New Enterprise Associates 14, L.P. v. Rich

EFiled: Mar 09 2023 08:00AM EST
Transaction ID 69300274
Case No. 2022-0406-JTL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NEW ENTERPRISE ASSOCIATES 14, )
L.P., NEA VENTURES 2014, L.P., )
NEA:SEED II, LLC, and CORE )
CAPITAL PARTNERS III, L.P., )
)
Plaintiffs, )
)
v. ) C.A. No. 2022-0406-JTL
)
GEORGE S. RICH, SR., DAVID )
RUTCHIK, JOSH STELLA, FUGUE, )
INC., GRI VENTURES, LLC, JMI )
FUGUE, LLC, RICH FAMILY )
VENTURES, LLC, and RUTCHIK )
DESCENDANTS’ TRUST, )
)
Defendants. )

OPINION ADDRESSING MOTION TO DISMISS UNDER RULE 12(b)(6)

Date Submitted: January 24, 2023
Date Decided: March 9, 2023

C. Barr Flinn, Paul J. Loughman, Michael A. Carbonara, Jr., YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; Michele D. Johnson, LATHAM
& WATKINS LLP, Orange County, California; Eric Leon, Nathan Taylor, Meredith
Cusick, Amanda R. Kurzydlowski, LATHAM & WATKINS LLP, New York, New
York; Counsel for Plaintiffs.

John P. DiTomo, Sebastian Van Oudenallen, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington Delaware; Patrick Montgomery, Paul Weeks, KING &
SPALDING LLP, Washington, DC; Counsel for Defendants.

LASTER, V.C.
 Fugue, Inc. (the “Company”) is a startup that spent six months looking for a buyer.

No one was interested. After declaring the sale process a failure, the Company needed

capital.

Management represented that a financing round led by an investor named George

Rich was the only available option. In return for the financing, the Company agreed to

issue shares of preferred stock that carried powerful blocking rights. Rich brought David

Rutchik and other investors into the round, and all received shares of preferred stock.

Three months after the recapitalization, the Company had $8 million on its books,

was no longer in distress, and had received a preliminary inbound expression of interest

from a potential acquirer. Rich, Rutchik, and the Company’s CEO comprised the board of

directors (the “Board”). The Board approved a transaction in which selected preferred

stockholders, including Rich and Rutchik, purchased additional shares at the original

issue price, set when the Company was in distress. The directors also granted themselves

millions of options, with the strike price set at one tenth of the value of the common stock

implied by the recapitalization.

The preliminary expression of interest blossomed into an acquisition at a healthy

valuation. When the transaction closed, the preferred stockholders received a return of

nearly 750%. The option holders received a return of 3,200%. Those gains came at the

expense of other Company stockholders, who suffered dilution from those equity

issuances and therefore received a lesser share of the merger consideration.

The plaintiffs are two investors who had funded the Company before the

recapitalization. One of the plaintiffs had a right of first offer (“ROFO”) that applied to
any issuance of securities. The Company did not honor the ROFO for the second offering

of preferred stock. That plaintiff has stated a claim for breach of contract, as well as a

claim for tortious interference with contract.

The plaintiffs have attempted to assert claims for breach of the duty of disclosure.

They argue that when asking a subset of the preferred stockholders to execute a written

consent approving the second offering of preferred stock, the directors had an obligation

to disclose that the Company had received a preliminary expression of interest from a

potential acquirer. That claim would fail in the context of a publicly traded entity. Under

the facts and circumstances present in this case, it is reasonably conceivable that the

information was material given that (i) the Company had told its investors three months

earlier that its process of exploring alternatives had failed, (ii) management had

simultaneously told its investors that it would take two to three years before the Company

had built up its business to a point where it could be sold, and (iii) the directors were

seeking approval to sell shares of preferred stock to selected investors, including two

insiders, at the same distressed price set in the recapitalization.

The additional twist is that the plaintiffs do not allege that the directors had a duty

to disclose the existence of the expression of interest to them. They allege that the

directors breached a duty to disclose the expression of interest to other stockholders,

resulting in injury to the plaintiffs when those stockholders were misled into approving

the second offering at the same price paid in the recapitalization. Although this decision

holds that the plaintiffs can assert that cause of action, the resulting claim is derivative,

2
and the plaintiffs’ standing to assert it was extinguished when the Company was sold.

The same is true for the plaintiffs’ related claims against other defendants.

The plaintiffs have sued the directors for breaching their fiduciary duties in

connection with the sale of the Company. The plaintiffs contend that the second offering

of preferred stock and the option grants were interested transactions, and they challenge

the sale of the Company as unfair because it conferred a unique benefit on the directors

by extinguishing any sell-side stockholder’s standing to pursue derivative claims

challenging those issuances, even though the merger consideration failed to afford any

value to those derivative claims. The plaintiffs have standing to challenge the merger on

that basis, and they have stated viable claims for breach of fiduciary against the directors

and against Rich’s affiliates as controlling stockholders, as well as a viable claim against

Rutchik’s affiliate for aiding and abetting breaches of fiduciary duty.

The defendants have an additional argument for dismissal that this decision does

not reach. As part of the recapitalization, the plaintiffs entered into a voting agreement

that contained a drag-along right. The plaintiffs covenanted not to sue the defendants over

any transaction that met the conditions of the drag-along right. The court will address the

implications of the covenant not to sue in a separate decision.

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 I. FACTUAL BACKGROUND

The facts are drawn from the operative complaint and the documents that it

incorporates by reference.1 At this procedural stage, the plaintiffs are entitled to have the

court credit their allegations and draw all reasonable inferences in their favor.

A. The Company

Founded in 2012, the Company provides tools to build, deploy, and maintain a

cloud infrastructure security platform. Josh Stella was a co-founder of the Company and

serves as its Chief Executive Officer.

In 2013, plaintiff Core Capital Partners III, L.P. (“Core Capital”) was the lead

investor in the Company’s seed round. Core Capital is an investment fund sponsored by

Core Capital Partners, which describes itself as a venture capital firm headquartered in

downtown Washington, D.C., with in excess of $300 million under management across

three funds.2

In 2014, plaintiffs New Enterprise Associates 14, L.P., NEA Ventures 2014, L.P.,

and NEA:Seed II, LLC invested in the Company. Each is an investment vehicle or fund

sponsored by New Enterprise Associates, a name-brand venture capital firm. The

Citations in the form “Ex. __” refer to documents attached to the Affidavit of
1

Sebastian Van Oudenallen, which collects documents incorporated by reference in the
operative complaint. Dkt. 14.
2
Core Capital Partners, http://www.core-capital.com/about (last visited Feb. 16,
2023).

4
distinctions among the entities are not important for this decision, which for simplicity

refers to them as “NEA.”

Across multiple rounds of financings, NEA invested a total of $36.1 million in the

Company, and Core Capital invested a total of $1.7 million. In return for their

investments, NEA and Core Capital received shares of preferred stock. The rights

conferred by their preferred stock included an aggregate liquidation preference equal to

their invested capital, and NEA and Core Capital each received the right to appoint one

member to the Board. During this period, the Board had five members.

B. The Failed Sale Process And The Recapitalization

In the second half of 2020, the Company began exploring strategic alternatives.

The principal goal was to find a potential acquirer. The process continued throughout

2020 and into the first quarter of 2021. During that time, the Company engaged with

more than fifteen possible buyers.

Toward the end of the first quarter of 2021, Stella told the Board that the

Company’s efforts to find a buyer had failed. Stella also represented that that Company

was running out of money and needed additional capital to continue operating. He

indicated that the Company would use the new money to grow its business and position

itself better as an acquisition target. According to Stella, that process would take two to

three years.

To provide the growth capital that the Company needed, Stella recommended that

the Company engage in a recapitalization that would involve the issuance of Series A-1

Preferred Stock to a group of investors led by Rich (the “Recapitalization”). Stella

5
represented to the Board and the Company’s existing investors that the Recapitalization

was the only option available and that a market check for other financing sources had not

generated any alternatives.

Based on Stella’s representations, the Board authorized management to proceed

with the Recapitalization.

C. The Terms Of The Recapitalization

The Company raised roughly $8 million in the Recapitalization. In return for this

capital, it issued 13,129,810 shares of Series A-1 Preferred Stock (the “Preferred Stock”),

reflecting a purchase price of $0.61 per share. The Recapitalization valued the

Company’s pre-transaction equity at $10 million.

Rich invested in the Recapitalization through two vehicles: GRI Ventures, LLC,

and JMI Fugue, LLC (together, the “Rich Entities”). Both of the Rich Entities were

special purpose vehicles that Rich formed for the investment. Rich controlled those

vehicles through Rich Family Ventures, LLC. GRI Ventures was designated as the “Lead

Investor” for the round. It invested $4,189,999.51 in return for 6,876,743 shares of

Preferred Stock. JMI Fugue invested $999,999.62 in return for 1,641,227 shares of

Preferred Stock. Together, the Rich Entities held 8,511,970 of the shares of Preferred

Stock, representing 65% of the issuance.

Twenty-three other investors participated in the Recapitalization. Eleven already

owned common stock in the Company. Another five were Company employees. Only

seven appear to be new investors.

NEA and Core Capital were invited to participate. They declined.

6
 For the Company’s existing investors, the terms of the Recapitalization were

onerous. In the Recapitalization, all of the existing preferred stock was converted into

common stock. Before the Recapitalization, the preferred stock held by the Company’s

investors carried an aggregate liquidation preference of $74.6 million, with $37.7 million

associated with shares of preferred stock held by NEA and Core Capital. The conversion

into common stock wiped out the liquidation preference.

After the Recapitalization, only the new Preferred Stock carried a liquidation

preference. Not only that, but it was a supercharged liquidation preference equal to two

times invested capital. The Preferred Stock was also participating preferred, meaning that

if there was a liquidity event, the holders of Preferred Stock would (i) receive a payment

equal to two times their invested capital before any amounts reached the common

stockholders and (ii) have the right to participate pro rata with the common stockholders

in any further distributions.

The effect of the Recapitalization on the existing investors was dramatic. NEA’s

economic ownership in the Company declined from 32% of the equity value before the

Recapitalization to 14% afterward. Core Capital’s economic ownership in the Company

declined from just under 3% before the Recapitalization to less than 1% afterward.

From a governance standpoint, the effect of the Recapitalization was even more

significant. The Company’s post-transaction capital structure consisted of 8,921,712

shares of common stock and 13,129,810 shares of Preferred Stock. The Preferred Stock

voted on an as-converted basis, giving it 60% of the Company’s voting power. The

Preferred Stock also carried class voting rights, and the approval of the Preferred Stock

7
voting as a separate class was required for significant corporate actions, including

engaging in a merger, a sale of assets, or any issuance of shares; increasing the number of

directors; amending the certificate of incorporation or the bylaws; and dissolving the

Company. Because the Rich Entities acquired 65% of the issuance, they controlled the

voting rights that the Preferred Stock carried. On a fully diluted basis, the Rich Entities

owned shares carrying 39% of the Company’s voting power.

As part of the Recapitalization, the Company and certain of its stockholders

entered into a Fourth Amended and Restated Voting Agreement dated as of April 30,

2021 (the “Voting Agreement”). All of the purchasers of Preferred Stock executed the

Voting Agreement, as did twenty-nine holders of common stock, including NEA and

Core Capital (the “Signatory Stockholders”).

Under the Voting Agreement, the Signatory Stockholders agreed to vote for (i)

one director designated by GRI Ventures, who initially was Rich, (ii) a second director

designated by the holders of a majority of the Preferred Stock, who initially was Rutchik,

(iii) a third director elected by a majority of the Preferred Stock held by investors other

than GRI Ventures, who initially was John Morris, (iv) a fourth director who would be

the CEO, and (v) a fifth director designated by all the outstanding stock voting together

as a single class, who initially was Wayne Jackson. Because the Rich Entities held

approximately 65% of the Preferred Stock, they had the contractual authority to designate

the first two of the five directors. Because the Rich Entities controlled 39% of the

Company’s fully diluted voting power, they had an outsized voice in the selection of the

fifth director.

8
 Morris and Jackson had been directors of the Company before the

Recapitalization. Rutchik was one of the twenty-three individuals and entities who

participated in the Recapitalization. Through the Rutchik Descendants’ Trust (the

“Rutchik Trust”), Rutchik paid $324,999.41 to acquire 533,398 shares of Preferred Stock.

Rutchik also was affiliated with Nodozac LLC, which paid $99,999.54 to acquire

164,122 shares of Preferred Stock. Through his affiliates, Rutchik acquired a total of

697,520 shares, representing 5% of the issuance.

Section 3.2 of the Voting Agreement contained a drag-along provision that

obligated the Signatory Stockholders to support a sale of the Company if approved by the

Board and a majority of the Preferred Stock (the “Drag-Along Provision”). As part of the

Drag-Along Provision, the Signatory Stockholders agreed not to exercise appraisal rights

and covenanted not to sue the directors or their affiliates in connection with a sale of the

Company that met the requirements of the Drag-Along Provision (the “Covenant Not To

Sue”).

NEA negotiated a side letter as part of the Recapitalization (the “Management

Rights Letter”). It granted NEA a ROFO if the Company proposed to offer or sell any

“New Securities,” defined broadly in a related document to mean any additional equity or

securities convertible into equity (the “Investor ROFO”). The Investor ROFO required

that the Company give notice to NEA of its intent to offer any equity securities for sale,

9
the number of equity securities to be offered, and the price and terms of the offer, so that

NEA could participate in the offering if it chose to do so.3

The Recapitalization became effective on April 30, 2021. Shortly before the

effective time, Stella and Rich proposed to increase the size of the Recapitalization from

$8 million to $10 million. The Board, which still included representatives of NEA and

Core Capital, rejected that proposal. It is reasonable to infer that the existing investors did

not want to suffer the additional dilution from a larger investment and believed that the

slightly smaller investment would fund the Company to a liquidity event. At a minimum,

having $8 million on its books would put the Company in a stronger position to negotiate

if it sought additional capital.

