the Transaction. Compl. ¶8. 3 Plaintiff Steven H. Busch is alleged to have
continuously owned more than 1,000 shares of Westell Class A Common Stock and
not to have been cashed out. Compl. ¶12.
15. Defendants filed a partial motion to dismiss. The motion seeks to
“dismiss with prejudice all claims brought on behalf of the ‘Busch Subclass’ in the
Verified Class Action Complaint[.]” D.I. 7.
NOW, THEREFORE, the Court having carefully considered the parties’
papers and oral argument on Defendants’ Partial Motion to Dismiss the Verified
Class Action Complaint, IT IS HEREBY ORDRED, this 2nd day of March 2023, as
follows:
1. A motion to dismiss must be granted if “plaintiff[s] could not recover
under any reasonably conceivable set of circumstances susceptible of proof.” Cent.
Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011) (citation omitted). Although the Court must examine the facts pleaded in the
light most favorable to Plaintiffs, it need not “accept every strained interpretation of
the allegations[.]” Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001). The
3
I note that stockholders owning more than 1,000 shares were not entitled to cash for
fractional shares in the Transaction. Instead, to extent those stockholders would have had
fractional shares as a result of the reverse stock split, any such fractional shares were
subject to the forward stock split that immediately followed the reverse stock split. “As a
result, the total number of shares of the Company’s Class A common stock and Class B
common stock held by a Continuing Stockholder [did] not change, but their ownership
percentage [] increase[d].” Compl. ¶35; Proxy Statement at 2.
5
Court will not “accept conclusory allegations unsupported by specific facts or . . .
draw unreasonable inferences in favor of the non-moving party.” Price v. E.I.
DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other
grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255 (Del. 2018).
A claim may also 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.
2. First, I note Defendants’ assertion that the Busch Subclass claims are,
if anything, derivative and not direct and must be dismissed for failure to satisfy
Court of Chancery Rule 23.1. D.I. 15 (“Defs.’ OB”) at 23–28; D.I. 34 (“Defs.’ RB”)
at 14–19. Plaintiffs, however, are adamant that the Busch Subclass claims are solely
direct causes of action. See D.I. 31 (“Pls.’ AB”) at 4 (“At no time do Plaintiffs assert
or even infer that the Defendants’ actions harmed the Company.”); see also id. (“To
the contrary, Plaintiffs’ claim the Defendants misled and ‘pushed’ Plaintiffs and all
unaffiliated stockholders either out or to the side for their own personal gain.
Accordingly, Plaintiffs’ Complaint sufficiently pleads direct claims.”); Hr’g Tr. at
60:5–62:17. I will, therefore, analyze the Busch Subclass claims to determine
whether they adequately state a direct cause of action. For the reasons I explain
below, they do not and therefore must be dismissed.
6
3. In support, Plaintiffs argue that Mr. Busch and the other members of
the “Busch Subclass”:
were harmed by Defendants’ actions in effectively establishing a low ceiling
for the value of the shares, and who were also harmed in connection with the
Transaction by Defendants’ “going dark” and delisting—and in their
dispensing with the financial reporting requirements of the SEC—affording
the defendants, as insiders, an enormous informational and trading advantage
in that trading was now to mainly occur in “privately negotiated sales.”
Pls.’ AB at 2. In Plaintiffs’ telling, Mr. Busch and the Busch Subclass have been
“kicked to the curb, in common parlance[,]” by Defendants. Hr’g Tr. at 21:19–20;
accord Pls.’ AB at 2 (“‘kicking to the curb’”); Hr’g Tr. at 25:12–13 (“thrown them
to the curb”); id. at 55:18–19 (“[i]n common parlance . . . kicked to the curb”).
4. Defendants respond that the Busch Subclass claims are “conclusory[,]”
“nonsensical,” rest on unpled assertions, and contradict Plaintiffs’ claims as to Ms.
LaBate. Defs.’ RB at 4–7. Indeed, if one were to employ the proverbial pizza-
meets-wall analogy, the pizza here was itself only half-baked.4
5. Consistent with this approach, Plaintiffs’ briefing failed to provide
much guidance as to how the Busch Subclass claims might fit under Delaware
precedent. See, e.g., Pls.’ AB at 27-30 (Part I of Argument, titled “The Complaint
Alleges a Cognizable Claim on Behalf of the Busch Subclass”) (citing no case law).