D. An Expression Of Interest

In late June 2021, something unexpected happened. Guy Podjarny, the founder

and CEO of Snyk Limited, contacted Stella about a potential strategic transaction. Snyk

is an England-registered corporation with its headquarters in Boston, Massachusetts.

Snyk provides a developer security platform.

On June 30, 2021, Podjarny emailed Stella to follow up on a prior conversation

they had the week before, writing: “I’d love to engage in a proper chat about a potential

deep partnership or (maybe more likely) acquisition.” Ex. 5. He advised that Snyk could

“dig in reasonably quickly” to determine the terms of a deal, and he suggested signing “a

3
Core Capital also entered into a side letter with the Company, but it primarily
addressed information rights and did not include a ROFO.

10
fresh MNDA and a refresh mutual demo.” Id. He also referenced a desire to “catch you

up on what we’ve been up to since our last conversations,” suggesting there had been

more than one prior conversation with Stella. Id.

The Snyk inquiry was significant. From mid-2020 until the end of the first quarter

2021, the Company had made outbound calls about a potential sale and spoken with

fifteen possible buyers. Those efforts had not generated any interest. Now, the Company

had received an inbound inquiry from a credible transaction partner who was already

known to the Company. The contact was preliminary, but it demonstrated that someone

had real interest in the Company. That put a different cast on the Company’s situation.

The Board did not disclose Snyk’s expression of interest to any of the

stockholders. The Board did not share the information with NEA under the Management

Rights Letter.

E. The Second Offering

On July 14, 2021, Morris and Jackson resigned from the Board, leaving Rich,

Rutchik, and Stella as the only three directors. One week later, on July 21, the Board

authorized the Company to issue a total of 3,938,941 additional shares of Preferred Stock,

which increased the outstanding shares of Preferred Stock by 18% (the “Second

Offering”).

Rather than treating the Second Offering as a new transaction, the Board decided

to amend the terms of the stock purchase agreement governing the Recapitalization to

encompass the Second Offering. By doing so, the Board permitted the shares to be issued

at the same price and with the same generous terms that Rich and his co-investors had

11
extracted in April 2021 when the Company was low on cash, had no other sources of

financing, and had no prospect of a near-term sale. Three months later, the Company had

$8 million on its books and had received an inbound expression of interest.

To effectuate the Second Offering, the Board unanimously approved an

amendment to the Company’s certificate of incorporation (the “Charter Amendment”)

that increased the authorized number of shares of Preferred Stock from 13,129,810 to

17,068,751. Under Section 242 of the Delaware General Corporation Law (the “DGCL”)

and the charter, the amendment required three stockholder-level votes: (i) an affirmative

vote from holders of a majority of the voting power of the Preferred Shares and the

common shares voting together as a single class, (ii) an affirmative vote from holders of a

majority of the voting power of the Preferred Shares voting as a single class, and (iii) an

affirmative vote from holders of a majority of the voting power of the Preferred Shares

excluding the shares held by the Rich Entities, voting as a separate class.

With 65% of the Preferred Stock, the Rich Entities could deliver the second vote

by themselves. With 42% of the outstanding voting power between them, Rich and

Rutchik only needed support from another 8% to carry the first vote.4 The third vote was

a tougher nut to crack. Net of the Rich Entities’ shares, there were 4,617,840 shares of

Preferred Stock outstanding. With Rutchik’s 697,520 votes in the plus column, they still

4
Before the Second Offering, Rich controlled 8,511,970 shares of Preferred Stock
and Rutchik controlled 697,520 shares of Preferred Stock. At the time, there were
8,921,712 shares of common stock outstanding and 13,129,810 shares of Preferred Stock
outstanding. (8,511,970 + 697,520) / (8,921,712 + 13,129,810) = 42%.

12
needed votes from holders of 3,920,320 shares of Preferred Stock. Conveniently, getting

the support from holders of that number of shares of Preferred Stock would carry them

well clear of the number of votes needed for the first vote. With those additional votes

added to the votes that Rich and Rutchik controlled, they would have 60% of the

outstanding voting power for purposes of the first vote.5

To obtain the necessary votes, the directors prepared a written consent with

signature blocks for twenty-one different holders of Preferred Stock, four of which were

entities associated with Rich or Rutchik. Ex. 3 (the “Written Consent”). Ten other holders

of Preferred Stock (the “Other Signatories”) joined Rich and Rutchik’s entities in

executing the Written Consent.6 The signature lines for seven additional holders remain

blank, supporting an inference that they declined to sign the Written Consent (the “Non-

Signatories”).7

5
The Rich Entities’ 8,511,970 votes plus Rutchik’s 697,520 votes plus 3,920,320
votes from additional shares of Preferred Stock = 13,129,810 votes / 22,051,522
outstanding votes = 59.54%.
6
As a reminder, the two entities associated with Rich are GRI Ventures and JMI
Fugue, LLC. The two entities associated with Rutchik are the Rutchik Trust and
Nodozac. The other ten holders whose signatures appear on the Written Consent are (1)
Peter Jaffee, (2) David Mitchell, (3) Tim Webb, (4) Chris Suen, (5) Ariel Eckstein, (6)
Cal Simmons, (7) Gustavo Bessalei and Amada Ali as joint owners, (8) the Jerry Simon
Revocable Trust dated June 8, 2016, (9) the Seth Spaulding Trust, and (10) the Legacy
Trust LLC. Id.
7
The seven non-signers are (1) Ajaipal S. Virdy, (2) Andrew Seligson, (3) David
Morris, (4) Ted Niedermeyer, (5) Ankush Khurana (6) Tyler Mills, and (7) Neil Glick
and William Boone Campbell as joint owners. Id.

13
 Four of the Other Signatories received the right to purchase shares of Preferred

Stock in the Second Offering at the same favorable price Rich had secured in April 2021

when the Company needed capital and seemed to have no other options.8 That made them

interested in the transaction they were approving. Another (Chris Suen) was a Company

employee and, as such, was not disinterested in the transaction that he approved. Ex. 3.

Only five of the Other Signatories appear to not to have participated in the Second

Offering or to have ties to the Board.9

The buyers in the Second Offering were the Rich Entities, the Rutchik Trust, and

six other entities and individuals.10 All but one of the purchasers had voted in favor of the

Second Offering or had a relationship with someone who did. The buyers in the latter

category included George Rich, Jr., who is inferably Rich’s son. Only an entity called

Caplin Fugue LLC does not appear at this stage of the proceeding to have a discernable

relationship to a signer of the Written Consent.

8
Those four are (1) Gus Bessalel, (2) Peter Jaffee, (3) David Mitchell, and (4)
Neal Simon, who at the pleading-stage can be inferred to have an affiliation with the
Jerry Simon Revocable Trust. Ex. 2. Bessalel and Mitchell were also employees. See Ex.
3.
9
Those five are (1) Tim Webb, (2) Ariel Eckstein, (3) Cal Simmons, (4) the Seth
Spaulding Trust, and (5) the Legacy Trust LLC. Ex. 2.
10
The complaint alleges that Rutchik purchased his shares through the Rutchik
Trust. Compl. ¶ 58. The list of purchasers names Rutchik, rather than the Rutchik Trust.
Ex. 2. At the pleading stage, the court takes the complaint’s allegation as true. There is
not necessarily a conflict between the complaint and the list of purchasers because
Rutchik could have opted to purchase the shares through the Rutchik Trust.

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 The Rich Entities acquired another 2,790,086 shares of Preferred Stock,

representing 70% of the Second Offering. That purchase brought their total ownership to

11,302,056 shares of Preferred Stock, or 66% of the class. George Rich, Jr. acquired

164,122 shares of Preferred Stock, representing 5% of the Second Offering and another

1% of the class. After the Second Offering, Rich and his son controlled 44% of the

Company’s outstanding voting power.11

Rutchik acquired another 328,245 shares, representing 8% of the Second Offering.

Through the Rutchik Trust, he already owned 533,398 shares of Preferred Stock, and

through Nodozac, he owned another 164,122 shares, giving him a total of 1,025,765

shares, or 6% of the class. After the Second Offering, the shares Rutchik controlled

carried 3.9% of the Company’s outstanding voting power. If Rich and Rutchik acted

together, they controlled 48% of the Company’s outstanding voting power.12

The Second Offering raised another $2,402,754.01 for the Company. When added

to the $8 million raised in the Recapitalization, the Company had raised a total of $10.4

million, before transaction costs.

The plaintiffs allege that there was no valid business justification for the Second

Offering. Company management had represented to the Board that the $8 million

11
8,921,712 shares of common stock plus 17,068,751 shares of Preferred Stock =
25,990,463 total votes. The Riches owned shares of Preferred Stock carrying 11,466,178
votes. 11,466,178 / 25,990,463 = 44%.
12
Rutchik’s 1,025,765 votes plus the Riches’ 11,466,178 votes = 12,491,943 votes
/ 25,990,463 total votes = 48%

15
provided by the original Recapitalization supplied enough growth capital to meet the

Company’s needs. The Company certainly did not need to acquire additional capital on

the same terms as the Recapitalization. In July 2021, the Company was not in the same

situation as in April, when it needed cash desperately and lacked negotiating leverage.

The Company did not comply with the Investor ROFO when conducting the

Second Offering. The Company did not inform NEA of its intent to engage in the Second

Offering, nor did it allow NEA to participate.

F. The Option Grants

On July 29, 2021, the Board granted stock options to acquire 6,029,555 shares of

common stock at an exercise price of $0.10 per share (the “Option Grants”). Of that total,

2,945,352 options were issued to thirty-one different employees and two advisors (the

“Disinterested Grants”). The remaining 3,084,203 options, representing 51% of the total,

went to the members of the Board (the “Interested Grants”).

Stella received the vast majority of the Interested Grants, presumably because he

was the CEO. His grant of 2,050,227 options represented two thirds of the Interested

Grants and one third of the Option Grants as a whole. One fourth of Stella’s options

vested upon grant with the remainder vesting proportionately over a four-year period. All

of the unvested options would accelerate and vest if there was both a change of control

and Stella was terminated without cause within twelve months after the change in control.

Stella’s options thus had a double trigger for acceleration.

Rutchik received 886,265 options, representing 29% of the Interested Grants and

15% of the Option Grants as a whole. He received the largest grant of options after Stella.

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The second-largest employee grant was 490,843 options, or 295,422 less than what

Rutchik received. Rutchik’s options vested proportionately over a three-year period, and

his unvested options would accelerate and vest upon a change of control. Rutchik’s

options thus had a single trigger for acceleration.

Rich received options on 147,711 shares, the same as the sixth-highest employee

after Stella. His options vested proportionately over a three-year period, and his unvested

options would accelerate and vest upon a change of control. Rich’s options also had a

single trigger for acceleration.

G. The Merger Negotiations And Term Sheet

While these events were transpiring, discussions with Snyk moved forward. By

September 2021, Snyk and the Company were negotiating a merger agreement. In

October, the Board retained an investment banker to conduct a market check in response

to a formal offer from Snyk.

On December 18, 2021, the Board informed the Company’s stockholders that

Snyk had agreed to a term sheet to acquire the Company for $120 million in cash. That

was the first time that the plaintiffs heard about the discussions with Snyk. Before then,

the plaintiffs believed that the Company had abandoned its efforts to find an acquirer in

April and that management was focusing on growing the business.

H. Requests For Information

After learning of the term sheet with Snyk, the plaintiffs requested information

about the timing and terms of the proposed transaction. The Company was evasive.

17
 On January 19, 2022, the plaintiffs served a demand to inspect books and records

under Section 220 of the DGCL. The demand expressed concern about the timing of the

Recapitalization and the proposed sale of the Company. At the time, the plaintiffs did not

know about the Second Offering.

The Company reacted angrily to the demand and accused the plaintiffs of

attempting to derail the transaction with Snyk. The Company threatened to sue the

plaintiffs. In a formal response to the demand, the Company claimed that the plaintiffs

lacked a proper purpose for conducting an inspection.

After further back and forth, the Company produced some documents in response

to the demand. The Company failed to produce communications between the Company

and any third party regarding the transaction with Snyk.

I. The Merger

On February 12, 2022, the Company circulated a draft merger agreement to the

plaintiffs along with a joinder agreement and a Section 280G Disclosure Statement and

Voting Form. The Company asked the plaintiffs to sign the joinder agreement and voting

form. The cover email asserted that the plaintiffs were obligated to sign under the terms

of the Drag-Along Provision.

Section 1.1 of the joinder agreement bound the signatory to vote in favor of the

merger with Snyk and against any competing proposal. Section 1.2 of the joinder

agreement caused the signatory to release any and all claims against the Company, the

defendants, and other parties.

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 The plaintiffs offered to sign the documents if Stella and Rich each signed a sworn

affirmation attesting to the fact that they had not had any communications about a

potential transaction with Snyk before the Recapitalization. Their counsel indicated that

they would, and the plaintiffs provided a draft affirmation.

On February 17, 2022, the Company announced that it had entered a merger

agreement with Snyk and closed the transaction (the “Snyk Merger”). At closing, the

Company had $5.5 million in cash on its balance sheet.

On February 18, 2022, after the Snyk Merger closed, counsel to Stella and Rich

proposed a substantially narrower affirmation. Stella was not willing to affirm that (i) he

did not have communications with Snyk outside the ordinary course of business before

the Recapitalization or that (ii) he did not have any communications or enter into any

agreements with any person associated with GRI Ventures, including Rich, about his

personal post-Recapitalization economics or business opportunities that were not

otherwise disclosed to the Board.

That same day, the Company provided an incomplete distribution waterfall

showing only the payments to the plaintiffs. It was not until February 21, 2022, that the

Company provided a full distribution waterfall. That document revealed the existence of

the shares of Preferred Stock issued in the Second Offering.

The waterfall showed that the Rich Entities received $14,570,213.04 in proceeds

for the 3,282,453 shares of the Preferred Stock they had purchased in the Second

Offering for $2,002,296.33, reflecting an increase in value of 728%. The Rutchik Trust

received $1,457,019.97 in proceeds for the 328,245 shares of the Preferred Stock it

19
purchased in the Second Offering for $200,229.45, thereby achieving the same

percentage gain. On a per share basis, the Rich Entities and the Rutchik Trust bought

shares of Preferred Stock at $0.61 per share. Through the Snyk Merger, they sold at $4.44

per share of Preferred Stock.

Stella, Rich, and Ruchik’s options vested as a result of the Snyk Merger. In the

transaction, the common stock was valued at $3.22 per share. Net of the exercise price of

$0.10 per share, the option holders received $3.10 per share. The Interested Grants

generated total net proceeds of $9,623,389.20: Stella received net proceeds of

$6,397,158.18; Rutchik received net proceeds of $2,765,340.43; and Rich received net

proceeds of $460,890.59.

In total, through the Second Offering and the Interested Grants, Rich, Rutchik, and

Stella received $25,650,622.21 in net proceeds from the Snyk Merger.

Part of the defendants’ gains came at the expense of the Company’s other

stockholders. Without the Second Offering and Interested Grants, the merger

consideration that Rich, Rutchik, and Stella received for those shares would have been

available for distribution pro rata to all of the stockholders. Yes, the Rich Entities and the

Rutchik Trust would have received their proportionate share based on the Preferred Stock

they acquired in the Recapitalization, but their pro rata share would have been a fraction

of the amounts they extracted through the Second Offering and the Interested Grants.

Through those transactions, the Rich Entities and the Rutchik Trust increased their net

take at the expense of the Company’s other stockholders. Through the Interested Grants,

Stella gained all of the equity interests that provided him with a share of the merger

20
consideration. In the Legal Analysis, infra, this decision provides rough estimates of the

amount of the diverted proceeds.

J. This Litigation

On May 9, 2022, NEA and Core Capital filed this lawsuit. The operative

complaint contains eight counts.

Counts I and II concern the Investor ROFO. Count I asserts that the Company

breached the Management Rights Letter by failing to comply with the Investor ROFO.

NEA contends that the complaint failed to provide notice of the Second Offering and did

not permit NEA to participate in the Second Offering. Count II asserts that the Rich

Entities and the Rutchik Trust tortiously interfered with the Management Rights Letter by

participating in the Company’s breach of the Investor ROFO.

Counts III, IV, and V assert claims based on the duty of disclosure. Count III

alleges that Rich, Rutchik, and Stella breached their duty of disclosure as directors by

failing to disclose Snyk’s inquiry when soliciting stockholder approval for the Charter

Amendment. Count IV alleges that the Rich Entities breached their duties as controlling

stockholders by failing to disclose the Snyk inquiry in connection with stockholder

approval of the Charter Amendment. Count IV alleges that the Rutchik Trust aided and

abetted the fiduciaries’ breaches of duty. The same counts advance similar disclosure

claims directed at the Option Grants.

Counts VI, VII, and VIII challenge the Snyk Merger. Count VI contends that Rich,

Rutchik, and Stella breached their fiduciary duties as directors by approving the Snyk

Merger. Count VII advances a similar theory against the Rich Entities for breaching their

21
fiduciary duties as controlling stockholders. Count VIII alleges that the Rutchik Trust

aided and abetted the fiduciaries’ breaches of duty.

The defendants have moved to dismiss the complaint in its entirety. They argue

that the complaint’s allegations fail to state claims on which relief can be granted. They

also contend that the Covenant Not To Sue bars the plaintiffs from asserting their claims.

This decision addresses the first issue. The court will address the Covenant Not To Sue

separately.

II. LEGAL ANALYSIS

The defendants have moved to dismiss the complaint under Rule 12(b)(6) on the

grounds that it fails to state a claim on which relief can be granted. When considering a

Rule 12(b)(6) motion, the court (i) accepts as true all well-pleaded factual allegations in

the complaint, (ii) credits vague allegations if they give the opposing party notice of the

claim, and (iii) draws all reasonable inferences in favor of the plaintiffs. Cent. Mortg. Co.

v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). Dismissal is

inappropriate “unless the plaintiff would not be entitled to recover under any reasonably

conceivable set of circumstances.” Id.

A. Count I: Breach Of The Investor ROFO

In Count I of the complaint, NEA asserts a claim against the Company for breach

of the Investor ROFO. The Company’s motion to dismiss Count I is denied.

“In alleging a breach of contract, a plaintiff need not plead specific facts to state an

actionable claim.” VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 611 (Del.

2003). At the motion to dismiss stage, it is sufficient to simply allege “first, the existence

22
of the contract . . .; second, the breach of an obligation imposed by that contract; and

third, the resultant damage to the plaintiff.” Id. at 612. So long as the complaint alleges

that an “agreement[] ha[s] been breached,” and even if it is not clear that the non-

breaching party has “suffer[ed] immediate quantifiable harm, the equitable powers of this

Court afford [it] broad discretion in fashioning appropriate relief.” Universal Studios Inc.

v. Viacom Inc., 705 A.2d 579, 583 (Del. Ch. 1997). It is thus more accurate to describe

the elements of a claim for breach of contract as “(i) a contractual obligation, (ii) a breach

of that obligation by the defendant, and (iii) a causally related injury that warrants a

remedy, such as damages or in an appropriate case, specific performance.” AB Stable VIII

LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *47 (Del. Ch. Nov. 30,

2020), aff’d, 268 A.3d 198 (Del. 2021).

Count I satisfies each of these elements. The complaint alleges that NEA was a

party to the Management Rights Letter which contained the Investor ROFO. That

provision in turn granted NEA a ROFO on any “New Securities.” Although the

Management Rights Letter did not define that term, the Fourth Amended and Restated

Investors’ Rights Agreement (the “Investors’ Rights Agreement”) defined New Securities

as, “collectively, equity securities of the Company, whether or not currently authorized,

as well as rights, options, or warrants to purchase such equity securities, or securities of

any type whatsoever that are, or may become, convertible or exchangeable into or

exercisable for such equity securities.” Ex. 1, Ex. D at 5. The Company issued new shares

of Preferred Stock in the Second Offering, which qualified as New Securities. The

Company failed to provide NEA with the notice and opportunity to participate that the

23
Investor ROFO required. NEA was damaged because it was deprived of the opportunity

to purchase its pro rata share of New Securities before the sale of the Company to Snyk.

The Company does not argue that NEA has failed to plead the elements of a claim

for breach of contract. Instead, the Company advances two arguments for dismissal.

The first is an extreme interpretation of the Investor ROFO under which the

Company had no obligation to give notice of the Second Offering until after that

transaction closed. At that point, NEA could not participate in the transaction, so the

Investor ROFO could not have been breached.

In reasoning its way to this nonsensical result, the Company observes that the Rich

Entities, defined as the “Major Investors,” possessed a ROFO right of their own under the

Investors’ Rights Agreement.13 The Investor ROFO states that if the Rich Entities waive

their ROFO, then that waiver also applies to NEA’s ROFO. But that knock-on waiver is

subject to an exception: If the Rich Entities go ahead and purchase New Securities

notwithstanding their waiver, then the Investor ROFO is reactivated. In other words, the

Rich Entities cannot formally waive their ROFO so that NEA loses the Investor ROFO,

only to exercise their power over the Company to ensure that they could purchase New

Securities notwithstanding the waiver. Focusing intently on the language of the

exception, the Company notes that it technically provides that in such a case, “the

13
The Investors’ Rights Agreement defined “Major Investors” as the Lead
Investor (i.e., GRI Ventures) plus any other investor that owned at least 1,641,227 shares
of Preferred Stock. Ex. 1, Ex. D at 4. Only JMI Fugue, the second of the two Rich
Entities, qualified.

24
Company shall provide the investor the notice of such purchase of New Securities by the

Major Investors and the Investor shall be entitled to participate in such Financing

Transaction in accordance with the terms and conditions of [the Investor ROFO].” Ex. 1,

Ex. G at 4. According to the Company, notice of the “purchase” means notice that the

purchase is complete. The Company claims that notice of the “purchase” does not require

notice of the Company’s “intention to offer” New Securities. And once the purchase is

complete (says the Company), the deal is done, and NEA has no means of enforcing its

rights under the Investor ROFO.

Only a litigator reading a contract after a dispute has arisen with the goal of

coming up with arguments for a client could embrace that degree of literalism. The

obvious intent of the exception is to permit NEA to “participate in such Financing

Transaction,” which NEA cannot do if the transaction has closed and all of the securities

have been purchased. The plain meaning of the provision is to reactivate the Investor

ROFO by requiring the Company to give notice of the fact that the Rich Entities are

purchasing securities notwithstanding their waiver of their own ROFO. The Company

had an obligation to give notice so that NEA could exercise the Investor ROFO and

participate. The Company failed to provide the necessary notice.

The Company’s only other argument for dismissal is that the closing of the Snyk

Merger terminated the Management Rights Letter and, therefore, terminated NEA’s

ability to bring a claim based on the Company’s pre-termination breach of the Investor

ROFO. That argument falls short as well.

25
 The parties joust over whether the Management Rights Letter should have

contained additional language that specified the consequences of termination. The

Company argues that if NEA wanted to preserve its ability to sue for a pre-termination

breach, then it should have included language to that effect. NEA responds that the

obligation to include additional language runs the other way, such that if the Company

wanted to eliminate liability for a prior breach, then the Company had to include

language to that effect.

Parties can always contract for specific results. Those outcomes may confirm or

comport with the default principles of law, or they may depart from the default principles

of law. Parties negotiate in the shadow of default principles of law, and if a contract is

silent, then default principles apply. When interpreting contract language, it is therefore

important to know what common law rule otherwise would apply. Sometimes, contract

language will track or closely resemble default principles of law, thereby enabling a court

to reject a contrary interpretation of settled language that one side or the other has

advanced. E.g., Warner Commc’ns Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 969

(Del. Ch. 1989) (Allen, C.) (interpreting term of preferred stock to provide for same

result as Section 242(b)(2) of the DGCL). In other cases, comparing the contract

language to the default outcome will demonstrate that the plain meaning of the language

calls for a different result. Either way, knowing what would happen if the contract were

silent is helpful in determining plain meaning.

Under the common law default rule, the termination of a contract “results in an

agreement becoming void, but that fact alone does not eliminate liability for a prior

26
breach.” AB Stable, 2020 WL 7024929, at *103 (noting the common law rule that an

injured party may claim damages following a contractual breach and termination); accord

23 Williston on Contracts § 63.3; 3 Farnsworth on Contracts § 12.09, at 12-79. In order

to depart from the common law rule and eliminate liability for a pre-termination breach,

the contract must contain language to that effect, such as a provision stating that “[i]n the

event of termination . . ., this Agreement shall forthwith become void and there shall be

no liability on the part of either party . . . .”14

The Management Rights Letter does not contain language waiving the Company’s

liability for a pre-termination breach. The Management Rights Letter states that “[t]he

rights described herein shall terminate and be of no further force or effect upon . . .

14
AB Stable, 2002 WL 7024929, at *103; accord Yatra Online, Inc. v. Ebix, Inc.,
2021 WL 3855514, at *9 (Del. Ch. Aug. 30, 2021), aff’d, 276 A.3d 476 (Del. 2022); In re
Anthem-Cigna Merger Litig., 2020 WL 5106556, at *133 (Del. Ch. Aug. 31, 2020), aff’d,
251 A.3d 1015 (Del. 2021); see ABA Mergers & Acqs. Comm., Model Tender Offer
Agreement 240 (2020) (discussing exceptions to a provision contemplating no liability
upon termination and stating that “[w]ithout this proviso, the language in Section 8.02
would provide that neither party would be liable for breach to the other after termination,
regardless of pre-closing breaches”); Kling & Nugent, supra, § 15A.02 at 15A-4.3
(noting the effect of a broad elimination of liability upon termination and suggesting that
“[it] is important . . . to continue and carve out a proviso to the effect that the foregoing
will not relieve any party for liability for its breach of any provision prior to
termination”). Cf. ABA Mergers & Acqs. Comm., Model Stock Purchase Agreement with
Commentary 280–81 (2d ed. 2010) (discussing effect-of-termination provision that did
not contain liability-extinguishing language but did contain an exception for specified
provisions as well as confirmatory language stating that “termination of this Agreement
will not relieve a party from any liability for any Breach of this Agreement occurring
prior to termination”); ABA Mergers & Acqs. Comm., Model Asset Purchase Agreement
with Commentary 199 (2001) (discussing effect-of-termination provision without
liability-extinguishing language and with confirmatory language stating that “the
terminating party’s right to pursue all legal remedies will survive such termination
unimpaired”).

27
consummation of a merger,” but that is forward-looking language designed to address

post-merger enforcement. Absent that language, the Management Rights Letter would

become an obligation of the surviving company, and the Investor ROFO would apply to

issuances of the surviving company’s securities. See 8 Del. C. § 259 (providing that

following a merger, “all debts, liabilities and duties of the respective constituent

corporations shall thenceforth attach to said surviving or resulting corporation, and may

be enforced against it to the same extent as if said debts, liabilities and duties had been

incurred or contracted by it”). The quoted language says nothing about extinguishing

liability for a pre-termination breach.

To argue for a different result, the Company cites a leading treatise on mergers

and acquisitions which recommends that parties who wish to avoid having a termination

provision extinguish their claims “carve out a proviso to the effect that the foregoing will

not relieve any party for liability for its breach of any provision prior to termination” so

as to avoid being left “without a remedy.” Dkt. 13 at 29 (citing Kling & Nugent, supra, §

15A.02 at 15A-4.3). That recommendation appropriately encourages parties to use

specific language in a contract to identify the outcome they want to achieve. It does not

take the position that under the common law, the termination of an agreement broadly

extinguishes the parties’ liability for pre-termination breaches. To the contrary, the only

example that the treatise cites for the effect of termination on liability for pre-termination

breaches is the Yatra decision, where the contract at issue specifically provided that upon

termination, “there shall be no liability on the part of any party with respect thereto,

except for [specified provisions] . . . and that nothing contained herein shall relieve any

28
party from liability for damages arising out of any fraud occurring prior to such

termination.” Yatra, 2021 WL 3855514, at *7. The agreement in Yatra contained

liability-eliminating language, which this court enforced. The Management Rights Letter

does not contain similar language.