4
See Auriga Capital Corp. v. Gatz Prop., 40 A.3d 839, 882 n.184 (Del. Ch. 2012)
(“[C]ounsel should remember that it is more time-consuming to clean up the pizza thrown
at a wall than it is to throw it.”).
7
6. At oral argument, Plaintiffs’ counsel attempted to clarify the nature of
the claims. Counsel pointed again to the three alleged aspects of the Transaction
noted above: (i) setting an “improper ceiling for the value of the shares” by
disclosing a fairness opinion for $1.48 per share in connection with the Transaction,5
(ii) “tak[ing] away the market by which Mr. Busch can trade[,]” and (iii) “tak[ing]
away the informational process through deregistering and delisting.” Hr’g Tr. at
22:1–8; see also Pls.’ AB at 27(“[H]aving established a ceiling of $1.48 for the value
of the shares, Defendants then delisted the stock depriving the unaffiliated
continuing shareholders of [ ] timely market information . . . as well as [a] liquid
market for the buying and selling of stock.”). Counsel further explained that I must
consider the three aspects of the Busch Subclass claims together. See Hr’g Tr. at
25:21–26:12 (“[W]e are not arguing that delisting is improper. We’re not
challenging delisting. We’re not even challenging the fact that they took the shares
off of the market. What we are challenging is that if you look at this as an entire
package . . . . It’s one package. And if you have a package and the package consists
5
Hr’g Tr. at 22:23–24:23 (“[O]n the last day that these shares were publicly traded, prior
to the delisting, they issued a fairness opinion. They put out a fairness opinion that had
two parts, basically. There was a fairness opinion from the special committee that said,
this is fair and in the best interests, and there was a fairness opinion from Emory which
said that they fairly valued the shares at $1.48. . . . So what we’ve argued, what we’ve pled,
and we’ve alleged, is common sense tells you that in an arm’s length transaction, there is
no one with common sense who is going to go to Mr. Busch and say, [“Y]ou know what?
I’m paying you $2 for your shares.”); see Hr’g Tr. at 38.
8
of three parts as to the continuing unaffiliated shareholders like Mr. Busch, an
improper valuation that is too low, you’ve taken away the market, and you’ve taken
away the information, you have hurt people like Mr. Busch tremendously. And what
we’re challeng[ing] is, and what we’re saying is, that that combination is deadly and
that combination should not go forward.”). 6
7. Given that Mr. Busch was not cashed out in the Transaction and
continues to own his Westell stock, I asked at oral argument what remedy Mr. Busch
seeks. Counsel responded that a fair price should be determined for Mr. Busch’s
shares and that Mr. Busch be granted an option to put his shares to the Company at
that price. Hr’g Tr. at 50:2–14, 53:8–54:22. 7 Mr. Busch’s counsel, however, stated
that he has identified no Delaware precedent in support of the type of claim advanced
by the Busch Subclass. Hr’g Tr. at 47:8–48:6.
8. In lieu of Delaware precedent, counsel instead analogized the claims to
(unbriefed) environmental externality concepts:
Think of it in the context of pollution. If there is a company that is polluting
the waters, it doesn’t have the ability to contain the damages of its pollution
and say, only certain people have claims but the people downstream do not
6
Mr. Busch’s argument is not altogether easy to follow. Moments after saying that Mr.
Busch is “not challenging delisting[,]” counsel stated that “Busch isn’t really challenging
the $1.48. What he’s really challenging is he’s challenging the going dark part or he’s
challenging the delisting.” Hr’g Tr. at 26:16–19.
7
But see Hr’g. Tr. at 50:15–20 (“THE COURT: Have you asked for that in your
complaint[?] [COUNSEL]: We have not. There, you know, we’ve asked for what’s
reasonable and what’s to be determined. You know, right now, we’re -- I’ve given my
answer.”).