Count I states a claim on which relief can be granted.

B. Count II: Tortious Interference With Contract

In Count II of the complaint, NEA asserts a claim against the Rich Entities and the

Rutchik Trust for tortiously interfering with the Management Rights Letter. This count

also states a claim on which relief can be granted.

Delaware has adopted the formulation of a claim for tortious interference with

contract that appears in the Restatement (Second) of Torts. WaveDivision Hldgs., LLC v.

Highland Cap. Mgmt., L.P., 49 A.3d 1168, 1174 (Del. 2012); ASDI, Inc. v. Beard Rsch.,

Inc., 11 A.3d 749, 751 (Del. 2010). Generally speaking, “[o]ne who intentionally and

improperly interferes with the performance of a contract . . . between another and a third

person by inducing or otherwise causing the third person not to perform the contract, is

subject to liability to the other.” Restatement (Second) of Torts § 766 (Am. L. Inst. 1979),

Westlaw (database updated Oct. 2022) [hereinafter Restatement]. Reframed as elements,

a plaintiff must plead “(1) a contract, (2) about which defendant knew, and (3) an

intentional act that is a significant factor in causing the breach of such contract, (4)

without justification, (5) which causes injury.” Bhole, Inc. v. Shore Invs., Inc., 67 A.3d

444, 453 (Del. 2013) (internal quotation marks omitted).

29
 In this case, the complaint easily pleads three of the five elements of a claim for

tortious interference with contract. There was a contract (the Management Rights Letter).

This decision has concluded that it is reasonably conceivable that the Investor ROFO was

breached, causing injury to NEA. Rich and Rutchik plainly knew about the contract, and

their knowledge is imputed to the Rich Entities and the Rutchik Trust, respectively.15

The first of the two remaining elements is the existence of an intentional act that is

a significant factor in causing the breach. To plead a claim against the Rich Entities and

the Rutchik Trust, the plaintiffs must plead an intentional act by those entities. NEA

alleges that the Rich Entities and the Rutchik Trust acted by written consent to approve

the Charter Amendment that was necessary to effectuate the Second Offering, failed to

cause the Company to provide the Investor ROFO notice to NEA, then purchased a

15
See, e.g., Tchrs.’ Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 671 n.23 (Del. Ch.
2006) (“[I]t is the general rule that knowledge of an officer or director of a corporation
will be imputed to the corporation.”); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL
2130607, at *11 (Del. Ch. Aug. 26, 2005) (imputing knowledge of member-employees to
limited liability companies); Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs.
Inc., 854 A.2d 121, 153–55 (Del. Ch. 2004) (imputing fraud claims to corporation where
it designated a manager of a limited liability company and where the manager made
fraudulent statements); Nolan v. E. Co., 241 A.2d 885, 891 (Del. Ch. 1968) (“Knowledge
of an agent acquired while acting within the scope of his authority is imputable to the
principal.”), aff’d, 249 A.2d 45 (Del. 1969); see also 3 William Meade Fletcher, Fletcher
Cyclopedia of the Law of Corporations § 790, at 16–20 (perm ed., rev. vol. 2011),
Westlaw (database updated Sept. 2022) (“[T]he general rule is well established that a
corporation is charged with constructive knowledge . . . of all material facts of which its
officer or agent receives notice or acquires knowledge [of] while acting in the course of
employment within the scope of his or her authority, even though the officer or agent
does not in fact communicate the knowledge to the corporation.” (footnote omitted)).

30
majority of the shares of Preferred Stock that comprised the Second Offering. See Compl.

¶¶ 96–103. At the pleading stage, those steps supply the requisite intentional act.

The Rich Entities and the Rutchik Trust respond that they instructed the

Company’s managers to provide notice to NEA and other non-consenting stockholders.

They rely on the Written Consent itself, which provides that “the appropriate officers or

officers [sic] of the Corporation . . . shall be, and hereby are, authorized, empowered and

directed to give notice of the corporate actions specified above, in accordance with

Section 228(e) of the DGCL, to those stockholders who have not consented in writing

hereto.” Ex. 3 at 3. That language is not about the notice required by the Investor ROFO.

It refers expressly to a statutory requirement found in Section 228(e), which states:

Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders or
members who have not consented in writing and who, if the action had
been taken at a meeting, would have been entitled to notice of the meeting
if the record date for notice of such meeting had been the date that written
consents signed by a sufficient number of holders or members to take the
action were delivered to the corporation as provided in subsection (c) of
this section

8 Del. C. § 228(e). An instruction to fulfill the statutory notice requirement is not an

instruction to fulfill the Investor ROFO’s notice requirement.

In any event, the complaint sufficiently pleads that the Company did not comply

with the Section 228(e) notice requirement. NEA and Core Capital allege that they did

not learn about the Second Offering until they requested books and records months later,

after learning of the Snyk Merger. Compl. ¶ 65.

31
 Rich and Rutchik constituted a majority of the Board. As such, they were

responsible for ensuring that the Company fulfilled its contractual obligations under the

Investor ROFO and its statutory obligations under Section 228(e). As directors

constituting a majority of the Board, Rich and Rutchik determined who would be able to

purchase shares of Preferred Stock in the Second Offering and how many shares they

would get. See Ex. 2. Only ten investors received the right to purchase shares. Four of the

purchasers were the Rich Entities, Rutchik, and a person who is inferably Rich’s son

(George Rich, Jr.). Those four acquired 83% of the 3,938,941 shares of Preferred Stock

issued in the Second Offering. The Rich Entities alone acquired 71% of the issuance.

They made these purchases despite knowing that the Company was obligated to offer the

New Securities first to NEA. It is reasonable to infer that the Rich Entities and the

Rutchik Trust acted in conjunction with their representatives on the Board to implement

the Second Offering in a manner that interfered with the Company’s ability to offer to

NEA the share of the New Securities to which NEA was contractually entitled. Those

allegations are sufficient to plead that the Rich Entities and the Rutchik Trust

intentionally acted in a manner that contributed to the breach of the Investor ROFO.

The final element is the existence of justification. “The tort of interference with

contractual relations is intended to protect a promisee’s economic interest in the

performance of a contract by making actionable ‘improper’ intentional interference with

the promisor’s performance.” Shearin v. E.F. Hutton Gp., 652 A.2d 578, 589 (Del. Ch.

1994). “The adjective ‘improper’ is critical. For participants in a competitive capitalist

economy, some types of intentional interference with contractual relations are a

32
legitimate part of doing business.” NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL

6436647, at *26 (Del. Ch. Nov. 17, 2014). “[C]laims for unfair competition and tortious

interference must necessarily be balanced against a party’s legitimate right to compete.”

Agilent Techs. v. Kirkland, 2009 WL 119865, at *8 (Del. Ch. Jan. 20, 2009). Determining

when intentional interference becomes improper requires a “complex normative

judgment relating to justification” based on the facts of the case and “an evaluation of

many factors.” Shearin, 652 A.2d at 589 (internal quotation marks omitted).

The Delaware Supreme Court has adopted the factors identified in Section 767 of

the Restatement as considerations to weigh when evaluating the existence of justification.

WaveDivision, 49 A.3d at 1174. The factors are:

(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests
of the other with which the actor’s conduct interferes, (d) the interests
sought to be advanced by the actor, (e) the social interests in protecting the
freedom of action of the actor and the contractual interests of the other, (f)
the proximity or remoteness of the actor’s conduct to the interference and
(g) the relations between the parties.

Id. Weighing the seven factors identified in the Restatement requires the court to engage

in a fact-specific inquiry to determine whether the interference with contract is improper

under the particular circumstances of the case. See Restatement, supra, § 767 cmt. b

(“[T]his branch of tort law has not developed a crystallized set of definite rules as to the

existence or non-existence of a privilege . . . . Since the determination of whether an

interference is improper is under the particular circumstances, it is an evaluation of these

factors for the precise facts of the case before the court.”).

33
 When the defendants that a plaintiff has sued for tortious interference control an

entity that was a party to the contract, the weighing of factors becomes more complex

because of the need to balance the policies served by a claim for tortious interference

with contract against the policies served by the corporate form.

Ordinarily, of course, only property belonging to the corporation [that is the
party to the contract] is available to satisfy obligations of the corporation.
Thus, while there may be independent grounds to hold another liable for the
obligations of a corporation . . . [,] those in control of a corporation are not
typically liable for distinctly corporate obligations by reason of that control.
This “fact,” of course, supplies one of the principal utilities of the corporate
form of organization.

Irwin & Leighton, Inc. v. W.M. Anderson Co., 532 A.2d 983, 987 (Del. Ch. 1987)

(internal citations omitted). A party who wishes to have a parent entity or other controller

backstop the obligations of the controlled entity can do so by contract, either by making

the parent a party to the agreement or by obtaining a guarantee. A party should not be

able to use a claim of tortious interference with contract to reap the benefits of

protections that it did not obtain at the bargaining table.

At the same time, Delaware’s respect for corporate separateness means that

Delaware maintains a role for tortious interference even when one entity controls another.

For example, Delaware law rejects the theory that “a parent and its wholly owned

subsidiaries constitute a single economic unit” such that “a parent cannot be liable for

interfering with the performance of a wholly owned subsidiary.” Shearin, 652 A.2d at

590; accord Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038 (Del. Ch.

2006). Delaware law instead balances “the significant economic interest of a parent

corporation in its subsidiary,” including the parent’s legitimate interest in consulting with

34
its subsidiary, against the subsidiary’s status as a separate entity and the interests of third

parties in their contractual relationships with the subsidiary. Shearin, 652 A.2d at 590.

The result is a limited affiliate privilege that protects a parent corporation that “pursues

lawful action in the good faith pursuit of [the subsidiary’s] profit making activities.” Id.

Recognizing a limited affiliate privilege is “consistent with the traditional respect

accorded to the corporate form by Delaware law . . . in that it does not ignore that a

parent and a subsidiary are separate entities. Rather, it recognizes that the close economic

relationship of related entities requires enhanced latitude in defining what ‘improper’

interactions would be.” Id. at 590 n.13 (internal citation omitted).

Here, because of the fact-intensive nature of this inquiry, it is not possible to

determine at the pleading stage whether the Rich Entities and the Rutchik Trust acted

with justification when they participated in the breach the of the Investor ROFO. By

acting as they did, the Rich Entities and Rutchik gobbled up 82% of the Second Offering

while paying the same price that Rich had extracted months earlier when the Company

needed cash. By acquiring more Preferred Stock at what was inferably an undervalued

price, the Rich Entities and Rutchik gained a greater ownership interest in the Company

at a low basis, setting themselves up to cash in if there was a liquidity event.

It is reasonable to infer that by proceeding in this fashion, the Rich Entities and

Rutchik did not cause the Company to pursue legitimate profitmaking activities. It was all

the same for the Company whether the Rich Entities, Rutchik, or NEA bought the shares

of Preferred Stock in the Second Offering. By acting as they did, the Rich Entities and the

Rutchik Trust pursued their own advantage. If anything, they acted contrary to the

35
Company’s legitimate profitmaking activities, because the Company had an interest in

selling the Preferred Stock for a higher price than Rich had extracted when the Company

was in desperate straits. Based on these pled facts, it is reasonably conceivable that the

Rich Entities and the Rutchik Trust acted without justification.

NEA has pled a claim for tortious interference with contract against the Rich

Entities and the Rutchik Trust.

C. Count III: The Claim Against The Directors For Breach Of The Duty Of
Disclosure In Connection With The Second Offering And Option Grants

In Count III of the complaint, NEA and Core Capital allege that Rich, Rutchik,

and Stella breached their fiduciary duty of disclosure when seeking stockholder approval

for the Second Offering and the Option Grants. The disclosure claim regarding the

Option Grants is dismissed because the Option Grants did not involve any stockholder

action or other identifiable disclosure issue. The disclosure claim regarding the Second

Offering states a claim on which relief can be granted, but it is a derivative claim that the

plaintiffs lost standing to pursue as a result of the Snyk Merger.

1. The Pertinent Parameters Of The Duty Of Disclosure

Directors of a Delaware corporation owe two fiduciary duties: care and loyalty.

Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006). The duty

of disclosure is not an independent duty, but rather arises as “the application in a specific

context of the board’s fiduciary duties . . . .” Malpiede v. Townson, 780 A.2d 1075, 1086

(Del. 2001).

36
 The scope and requirements of the duty of disclosure depend on context. Stroud v.

Grace, 606 A.2d 75, 85 (Del. 1992). When confronting a disclosure claim, a court

therefore must engage in a context-specific analysis to determine the source of the duty,

its requirements, and any remedies for breach. See Lawrence A. Hamermesh, Calling Off

the Lynch Mob: The Corporate Director’s Fiduciary Disclosure Duty, 49 Vand. L. Rev.

1087, 1099 (1996). “Governing principles have been developed for recurring scenarios,

four of which are prominent.” In re Wayport, Inc. Litig., 76 A.3d 296, 314 (Del. Ch.

2013). Two of those scenarios are potentially present in this case.

The first involves a request for stockholder action. When directors submit to the

stockholders a transaction that requires stockholder approval (such as a merger, sale of

assets, or charter amendment) or which requires a stockholder investment decision (such

as tendering shares or making an appraisal election), the directors have a duty to provide

the stockholders with all material information reasonably available to them. Pfeffer v.

Redstone, 965 A.2d 676, 686 (Del. 2009); Delman v. GigAcquisitions3, LLC, --- A.3d ---,

---, 2023 WL 29325, at *24 (Del. Ch. Jan. 4, 2023); Wayport, 76 A.3d at 314.

The second scenario involves a corporate fiduciary who speaks outside of the

context of soliciting or recommending stockholder action, such as through “public

statements made to the market,” “statements informing shareholders about the affairs of

the corporation,” or public filings required by the federal securities laws. Malone v.

Brincat, 722 A.2d 5, 11 (Del. 1998). “In that context, directors owe a duty to

stockholders not to speak falsely.” Wayport, 76 A.2d at 315.

37
 Whenever directors communicate publicly or directly with shareholders
about the corporation’s affairs, with or without a request for shareholder
action, directors have a fiduciary duty to shareholders to exercise due care,
good faith and loyalty. It follows a fortiori that when directors
communicate publicly or directly with shareholders about corporate matters
the sine qua non of directors’ fiduciary duty to shareholders is honesty.

Malone, 722 A.2d at 10; accord id. at 10–11 (“Shareholders are entitled to rely upon the

truthfulness of all information disseminated to them by the directors they elect to manage

the corporate enterprise.”). “[D]irectors who knowingly disseminate false information

that results in corporate injury or damage to an individual stockholder violate their

fiduciary duty, and may be held accountable in a manner appropriate to the

circumstances.” Id. at 9; accord id. at 14 (“When the directors are not seeking

shareholder action, but are deliberately misinforming shareholders about the business of

the corporation, either directly or by a public statement, there is a violation of fiduciary

duty.”).

The plaintiffs have identified reasons why the duty of disclosure could apply to the

Second Offering. Most clearly, there was a request for stockholder action. To facilitate

that issuance, the Company needed more authorized shares of Preferred Stock, which

necessitated the Charter Amendment. As discussed in the Factual Background, the

Charter Amendment required three votes: (i) an affirmative vote from holders of a

majority of the voting power of the Preferred Shares and the common shares voting

together as a single class, (ii) an affirmative vote from holders of a majority of the voting

power of the Preferred Shares voting as a single class, and (iii) an affirmative vote from

38
holders of a majority of the voting power of the Preferred Shares excluding the shares

held by the Rich Entities, voting as a separate class.

As the holders of a majority of the Preferred Stock, the Rich Entities could deliver

the second vote themselves. Together, the entities that Rich and Rutchik controlled held

shares with 44% of the Company’s voting power, so they could almost deliver the first

vote. Where they needed help was the third vote, where the Rich Entities’ votes did not

count. And if they secured that vote, then they would have more than enough votes to

clear the first vote.

To secure the votes they needed, the directors solicited seventeen other holders of

Preferred Stock. The ten Other Signatories signed the Written Consent. The seven Non-

Signatories did not sign the Written Consent. The request to sign the Written Consent

was a request for stockholder action to which the duty of disclosure applies.

The plaintiffs also argue that Stella previously had told the Board in April 2021

that the Company had failed to identify any potential acquirers, was shutting down its

process, and would spend the next two to three years building its business before

exploring a sale. The plaintiffs argue that when speaking in connection with the Second

Offering, the directors had an obligation to update that prior disclosure, which had

become false in light of the Snyk inquiry. See Wayport, 76 A.3d at 324 (discussing duty

to update). What the plaintiffs have not done is to identify any occasion on which the

directors spoke except through the solicitation of the Written Consent. The duty of

disclosure in connection with a request for stockholder action is broader than the more

39
general duty to speak honestly and completely, so there is no need to analyze the separate

theory.

The plaintiffs have not identified any basis for a disclosure claim in connection

with the Option Grants. The Written Consent does not contain any reference to the

Option Grants, and the plaintiffs have not identified any other source of stockholder

action that could relate to the Option Grants. They also have not pointed to any

statements by the directors regarding the Option Grants. To the extent Count III pertains

to the Option Grants, the claim is dismissed.

2. The Disclosure-Based Challenge To The Second Offering

The plaintiffs contend that the directors breached their duty of disclosure when

asking the Other Signatories to execute the Written Consent. This claim advances a novel

theory, because the plaintiffs are not arguing that the directors breached their duty of

disclosure when making disclosures to them or when seeking their vote. They are seeking

to litigate the sufficiency of the disclosures that the directors provided to the Other

Signatories. Although novel, this theory is viable under Delaware law.

a. The Obligation To Make Disclosures When Seeking Consents
From A Limited Number Of Stockholders

A threshold issue is whether Delaware law imposes a duty of disclosure when

directors seek written consents from a limited number of stockholders in a private

company. Precedent demonstrates that the duty exists.

The Delaware Supreme Court’s decision in Stroud is its most significant ruling

about the duty of disclosure in the context of a privately held company. In Stroud, the

40
stockholders in a family-owned corporation were divided into factions, with a large

controlling block and a small minority block. 606 A.2d at 79–80. The controlling

stockholders planned to approve amendments to the corporation’s charter and by-laws at

the annual meeting. Id. They did not need support from the minority to carry the vote,

and the directors did not solicit proxies. Id. at 80. The only information that the directors

provided in advance of the meeting was the statutorily required notice of meeting and a

summary of the proposed charter amendments. Id. at 80, 85. A stockholder plaintiff from

the minority asserted that the board of directors had a fiduciary duty to disclose all

material information, and the Court of Chancery agreed. Id. at 86.

On appeal, the Delaware Supreme Court reversed. The high court acknowledged

that “directors of Delaware corporations are under a fiduciary duty to disclose fully and

fairly all material information within the board’s control when it seeks shareholder

action.” Id. at 84. But the court held that when directors were not seeking stockholder

action, viz. not soliciting proxies, they only needed to comply with the statutory

requirements of the DGCL. Id. at 87. The corporation had a duty to give notice of the

meeting in compliance with Section 222(a) of the DGCL, and the corporation had a duty

to disclose a summary of the proposed charter amendments as required by Section

242(b)(1) of the DGCL. Id. at 86. The high court rejected the trial court’s view that the

directors had a fiduciary duty to provide all material information reasonably available to

all stockholders. Id. The high court held instead that

under all of the circumstances here, the board had no duty to disclose
anything beyond the requirements of section 242(b)(1) of the General
Corporation Law. The board complied with its statutory duty and included

41
 with its notice both the certificates of incorporation and the proposed
amendments. . . . Nor is the board’s conduct inequitable.

Id. at 87. The Delaware Supreme Court admonished the Court of Chancery to “act with

caution and restraint when ignoring the clear language of the General Corporation Law in

favor of other legal or equitable principles.” Id. The Delaware Supreme Court stressed

that its holding was “limited to non-public, privately-held [sic] companies.” Id. at 86.

The Stroud decision involved a situation in which the minority stockholders were

not being asked or required to do anything. Since Stroud, this court has held that the

directors of a privately held company have a duty to disclose all material information

reasonably available to all stockholders when giving stockholders notice of a merger that

would trigger appraisal rights, even if the directors were not seeking any votes. See Nagy

v. Bistricer, 770 A.2d 43 (Del. Ch. 2000); Turner v. Bernstein, 776 A.2d 530 (Del. Ch.

2000). In Turner, the directors of a privately held Delaware corporation controlled a

majority of the corporation’s voting power, and they used their control to cause the

company to sell itself to a third party, with the directors both approving the transaction at

the board level and supplying the necessary stockholder-level consents. 776 A.2d at 534.

After the merger closed, the directors circulated an information statement to enable

stockholders to decide whether to accept the merger consideration or seek appraisal. Id.

The information statement provided the stockholders with “extremely cursory

information.” Id. at 532. The directors “did not give the stockholders any current

financial information or explain why the merger was in [their] best interests.” Id. The

stockholders “did not even receive the company’s most recent financial results for the

42
periods proximate to the vote,” nor “any projections of future company performance,”

nor “any explanation of why the [company’s] board believed that the merger

consideration [should be accepted].” Id. at 535. Writing as a Vice Chancellor, Chief

Justice Strine granted summary judgment in favor of the plaintiffs, holding that the duty

to disclose all material information applied and that the directors “defaulted on this

obligation” where they “did not even attempt to put together a disclosure containing any

cogent recitation of the material facts pertinent to the stockholders’ choice.” Id. at 542.

Then-Vice Chancellor Strine reached the same result in Nagy, where the directors

and controlling stockholders of a privately held corporation effected a merger between

the corporation and another entity that they controlled. 770 A.2d at 47. As in Turner, the

defendants distributed a disclosure document that provided minimal information. Chief

Justice Strine observed that “[a]lthough the Information Circular contained a good deal of

information about how to perfect appraisal rights and the nature of an appraisal

proceeding under § 262, the Information Circular was wholly devoid of other material

information.” Id. at 48. He noted that the disclosure document (i) did not provide any

financial information about the buyer or the seller, (ii) did not describe the process or

events leading to the merger, (iii) did not describe why the seller’s board had agreed to

the merger, and (iv) contained no information regarding the fact that the seller’s

controllers held a controlling interest in the buyer. Id. The fact that the defendants had not

solicited the plaintiff’s vote did not foreclose a disclosure claim where the plaintiff had to

decide whether to accept the merger consideration or seek appraisal. Id. at 60.

43
 The court took the next step in Kurz v. Holbrook by applying these disclosure

principles to the solicitation of consents by the directors of a privately held company. 989

A.2d 140, 183 (Del. Ch. 2010), aff’d in part, rev’d in part on other grounds sub nom.

Crown EMAK P’rs, LLC v. Kurz, 992 A.2d 377 (Del. 2010). The court explained that

when directors seek stockholder action, the duty of disclosure applies “regardless of

whether a corporation is registered and publicly traded, dark and delisted, or closely

held.” 16 Rather than the duty disappearing,

[w]hat changes is not the underlying duty but rather the context-dependent
analysis of what information is material. Factors such as the nature of the
corporation and its business, the information already available to
stockholders, the other information being provided in the solicitation, and
the type of action being solicited all affect the determination of materiality.

16
Id. In one pre-Kurz decision, the court had identified the issue but declined to
address it. Unanue v. Unanue, 2004 WL 2521292, at *8 (Del. Ch. Nov. 3, 2004). In
Unanue, three branches of a family each effectively controlled one third of the
company’s stock. After the patriarch of one of the branches began acting in an autocratic
manner, the other two branches of the family executed written consents removing him
from his position as a director. Id. at *4. Members of the removed patriarch’s branch
challenged the written consent, contending that the director-representatives of the other
branches failed to disclose all material information when soliciting the written consents
from their family members because they failed to disclose the removed director’s side of
the story. Id. at *4, *8. After discussing Stroud, this court “question[ed] whether
additional disclosure duties [beyond the statutory notice requirement in Section 228(e)]
should be required in the written consent context.” Id. at *9. But this court declined to
address the issue after finding that the nondisclosures were not material on the facts of
the case. Id. at *10. The analogy to Stroud is dubious, because Stroud did not involve a
request for stockholder action. The plaintiffs in Stroud argued that the directors owed
them a duty of disclosure though no one had solicited consents or proxies from them, and
even though they had no decision to make. 606 A.2d at 87. By contrast, another pre-Kurz
decision held that when managers of a closely held LLC solicited a written consent from
one of its members, they acted as fiduciaries and had “a duty to disclose all material facts
bearing on the decision at issue.” Bakerman v. Sidney Frank Importing Co., 2006 WL
3927242, at *14 (Del. Ch. Oct. 10, 2006).

44
Kurz, 989 A.2d at 183.

Since Kurz, this court has acknowledged that the directors of a private company

owe a duty of full disclosure when selectively soliciting consents. Kerbawy v.

McDonnell, 2015 WL 4929198, *12 (Del. Ch. Aug. 18, 2015); see eBay Domestic

Hldgs., Inc. v. Newmark, 16 A.3d 1, 31 (Del. Ch. 2010) (following Kurz in holding that

“[f]iduciary duties apply regardless of whether a corporation is ‘registered and publicly

traded, dark and delisted, or closely held’” (quoting Kurz, 989 A.2d at 183)).

In Kerbawy, a director of a privately held company had assisted the holder of 5%

of the common stock in soliciting consents to remove the incumbent directors and elect a

new board majority. 2015 WL 4929198, at *1–2. The stockholder circulated written

consent materials to a subset of the other stockholders and ultimately delivered to the

company consents from holders of 53% of the outstanding stock. Id. at *11. The

incumbent board majority refused to accept the consents, contending that disclosures that

the director had made to the stockholders were materially misleading. Id. at *1, *5–6. In a

subsequent action under Section 225 of the DGCL to determine the composition of the

board, the court observed that “if a fiduciary breaches his or her disclosure obligations in

connection with soliciting stockholders’ votes or consents, and the Court finds that such

breaches inequitably tainted the election process, that could be grounds for setting aside

otherwise valid votes or consents.” Id. at *12 (cleaned up). The court held that the

director who assisted the stockholder “would be held to a duty of disclosure in this

situation.” Id. at *15. Despite making that observation, the court declined to rule on the

issue because the equities of the case did not support invalidating the consents. Id.

45
 Under these authorities, the Company’s directors owed a duty of disclosure when

asking stockholders to execute the Written Consent. That duty required that they provide

the stockholders being solicited with all material information that was reasonably

available, with materiality being judged based on the facts and circumstances facing a

private entity in the Company’s position. The Company’s directors did not owe a duty of

disclosure to the stockholders from whom they did not solicit consents, because those

stockholders were not asked or put in a position where they were required to make any

type of decision that triggered the duty.

b. The Ability To Challenge Disclosures Made To Other
Stockholders

For the plaintiffs, establishing that the Company’s directors owed a duty of

disclosure when they solicited consents only goes part of the way. The plaintiffs must

also establish that a stockholder to whom the directors did not owe a duty of disclosure

can sue a fiduciary for failing to disclose all material information to the stockholders who

were owed that duty. That is a novel issue that differs from the disclosure claim advanced

in Stroud, Kurz, and Kerbawy, because the parties asserting disclosure violations in those

cases contended that they could sue based on the disclosures made or not made to them.