9
have claims. If you have committed an act that is a violation of your duty,
then all individuals in this case, shareholders, who have been affected by the
violative conduct have claims that ought to be sorted out through the legal
process. So the question is do these people have the ability, do they have the
right, to come into this court and to complain? And the answer to that
question, Your Honor, is yes, they do. So we are saying that the unaffiliated
continuing shareholders, those asserting claims here, are not and have never
been in the same shoes as the defendants, and, therefore, their claim should
continue.
Hr’g Tr. at 20:18–21:11. According to Mr. Busch, if a controlling stockholder has
allegedly harmed one portion of the (former) minority stockholder base, then it
follows that all minority stockholders will have a litigable claim.
9. Mr. Busch’s difficulty articulating a coherent basis for his claim is
understandable given that the Transaction would have been accretive to Mr. Busch
and the Busch Subclass, as continuing stockholders, if the $1.48 per share price at
which the cashed-out stockholders’ shares were purchased was too low. And,
indeed, counsel acknowledged that, “as a matter of corporate financial and as a
matter of pure economics, that’s right.” Hr’g Tr. at 52:3–5. Counsel asserted that
was incorrect, however, “as a matter of the real world, so to speak, and how the
markets work[.]” Hr’g Tr. at 52:5–6. 8
8
I note that counsel acknowledged that Mr. Busch is not asserting that Defendants had a
fiduciary duty to ensure a market for his stock or seeking relief to that effect. Hr’g Tr. at
52:8–12.
10
10. I turn, then, to Defendants’ argument that Mr. Busch’s theory of the
case rests on conclusory allegations, supplemented by attempts to amend his
pleading through briefing and attorney-testimony. I agree with Defendants.
11. Assuming that the Busch Subclass claims are not derivative, they are
subject to the liberal standards of notice pleading. There are limits, however, as the
plaintiff’s allegations should at least “put [the] defendant[s] on fair notice in a
general way of the cause of action asserted[.]” Garfield v. Allen, 277 A.3d 296, 360
(Del. Ch. 2022) (citation omitted). I have included significant passages in this order
from the hearing transcript because the Complaint is exceedingly conclusory as to
the Busch Subclass claims. As Defendants rightly point out, with respect to the
Busch Subclass claims, the Complaint alleges that the price at which Mr. Busch
could sell his stock was “suppressed” in connection with the Transaction—and not
much else. Compl. ¶56. Plaintiffs counter that they included lengthy passages from
the Proxy Statement in the Complaint disclosing how the Transaction would result
in the delisting of Westell’s stock and the suspension of periodic reporting. That is
true, but it is hard to say that the allegations give any sense, for even minimal notice-
pleading purposes, of the nexus between those disclosures and the Busch Subclass
claims.
12. During briefing and oral argument, counsel attempted to bolster the
claims. The answering brief attempted to draw a connection between the price
11
suppression alleged by Mr. Busch and the delisting and suspension of periodic
reporting. As Defendants point out, however, a plaintiff “cannot defeat an argument
raised in a motion to dismiss by proffering an after-the-fact theory for this first time
in his answering brief.” In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108,
at *23 (Del. Ch. Mar. 31, 2017, revised Apr. 11, 2017). 9
13. At oral argument, counsel stated that the Busch Subclass is “stuck with
a horrible situation.” Hr’g Tr. at 24:23–25:2. According to counsel, “[i]t is terrible,
because they have thousands of shares that are basically paperweights now. It is
deadweight. They are subject to private negotiations. There is no market anymore.
There is no information.” Hr’g Tr. at 25:2–6. None of this is alleged in the
Complaint. Other than long passages copied and pasted from the pre-Transaction
Proxy Statement, the Complaint—which was filed 18 months after the
Transaction—failed to plead anything about the subsequent effects of the
Transaction, delisting, and deregistration. 10
9
See also MCG Cap. Corp. v. Maginn, 2010 WL 1782271, at *5 (Del. Ch. May 5, 2010)
(“[Plaintiff] could either seek leave to amend its complaint or stand on its complaint and
answer the motion to dismiss. Having chosen the latter course of action, it is bound to the
factual allegations contained in its complaint. It cannot supplement the complaint through
its brief.”) (citations omitted).