It is also a different issue than in Turner and Nagy, where the plaintiffs had to make an

investment decision.

The defendants advance a straightforward argument against the plaintiffs having

standing to sue: Because no one sought consents from the plaintiffs, they cannot assert a

claim for breach of the duty of disclosure. According to the defendants, only the

46
stockholders who delivered consents can complain about whether or not they were

misled. The plaintiffs are not among the Other Signatories, so they cannot sue.

That position might have merit if the alleged disclosure violations only affected

the stockholders who delivered the consents, but that is not what happens in most

stockholder votes, and it is not what happened in this one. The outcome of a stockholder

vote typically affects non-voting stockholders as well, either because the approval clears

the way for a significant lifecycle event like a merger, sale of assets, and (as here) a

charter amendment,17 or because stockholder approval has effects on the ability of

stockholders to challenge corporate action that was the subject of the vote as void or

voidable,18 or as constituting a breach of fiduciary duty.19

The duty of disclosure protects not just the stockholders whose votes are solicited,

but the overall integrity of the voting process. “What legitimizes the stockholder vote as a

decision-making mechanism is the premise that stockholders with economic ownership

are expressing their collective view as to whether a particular course of action serves the

corporate goal of stockholder wealth maximization.” Kurz, 989 A.2d at 178. The

legitimating conditions for meaningful stockholder voting include aligned economic

incentives, the absence of coercion, “and the presence of full information about the

17
See 8 Del. C. §§ 242(b), 251(c), 271(a).
18
Id. § 144(a).
19
See Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 312–13 (Del. 2015); Kahn
v. M & F Worldwide Corp., 88 A.3d 635, 653–54 (Del. 2014).

47
material facts.” Id. The importance of disclosure is so significant that Delaware law

recognizes an exception to the rule that proxies and consents are voted based on the face

of the document: “Where a vote is claimed to have resulted from the commission of a

fraud or breach of fiduciary duty that goes to the very integrity of the election process,

this Court may consider such extrinsic evidence as may be relevant to prove the fraud or

breach of duty.”20

Cases from a related area illustrate these principles. In cases where non-tendering

stockholders have claimed that fiduciaries breached their duty of disclosure in connection

with tender offers, the defendants have argued that because the non-tendering plaintiffs

were not misled into tendering their shares, they could not assert disclosure claims. In a

series of cases, Chancellor Allen rejected that argument, explaining that “a nontendering

shareholder may suffer an injury, and therefore may state a claim upon which relief will

be granted, when, as alleged, false information and omissions led others to tender their

shares.”21 The principal difference between a tender offer and this case is that a non-

20
Parshalle v. Roy, 567 A.2d 19, 24 n.4 (Del. Ch. 1989); id. at 24 (noting the
exception to the face-of-the-ballot rule that applies “where the challenged vote is claimed
to be a result of fraud or breach of duty”); accord Staub v. Reading & Bates Corp., 1991
WL 1182613, at *2 (Del. Ch. Dec. 26, 1991) (explaining that a court can look beyond a
facially valid proxy in instances involving “fraud or breach of duty”); see Blasius Indus.
Inc. v. Atlas Corp., 564 A.2d 651, 670 (Del. Ch. 1989) (Allen, C.) (explaining that
“judges of election (and reviewing courts absent fraud or breach of duty) are not to
inquire into [a record owner’s] intention except as expressed on the face of the proxy,
consent, or other ballot”); id. (stating that “absent fraud, or breach of duty, effect must be
given to properly submitted proxies that are not inconsistent”).
21
Freedman v. Rest. Assocs. Indus., Inc., 1990 WL 135923, *8 (Del. Ch. Sept. 19,
1990) (Allen, C.) (cleaned up); see Cinerama, Inc. v. Technicolor, Inc., 1991 WL
48
tendering stockholder knows what disclosures were made to the stockholders who

tendered and can more easily plead a disclosure claim. In both settings, the stockholder

that did not act in response to the disclosure violations is injured by actions that other

stockholders were induced to take. That is true whether the stockholder who did not act

was given the opportunity to make a decision (as in the tender offer context) or was not

(as in this case).

The plaintiffs therefore have standing to challenge the disclosures that the

directors provided to the Other Signatories.

c. Whether The Snyk Inquiry Was Material Information

The plaintiffs contend that the directors breached their duty of disclosure by

failing to inform the Other Signatories about Snyk’s inquiry to Stella. This claim survives

111134, at *21 (Del. Ch. June 24, 1991) (Allen, C.) (noting that because the plaintiff did
not tender, it was not misled by any disclosure violations, but nevertheless could
challenge the adequacy of the disclosure where “[i]t was plainly, though indirectly,
affected by the tender offer [because it] was that transaction that put MAF in a position to
exercise cash-out rights under Section 253 of the Delaware Corporation Law”)
(subsequent history omitted). In Freedman, Chancellor Allen noted that a non-tendering
plaintiff is plainly injured by misleading disclosures in a tender offer that enables the
tender offeror to acquire control. 1990 WL 135923, at *8. He held open the question of
“[w]hether it is true that a non-tendering shareholder may be injured by
misrepresentations in a tender offer made by an offeror who already has control is a
different matter.” Id. Here, the injury arises not because of a change of control, but rather
through the Second Offering that the solicited consents enabled to take place. The actions
of the consenting holders of Preferred Stock thus inflicted an injury directly on the
Company and indirectly on the plaintiffs.

49
because it is not possible to determine as a matter of law that the Snyk inquiry was

immaterial on the facts alleged in the complaint.

Delaware law follows the federal standard for materiality. Rosenblatt v. Getty Oil

Co., 493 A.2d 929, 944 (Del. 1985) (adopting materiality standard from TSC Industries,

Inc. v. Northway, Inc., 426 U. S. 438 (1976)). Information is material if it “‘would have

assumed actual significance in the deliberations’ of a person deciding whether to buy,

sell, vote, or tender stock.” In re Oracle Corp., 867 A.2d 904, 934 (Del. Ch. 2004)

(quoting Rosenblatt, 493 A.2d at 944), aff’d, 872 A.2d 960 (Del. 2005) (TABLE). The

test does not require a substantial likelihood that the information would have caused the

reasonable investor to act differently, such as by changing his vote or opting not to buy,

sell, or tender stock. Rather, the question is whether there is “a substantial likelihood that

the disclosure of the omitted fact would have been viewed by the reasonable investor as

having significantly altered the ‘total mix’ of information made available.” Rosenblatt,

493 A.2d at 944 (cleaned up). At the pleading stage, the operative question is whether the

complaint “supports a rational inference that material facts were not disclosed or that the

disclosed information was otherwise materially misleading.” Morrison, 191 A.3d at 282.

The resulting inquiry necessarily is “fact-intensive, and the Court should deny a motion

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

determination as a matter of law.” Chester Cnty. Empls.’ Ret. Fund v. KCG Hldgs., Inc.,

2019 WL 2564093, at *10 (Del. Ch. June 21, 2019).

The defendants argue that the Snyk inquiry was too preliminary to constitute

material information that the directors have a duty to disclose. If the Company were

50
publicly traded, then that argument would prevail. But because the Company was a small,

privately held entity that had recently ended a sale process and told its stockholders that a

transaction was not likely to happen for two to three years, it is not possible to determine

at this stage that the Snyk inquiry was immaterial as a matter of law.

In cases involving publicly traded companies, Delaware decisions have held that

when the duty of disclosure applies, directors must provide stockholders with an accurate,

full, and fair description of significant meetings or other interactions between target

management and a bidder.22 That includes material interactions between the target and

the bidder that take place before key agreements are reached.

22
See, e.g., Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1280–82 (Del.
1994) (reversing a grant of summary judgment in favor of defendants on disclosure claim
where proxy failed to disclose the existence of a bid because “once defendants traveled
down the road of partial disclosure of the history leading up to the Merger and used the
vague language described, they had an obligation to provide the stockholders with an
accurate, full, and fair characterization of those historic events,” including the existence
of the bid); Firefighters’ Pension Sys. of Kan. City v. Presidio, Inc., 251 A.3d 251, 261
(Del. Ch. 2021) (“It is reasonably conceivable that the existence of the tip was material
information that should have been disclosed to the stockholders. The Proxy made no
mention of LionTree’s tip to BCP.”); In re Xura, Inc. S’holder Litig., 2018 WL 6498677,
at *13 (Del. Ch. Dec. 10, 2018) (holding that plaintiff adequately pled a claim for breach
of the duty of disclosure where stockholders appeared to lack information about private
communications between CEO and bidders); In re OM Gp., Inc. S’holders Litig., 2016
WL 5929951, at *12 (Del. Ch. Oct. 12, 2016) (“[O]ur Supreme Court recognized that a
partial and incomplete disclosure of arguably immaterial information regarding the
history of negotiations leading to a merger might result in a materially misleading
disclosure if not supplemented with information that would allow the stockholders to
draw the complete picture.”); Alessi v. Beracha, 849 A.2d 939, 946 (Del. Ch. 2004)
(holding that negotiations between buyer’s and target’s CEOs were material when the
parties discussed “significant terms” including “valuation”); see also In re PLX Tech. Inc.
S’holders Litig., 2018 WL 5018535, at *33–34 (Del. Ch. Oct. 16, 2018) (finding after
trial that recommendation statement omitted material information where it failed to
disclose a communication between a director and a potential bidder about the bidder’s
51
 There was a time when Delaware law required an agreement in principle on price

and structure before any disclosure obligation arose regarding a transaction involving a

publicly traded company. See Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 847 (Del.

1987). In Bershad, the Delaware Supreme Court held that a board of directors had not

breached its fiduciary duties by failing to disclose “certain casual inquiries” regarding a

potential transaction that the target company flatly rejected and which never led to a sale.

Id. The high court stated: “Efforts by public corporations to arrange mergers are

immaterial under the Rosenblatt v. Getty standard, as a matter of law, until the firms have

agreed on the price and structure of the transaction.” Id.

That is no longer the law. One year later, the Supreme Court of the United States

issued its decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which rejected the

price-and-structure rule (also known as the agreement-in-principle test) as contrary to the

materiality standard set forth in TSC Industries. Id. at 232–40. The TSC Industries

standard is the test for materiality that the Delaware Supreme Court adopted in

Rosenblatt. 493 A.2d at 944.

In the immediate aftermath of Basic, it was open to question whether the

agreement-in-principle rule continued to apply to public companies for purposes of

Delaware law. Subsequent developments have made clear that Bershad’s statement no

interest in acquiring the company and the likely timeframe for a bid), aff’d, 211 A.3d 137
(Del. 2019) (TABLE).

52
longer stands as a bright-line rule. In Alessi, Chancellor Chandler explained why the

outcome in Bershad made sense on its facts:

In Bershad, the evidence indicated that the defendants informed inquiring
parties that “Dorr-Oliver was not for sale.” In addition, the one inquiring
party that the plaintiff specifically identified “did not have detailed, non-
public financial data on Dorr-Oliver and never seriously considered making
an offer.” The Court held that “since it is undisputed that: (1) Dorr-Oliver
was not for sale, and (2) no offer was ever made for Dorr-Oliver, the
defendants were not obligated to disclose preliminary discussions regarding
an unlikely sale.”

849 A.2d at 945 (cleaned up).

Chancellor Chandler explained at length why the fact-specific ruling in Bershad

could not be read as establishing a “broad and inflexible rule” in which no duty to

disclose arose until there was an agreement as to price and structure. Id. at 946–50. He

observed that the Delaware Supreme Court provided three rationales for ruling in the

defendant’s favor in Bershad:

• “The probability of completing a merger benefiting all shareholders may well
hinge on secrecy during the negotiation process.” Bershad, 535 A.3d at 847 n.5.

• “It would be very difficult for those responsible to determine when disclosures
should be made.” Id.

• “Delaware law does not require disclosure of inherently unreliable or speculative
information which tend to confuse stockholders or inundate them with an overload
of information.”23

23
Chancellor Chandler drew this rationale from Arnold. He observed that
“[a]lthough not found in Bershad, the Delaware Supreme Court stated in Arnold that this
‘principle is consistent with Bershad.’” Alessi, 849 A.2d at 947 n.48 (quoting Arnold, 650
A.2d at 1280).

53
Chancellor Chandler explained that each of these considerations supported a fact-specific

inquiry into whether the information in question was material and needed to be disclosed.

Each consideration could weigh against disclosure in certain circumstances, but not in

others.

• “The first rationale, that secrecy increases shareholder wealth in some cases, is not
a justification for maintaining secrecy in all cases.” Id. at 947.

• “The second rationale, that fiduciaries find non-disclosure of merger negotiations
easier than tough decisions about when to disclose, is insufficient to justify the
omission of material information . . . .” Id. at 948. He explained that materiality
always requires a fact-based judgment in light of all of the circumstances. Any
approach that makes a single fact or occurrence outcome-determinative will
necessarily be over- or underinclusive. Id.

• “The third rationale, shareholder confusion, is the least persuasive.” Id. The
rationale improperly assumed “that investors are nitwits, unable to appreciate—
even when told—that mergers are risk propositions up until the closing.” Id.

Chancellor Chandler concluded that although each of the rationales was a valid concern,

they did not justify a bright-line rule. Id. at 947.

Chancellor Chandler also noted that the Basic decision had rejected the

agreement-in-principle test. The Supreme Court of the United States stated:

We . . . find no valid justification for artificially excluding from the
definition of materiality information concerning merger discussions, which
would otherwise be considered significant to the trading decision of a
reasonable investor, merely because agreement-in-principle as to price and
structure has not yet been reached by the parties or their representatives.

Basic, 485 U.S. at 236. The Basic decision held that “[w]hether merger discussions in any

particular case are material . . . depends on the facts.” Id. at 239. The Supreme Court of

the United States explained instead that whether a contingent event, such as a merger, is

material “will depend at any given time upon a balancing of both the indicated

54
probability that the event will occur and the anticipated magnitude of the event in light of

the totality of the company activity.” Id. at 238 (cleaned up). Chancellor Chandler held

that Delaware law followed the Basic test.24

For public companies, investors have a range of sources of information available,

starting with the stock price itself and extending to analyst reports, news articles, market

coverage, and many other forms of content. For a privately held entity like the Company,

information is tougher to get, and even loose indications of value can be significant. In

this case, the Company had spent the second half of 2020 and the first half of 2021

exploring strategic alternatives and searching for a buyer. In April 2021, management had

told the Board, including representatives of NEA and Core Capital, that the Company had

failed to find a buyer, would be focusing on growing its core business, and that it would

take two to three years before the Company could be sold. Based on that assessment, the

24
There are other Delaware cases which have held that preliminary merger
discussions were not material, but those cases involved preliminary discussions about
deals that never came to fruition, and none of them were rendered at the pleading stage.
See Wayport, 76 A.3d at 321 (post-trial decision involving a fiduciary’s disclosure
obligations when buying stock from another stockholder and finding the existence of an
entity’s proposal was not material because the entity never accepted the company’s
counteroffer, no agreement on price and structure was reached, and the transaction did
not come to fruition); In re MONY Gp. Inc. S’holder Litig., 852 A.2d 9, 29–30 (Del. Ch.
2004) (preliminary injunction decision holding that there was no obligation to disclose an
expression of interest made by an entity other than the ultimate acquirer that “did not
provide a price or structure” and was contingent on the pending deal’s failure); Shamrock
Hldgs., Inc. v. Polaroid Corp., 559 A.2d 257, 261–62, 274–75 (Del. Ch. 1989) (post-trial
decision involving the adoption of an employee stock ownership plan, not a merger, and
holding that there was no obligation to disclose that an entity had “expressed its interest
in a ‘friendly’ meeting” with management because “[i]ts only significance [was] as a
possible forerunner to an acquisition proposal” that ultimately did not materialize).

55
Board and the Company’s stockholders, including NEA and Core Capital, approved the

Recapitalization.

Against that backdrop, the inbound call from Snyk’s CEO to Stella was a

significant development. So was his follow-up email proposing “a proper chat about a

potential deep partnership or (maybe more likely) acquisition,” his representation that

Snyk could “dig in reasonably quickly” to determine the terms of a deal, and his

suggestion that the companies sign up “a fresh MNDA and a refresh mutual demo.” Ex.

5. In contrast to the six-month effort which suggested that no one saw value in the

Company, Snyk’s inbound call showed that someone did. And in contrast to the

assessment that a sale of the Company would not be viable for two to three years, Snyk’s

inbound inquiry suggested the possibility of a near-term liquidity event. Those factors

made the Snyk inquiry particularly significant when the Company was proposing to issue

additional shares of Preferred Stock to insiders and their associates at the same price

agreed to in the Recapitalization.

Under the circumstances, it is reasonably conceivable that the directors’ duty of

disclosure required them to say something to the effect that the Company had received a

recent inbound call from a credible buyer, but that the conversation was preliminary and

there were no assurances that any type of transaction would result. It is reasonably

conceivable that the information would have been important to a stockholder evaluating

whether to consent to the stockholder defendants and other selected investors buying

more Preferred Stock at a price set three months earlier when the Company was running

out of money and thought it had no other prospects. It is reasonably conceivable that the

56
information “would have assumed actual significance in the deliberations” of a

stockholder deciding whether to execute the Written Consent. Rosenblatt, 493 A.2d at

944. Put differently, it is reasonably conceivable that the information “would have been

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

information made available.” Id. At a minimum, additional discovery is warranted before

making a materiality determination as a matter of law, which warrants denying the

motion to dismiss. KCG Hldgs., 2019 WL 2564093, at *10.

The presence of the blank signature blocks for the Non-Consenting Stockholders

supports a pleading-stage inference that some stockholders declined to execute the

Written Consent. There are many possible reasons why that might be so, but at the

pleading stage, one plaintiff-friendly inference is that the stockholders declined because

giving selected Preferred Stockholders the right to buy additional shares at the same price

set three months earlier when the Company was running out of money and thought it had

no other prospects represented too rich a deal for Rich, Rutchik, and their confederates. If

deciding whether to sign off on the Written Consent was a close call in the first place,

then the Company’s receipt of an inbound inquiry, albeit preliminary, would have

assumed even greater significance. It is reasonable to infer that Rich and Rutchik only

secured the necessary votes by giving four of the ten Other Signatories the right to share

in the fruits of the Second Offering.25

25
One wonders if permitting an investor to participate in an undervalued offering
in return for providing the votes needed for the offering to succeed could be viewed as
vote buying. See Crown, 992 A.2d at 390 (discussing third-party vote buying). A transfer
57
 It is reasonably conceivable that information about the Snyk inquiry “would have

been viewed by the reasonable investor as having significantly altered the ‘total mix’ of

information made available.” Rosenblatt, 493 A.2d at 944. At a minimum, additional

discovery is warranted before making a materiality determination as a matter of law,

which calls for denying the motion to dismiss. KCG Hldgs., 2019 WL 2564093, at *10.

of value in return for a vote is inferably present. The innovation is that the consideration
for the vote is bundled with the right to participate in an undervalued offering, rather than
through an unbundled side payment. Yet at a superficial level, the same might be said
about any attractive third-party transaction where stockholders vote in favor to receive
the merger consideration. Rather than treating that transaction as a bundled vote, our law
gives the vote powerful cleansing effect. Compare Corwin, 125 A.3d at 312–14 (Del.
2015) (holding that a fully informed stockholder vote on a merger causes the standard of
review to be an irrebuttable version of the business judgment rule) with James D. Cox,
Tomas J. Mondino & Randall S. Thomas, Understanding the (Ir)relevance of
Shareholder Votes on M&A Deals, 69 Duke L.J. 503, 542 (2019) (“Simply stated, the
norm celebrated in Corwin, followed in other contexts in Delaware and well received
outside of Delaware, is that it is permissible to bundle in a single resolution the deal’s
approval as well as a concurrent vote excusing managerial misconduct that occurred or
may have occurred during that transaction.”). An interested transaction where only a
subset of stockholders is permitted to participate might well present a different case than
Corwin cleansing. The idea of giving a preferential right to participate in an attractive
transaction as one side of a quid pro quo resembles the issues involved in IPO spinning,
in which bankers award pre-IPO allocations of stock to individuals who might provide
future business. See In re eBay, Inc. S’holders Litig., 2004 WL 253521, *4–5 (Del. Ch.
Jan. 23, 2004) (holding that ability to participate in IPOs was a corporate opportunity
creating loyalty issues for directors who accepted it); see generally Christine Hurt, Moral
Hazard and the Initial Public Offering, 26 Cardozo L. Rev. 711, 740–44 (2005). The
issue is an intriguing one that warrants further exploration, but this decision is not the
appropriate place for it.

58
 3. Is The Disclosure Claim Direct Or Derivative?

A claim for breach of the duty of disclosure can be direct or derivative. To

determine which it is, the court must consider “(1) who suffered the alleged harm (the

corporation or the suing stockholders, individually); and (2) who would receive the

benefit of any recovery or other remedy (the corporation or the stockholders,

individually)?” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del.

2004).

Under the Tooley test, a claim for breach of the duty of disclosure that arises in

connection with a request for stockholder action states a direct claim. Brookfield Asset

Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1263 n.39 (Del. 2021); accord In re J.P. Morgan

Chase & Co. S’holder Litig., 906 A.2d 766, 772 (Del. 2006). The duty of disclosure is

owed to the stockholders themselves, who are injured when the duty is violated. Any

recovery or remedy logically flows to them.

This case presents a twist on that generalization because the plaintiffs are not

suing based on their own right to receive information in connection with a request for

stockholder action, but rather based on a failure to disclose information to the Other

Signatories. In that setting, the only harm the plaintiffs can claim flows to them

indirectly, as a result of the Second Offering. I have previously attempted to explain why

a claim involving the issuance of equity to an insider inflicts both an injury at the entity

level and an injury at the investor level, with the injury primarily felt at the investor level

and the corporate-level injury deriving only from the legal construct that a corporation’s

shares (representing proportionate ownership interests in the firm) are assets of the firm

59
itself.26 But that doctrinal battle has been lost, with the Delaware Supreme Court holding

definitively that claims for equity dilution are only and always derivative. Brookfield, 261

A.3d at 1263.

For purposes of the first prong of Tooley, the answer Brookfield requires is that

only the corporation has suffered an injury. The Other Signatories have suffered an injury

at the investor level because they were deprived of material information, but the suing

stockholders have not suffered that injury. They have only suffered an injury by virtue of

the transaction that the Written Consent approved, which was the dilutive Second

Offering.

The second prong of Tooley generally follows the first prong, because the remedy

typically flows to the injured party. The answer Brookfield requires is that the remedy

26
See In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 132 A.3d 67, 95–118 (Del.
Ch. 2015) (holding that purchase of asset from controller in return for stock inflicted an
injury that was primarily direct but, at a minimum, both derivative and direct, such that
plaintiffs retained standing to pursue a claim after a subsequent controller squeeze-out),
rev’d sub nom. El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del.
2016) (holding that purchase of asset from controller in return for stock was solely
derivative such that standing to pursue a claim was extinguished by a subsequent
controller squeeze-out merger leaving plaintiff with alternative of challenging the fairness
of the merger); Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 654–61 (Del. Ch.
2013) (holding that interested recapitalization involving dilutive issuance inflicted an
injury that was primarily direct but, at a minimum, both derivative and direct), abrogated
in part by El Paso, 152 A.3d at 1264 (rejecting analysis of dilution claim as having both
direct and derivative components).

60
would flow to the corporation, either by returning some or all of the shares to the

corporate treasurer or through a monetary award to the corporation.27

Because the disclosure claim is derivative, the closing of the Snyk Merger

deprived the plaintiffs of standing to pursue their disclosure claim. See, e.g., Ark. Tchr.

Ret. Sys. v. Countrywide Fin. Corp., 75 A.3d 888, 894 (Del. 2013); Lewis v. Ward, 852

A.2d 896, 904 (Del. 2004); Lewis v. Anderson, 477 A.2d 1040, 1046 (Del. 1984). Count

III is therefore dismissed.

D. Counts IV and V: Claims Against The Rich Entities And The Rutchik Trust
Based On The Second Offering And The Option Grants

In Counts IV and V of the complaint, the plaintiffs assert claims against the Rich

Entities and the Rutchik Trust based on the Second Offering and the Option Grants. In

Count IV, the plaintiffs contend that the Rich Entities were the Company’s controlling

stockholders, owed the same duty of disclosure in connection with the Second Offering

and the Option Grants as the directors, and breached its duty as the directors did. In

27
The analysis is not so simple, because a court of equity can award a stockholder-
level remedy for a derivative claim. See Goldstein v. Denner, 2022 WL 1797224, at *15–
20 (Del. Ch. June 2, 2022) (collecting authorities); compare Deane v. Maginn, 2022 WL
16557974, at *29 (Del. Ch. Nov. 1, 2022) (awarding investor-level recovery for
derivative claim), with Bamford v. Penfold, L.P., 2022 WL 2278867, at *54–56 (Del. Ch.
June 24, 2022) (considering but rejecting request for stockholder-level remedy for
derivative claim). That type of remedial calculus comes at the end of the case, while the
Tooley assessment generally comes at the beginning. As a practical matter, the court’s
remedial flexibility means that the second prong of Tooley does not play much of a role
in the analysis. The characterization of the injury in the first prong dominates the
outcome.

61
Count V, the plaintiffs contend that the Rutchik Trust aided and abetted the directors and

the Rich Entities in breaching their fiduciary duty of disclosure.

Counts IV and V fail to state a disclosure claim based on the Option Grants for the

same reasons as Count III. Whether Counts IV and V state claims based on the Second

Offering presents a relatively easy call for Count V and a more difficult call for Count

IV. In the interest of brevity, this decision will not analyze those claims because each is

derivative for the same reasons that Count III is derivative. The closing of the Snyk

Merger deprived the plaintiffs of standing to pursue Counts IV and V, which are

therefore dismissed.

E. Count VI: The Claim That The Director Defendants Breached Their
Fiduciary Duties By Approving The Snyk Merger

In Count VI of the complaint, NEA and Core Capital challenge the Snyk Merger

on the theory that (i) it was an interested transaction that conferred unique benefits on the

defendants by extinguishing the plaintiffs’ standing to maintain derivative claims and (ii)

the merger consideration did not take into account the value of the derivative claims. In

advancing this theory, the plaintiffs allege that the Second Offering and Option Grants

were interested transactions in their own right and that the defendants would not have

been able to show that those transactions were entirely fair (the “Interested Transaction

Claims”). Those claims are distinct from the claim for breach of the duty of disclosure in

connection with the Second Offering (the “Disclosure Claim”), discussed above, which

the plaintiffs sought to maintain as a direct claim, but which this decision has held to be

62
derivative. For purposes of the challenge to the Snyk Merger, both the Interested

Transaction Claims and the Disclosure Claim are in play.

Evaluating whether the plaintiffs have stated a claim against the Snyk Merger

involves a two-step process. First, the plaintiffs must show that they have standing to

challenge the Snyk Merger. Second, the plaintiffs must have stated a claim against the

defendants on which relief can be granted.