10
If anything, the combination of extended attorney-testimony about these matters during
oral argument and the absence of such allegations in the pleadings likely colors my view
of whether counsel himself believes that what is pled adequately alleges a reasonably
conceivable claim.
12
14. Defendants also argue that Mr. Busch and the Busch Subclass, as
continuing stockholders, were treated the same as Defendants in the Transaction.
Defs.’ OB at 18–21; Defs.’ RB at 11–12 (citing In re MultiPlan Corp. S’holders
Litig., 268 A.3d 784, 809 (Del. Ch. 2022) (“entire fairness is not triggered by [the
presence of a controlling stockholder] alone”). Further, Defendants assert that
delisting and the suspension of periodic reporting is not, by itself, grounds for a claim
for breach of fiduciary duty.11
15. Notably, neither party cited to me then-Vice Chancellor Jacobs’s
decision in Hamilton v. Nozko, 1994 WL 413299 (Del. Ch. July 27, 1994). That
decision provides:
The question is whether corporate fiduciaries commit an actionable breach of
fiduciary duty if for self-interested reasons they cause the corporation’s stock
to be deregistered and delisted and as a result, cause the market for the
stockholders’ investment to become significantly impaired or eliminated. As
a purely conceptual matter that question must be answered in the affirmative,
if only by reason of the doctrine that corporate action, even where legally
11
See Defs.’ RB at 8-9; see also Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998) (“In the
absence of a request for stockholder action, the Delaware General Corporation Law does
not require directors to provide shareholders with information concerning the finances or
affairs of the corporation.”); Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs.
Inc., 854 A.2d 121, 153 (Del. Ch. 2004) (“[F]iduciaries have no distinctive state law duty
to disclose material developments with respect to the company’s business.”) (internal
quotation marks omitted); Wynnefield P’rs Small Cap Value L.P. v. Niagara Corp., 2006
WL 1737862, at *9 (Del. Ch. Jun. 19, 2006) (“Delaware law recognizes a corporate board’s
ability, in a proper exercise of their business judgment, to cause the corporation to take
steps to deregister even if, as an incidental matter, deregistration might adversely impact
the market for the corporation’s securities.”), aff’d in part and rev’d in part on other
grounds Niagara Corp. v. Wynnefield P’rs Small Cap Value L.P., 907 A.2d 146 (Del. 2006)
(TABLE)).
13
permissible, will be proscribed if taken for an inequitable purpose. Such
fiduciary manipulation of the corporate machinery for personal advantage
would, if proven, be actionable.
Id. at *6 (citations omitted). In Wynnefield Partners, however, former-Vice
Chancellor Parsons distinguished Hamilton on the grounds that “a board member
actually attempted to purchase the company’s shares at a low price following
deregistration.” 2006 WL 1737862, at *9.
16. Here, I agree with Defendants that Mr. Busch’s assertions of self-
dealing, insofar as they are relevant to the Busch Subclass, are hypothetical and
asserted in a conclusory manner through briefing and statements of counsel. See
Ford v. VMware, Inc., 2017 WL 1684089, at *10 (Del. Ch. May 2, 2017) (allegation
that defendant might engage in future wrongful conduct was “a conclusory and
speculative allegation of future harm that the court need not credit”); Solomon v.
Armstrong, 747 A.2d 1098, 1122 (Del. Ch. 1999) (declining to “entertain such
transparent hypothetical abuses and the hypothetical fear of retribution and
coercion”), aff’d, 746 A.2d 277 (Del. 2000) (TABLE). Further relevant here, is that,
unlike Hamilton, the Transaction was accretive to the Busch Subclass.
17. I therefore make no judgment as to whether, in different circumstances,
a continuing stockholder in a reverse-split / forward-split delisting transaction may
state a cognizable claim for breach of fiduciary duty. I simply conclude that the
Busch Subclass claims, as presented here, must be dismissed.
14
For the foregoing reasons, Defendants’ Partial Motion to Dismiss the Verified
Class Action Complaint is hereby GRANTED.
/s/ Nathan A. Cook
Vice Chancellor Nathan A. Cook
15