1. The Plaintiffs’ Standing To Challenge The Snyk Merger

The Delaware Supreme Court has endorsed a pleading-stage framework that this

court used in the Primedia decision to evaluate whether a plaintiff had standing to

challenge a merger based on the extinguishment of derivative standing. Morris v. Spectra

Energy P’rs (DE) GP, LP, 246 A.3d 121, 136 (Del. 2021) (“When the court is faced with

a post-merger claim challenging the fairness of a merger based on the defendant’s failure

to secure value for derivative claims, we think that the Primedia framework provides a

reasonable basis to conduct a pleadings-based analysis to evaluate standing on a motion

to dismiss.”). The Primedia decision described the framework as follows:

A plaintiff claiming standing to challenge a merger directly under Parnes
because of a board’s alleged failure to obtain value for an underlying
derivative claim must meet a three part test. First, the plaintiff must plead
an underlying derivative claim that has survived a motion to dismiss or
otherwise could state a claim on which relief could be granted. Second, the
value of the derivative claim must be material in the context of the merger.
Third, the complaint challenging the merger must support a pleadings-stage
inference that the acquirer would not assert the underlying derivative claim
and did not provide value for it.

In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 477 (Del. Ch. 2013). In this case, the

plaintiffs can meet all of the Primedia requirements.

63
 a. Viable Derivative Claims

The first Primedia element is met because the plaintiffs have pled derivative

claims that would survive a Rule 12(b)(6) motion to dismiss. This decision has held that

the Disclosure Claim passes muster under Rule 12(b)(6). The Interested Transaction

Claims do too.

i. The Governing Law

The plaintiffs contend that Rich, Rutchik, and Stella breached their fiduciary

duties when approving the Second Offering and the Option Grants. To determine whether

directors have complied with their fiduciary duties, Delaware courts evaluate their actions

through the lens of a standard of review. “Delaware has three tiers of review for

evaluating director decision-making: the business judgment rule, enhanced scrutiny, and

entire fairness.” Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).

Delaware’s default standard of review is the business judgment rule. That standard

of review presumes that “in making a business decision the directors of a corporation

acted on an informed basis, in good faith and in the honest belief that the action taken

was in the best interests of the company.” 28 Unless a plaintiff rebuts one of the elements

28
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). In Brehm v. Eisner, the
Delaware Supreme Court overruled seven decisions, including Aronson, to the extent
those precedents reviewed a Rule 23.1 decision by the Court of Chancery under an abuse
of discretion standard or otherwise suggested deferential appellate review. See 746 A.2d
244, 253 n.13 (Del. 2000) (overruling in part on this issue Scattered Corp. v. Chi. Stock
Exch., 701 A.2d 70, 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207, 1217 n.15
(Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950, 952 (Del. 1992); Levine v.
Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot, 539 A.2d 180, 186 (Del. 1988);
Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984); and Aronson, 473 A.2d at 814). The
64
of the rule, “the court merely looks to see whether the business decision made was

rational in the sense of being one logical approach to advancing the corporation’s

objectives.” In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010). Only

when a decision lacks any rationally conceivable basis will a court infer bad faith and a

breach of duty.29 The business judgment rule thus provides “something as close to non-

review as our law contemplates.” Kallick v. Sandridge Energy, Inc., 68 A.3d 242, 257

Brehm Court held that going forward, appellate review of a Rule 23.1 determination
would be de novo and plenary. 746 A.2d at 253. The seven partially overruled precedents
otherwise remain good law. This decision does not rely on any of them for the standard
of appellate review. Having described Brehm’s relationship to these cases, this decision
omits the cases’ cumbersome subsequent history, because stating that they were
overruled by Brehm creates the misimpression that Brehm rejected a series of
foundational Delaware decisions.

More recently, the Delaware Supreme Court overruled Aronson and Rales v.
Blasband, 634 A.2d 927 (Del. 1993), to the extent that they set out alternative tests for
demand futility. United Food & Com. Workers Union & Participating Food Indus.
Empls. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021). The
high court adopted a single, unified test for demand futility. Although the Zuckerberg test
displaced the prior tests, cases properly applying Aronson and Rales remain good law. Id.
This decision therefore does not identify any precedents, including Aronson and Rales, as
having been overruled by Zuckerberg.
29
See Brehm, 746 A.2d at 264 (“Irrationality is the outer limit of the business
judgment rule. Irrationality may be the functional equivalent of the waste test or it may
tend to show that the decision is not made in good faith, which is a key ingredient of the
business judgment rule.” (footnote omitted)); In re J.P. Stevens & Co., Inc. S’holders
Litig., 542 A.2d 770, 780–81 (Del. Ch. 1988) (Allen, C.) (“A court may, however, review
the substance of a business decision made by an apparently well motivated board for the
limited purpose of assessing whether that decision is so far beyond the bounds of
reasonable judgment that it seems essentially inexplicable on any ground other than bad
faith.” (internal citation omitted)).

65
(Del. Ch. 2013). This standard of review “reflects and promotes the role of the board of

directors as the proper body to manage the business and affairs of the corporation.” In re

Trados Inc. S’holder Litig. (Trados I), 2009 WL 2225958, at *6 (Del. Ch. July 24, 2009);

see generally Stephen M. Bainbridge, The Business Judgment Rule as Abstention

Doctrine, 57 Vand. L. Rev. 83 (2004).

Delaware’s most onerous standard of review is the entire fairness test. When entire

fairness governs, the defendants must establish “to the court’s satisfaction that the

transaction was the product of both fair dealing and fair price.” Cinerama, Inc. v.

Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (citation omitted). “Not even an

honest belief that the transaction was entirely fair will be sufficient to establish entire

fairness. Rather, the transaction itself must be objectively fair, independent of the board’s

beliefs.” Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).

In between lies enhanced scrutiny, which “is Delaware’s intermediate standard of

review.” In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d 17, 43 (Del. Ch. 2013). It

applies to “specific, recurring, and readily identifiable situations involving potential

conflicts of interest where the realities of the decisionmaking context can subtly

undermine the decisions of even independent and disinterested directors.”30 Inherent in

30
Id.; accord Reis, 28 A.3d at 457–59; see Paramount Commc’ns, Inc. v. QVC
Network, Inc., 637 A.2d 34, 42 (Del. 1994) (“[T]here are rare situations which mandate
that a court take a more direct and active role in overseeing the decisions made and
actions taken by directors. In these situations, a court subjects the directors’ conduct to
enhanced scrutiny to ensure that it is reasonable.”); Dollar Thrifty, 14 A.3d at 598 (“In a
situation where heightened scrutiny applies, the predicate question of what the board’s
true motivation was comes into play. The court must take a nuanced and realistic look at
66
these situations are subtle structural and situational conflicts that do not rise to a level

sufficient to trigger entire fairness review, but also do not comfortably permit expansive

judicial deference.31 Framed generally, enhanced scrutiny requires that the defendant

fiduciaries “bear the burden of persuasion to show that their motivations were proper and

not selfish” and that “their actions were reasonable in relation to their legitimate

objective.” Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del. Ch. 2007). The

Second Offering and the Option Grants do not fit any of the established situations in

which enhanced scrutiny applies, rendering that standard inapplicable.

Analysis starts with the default standard of the business judgment rule. The

question is whether the plaintiffs have alleged facts sufficient to rebut one of the

presumptions of the business judgment rule, thereby creating a pleading-stage inference

that the directors would bear the burden of proving that their actions were entirely fair. If

the possibility that personal interests short of pure self-dealing have influenced the board
to block a bid or to steer a deal to one bidder rather than another.”).
31
In re Rural Metro Corp. S’holders Litig., 88 A.3d 54, 82 (Del. Ch. 2014), aff’d
sub nom. RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015); accord Huff Energy
Fund, L.P. v. Gershen, 2016 WL 5462958, at *13 (Del. Ch. Sept. 29, 2016); see Dollar
Thrifty, 14 A.3d at 597 (“Avoiding a crude bifurcation of the world into two starkly
divergent categories—business judgment rule review reflecting a policy of maximal
deference to disinterested board decisionmaking and entire fairness review reflecting a
policy of extreme skepticism toward self-dealing decisions—the Delaware Supreme
Court’s Unocal and Revlon decisions adopted a middle ground.”); Golden Cycle, LLC v.
Allan, 1998 WL 892631, at *11 (Del. Ch. Dec. 10, 1998) (locating the Unocal and
Revlon enhanced scrutiny standard between the business judgment rule and the entire
fairness test).

67
the plaintiffs have alleged facts at the pleading stage that support an inference of

unfairness, then the court must credit those allegations. The defendants cannot introduce

evidence at the pleading stage, nor can a court weigh competing evidence. Therefore, a

plaintiff who has alleged facts sufficient to rebut the business judgment rule and support

an inference of unfairness will survive a Rule 12(b)(6) motion.

To change the pleading-stage standard of review from the business judgment rule

to entire fairness, the complaint must allege 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. See Aronson, 473

A.2d at 812. Consequently, to determine whether to intensify the standard of review from

business judgment to entire fairness, a court counts heads. Frederick Hsu Living Tr. v.

ODN Hldg. Corp., 2017 WL 1437308, at *26 (Del. Ch. Apr. 14, 2017). If a director-by-

director analysis leaves insufficient directors to make up a board majority, then the court

will review the decision for entire fairness. Id.

At the pleading stage, a plaintiff can prevent a director from qualifying as part of

the requisite board majority by alleging that the director received “a personal financial

benefit from a transaction that is not equally shared by the stockholders.”32 A plaintiff

32
Rales, 634 A.2d at 936 (citations omitted); accord Cede & Co. v. Technicolor,
Inc., 634 A.2d 345, 362 (Del. 1993) (“Classic examples of director self-interest in a
business transaction involve either a director appearing on both sides of a transaction or a
director receiving a personal benefit from a transaction not received by the shareholders
generally.”); Pogostin, 480 A.2d at 624 (“Directorial interest exists whenever . . . a
director either has received, or is entitled to receive, a personal financial benefit from the
challenged transaction which is not equally shared by the stockholders.”).

68
also can prevent a director from qualifying as part of the requisite board majority by

alleging that the director was sufficiently loyal to, beholden to, or otherwise influenced

by an interested party to undermine the director’s ability to judge the matter on its

merits.33 There are other means as well, but those two are sufficient for this case.

ii. The Governing Law And The Second Offering

The Second Offering was an interested transaction to which the entire fairness test

would apply. At the time of the Second Offering, the Board comprised Rich, Rutchik, and

Stella. None qualify as disinterested and independent.

For a director to be disinterested, the director “can neither appear on both sides of

a transaction nor expect to derive any personal financial benefit from it in the sense of

self-dealing, as opposed to a benefit which devolves upon the corporation or all

stockholders generally.” Aronson, 473 A.2d at 812. The benefit that the director receives

must be sufficiently material to rebut the presumption of loyalty. Technicolor, 634 A.2d

33
Aronson, 473 A.2d at 815 (stating that one way to allege successfully that an
individual director is under the control of another is by pleading “such facts as would
demonstrate that through personal or other relationships the directors are beholden to the
controlling person”); Friedman v. Beningson, 1995 WL 716762, at *4 (Del. Ch. Dec. 4,
1995) (Allen, C.) (“The requirement that directors exercise independent judgment,
(insofar as it is a distinct prerequisite to business judgment review from a requirement
that directors exercise financially disinterested judgment[)], directs a court to an inquiry
into all of the circumstances that are alleged to have inappropriately affected the exercise
of board power. This inquiry may include the subject whether some or all directors are
‘beholden’ to or under the control, domination or strong influence of a party with a
material financial interest in the transaction under attack, which interest is adverse to that
of the corporation.”). Classic examples involve familial relationships, such as a parent’s
love for and loyalty to a child. See, e.g., Harbor Fin. P’rs v. Huizenga, 751 A.2d 879,
889 (Del. Ch. 1999).

69
at 363. “Directorial interest also exists where a corporate decision will have a materially

detrimental impact on a director, but not on the corporation and the stockholders.” Rales,

634 A.2d at 936.

Rich and Rutchik both approved the Second Offering and participated in it. They

stood on both sides of the transaction and benefitted from it. The opportunity to buy

undervalued Preferred Stock at the same price set in the Recapitalization was not shared

equally with other stockholders. Perhaps they bought shares of Preferred Stock in the

Second Offering as a favor or on a lark, but given that they pursued and participated in

the Second Offering, it is reasonable to infer at the pleading stage that the benefit they

secured was material to them. Rich and Rutchik therefore cannot qualify as disinterested

for purposes of the Second Offering.

Stella was the CEO. He reported to the Board majority consisting of Rich and

Rutchik, and Rich controlled the Company through the Rich Entities. Under the great

weight of Delaware precedent, senior corporate officers generally lack independence for

purposes of evaluating matters that implicate the interests of either a controller or a

conflicted board majority.34 Stella did not participate in the Second Offering and

34
Many of the cases standing for this proposition involve the issue of
disqualification for purposes of demand futility under Rule 23.1 rather than an inference
of a lack of independence under Rule 12(b)(6). Rule 23.1 requires a higher pleading
standard, making those precedents all the more persuasive for purposes of analysis under
Rule 12(b)(6). E.g., id. at 937 (holding that President and CEO of corporation could not
impartially consider a litigation demand which, if granted, would have resulted in a suit
adverse to significant stockholders); In re The Student Loan Corp. Deriv. Litig., 2002 WL
75479, at *3 (Del. Ch. Jan. 8, 2002) (“In the case of [the CEO], to accept such a
[litigation] demand would require him to decide to have Student Loan sue Citigroup, an
70
therefore was not interested in that transaction, but he was not independent of Rich and

Rutchik for purposes of the decision to approve it.

Because there were no disinterested and independent directors to approve the

Second Offering, the entire fairness standard applies. The plaintiffs have pled facts

supporting an inference of unfairness. When approving the Second Offering, Rich,

Rutchik, and Stella allowed the participating stockholders, including Rich and Rutchik

and their affiliates, to acquire Preferred Stock at the same price and on the same terms

that Rich had extracted three months before, in April 2021, when the Company was

running out of money and had spent six months exploring a potential sale in an effort that

failed to generate any interest. When Rich negotiated that transaction, he was the only

act that would displease a majority stockholder in a position to displace him from his
lucrative CEO position.”); Mizel v. Connolly, 1999 WL 550369, at *3 (Del. Ch. July 22,
1999) (observing that President and CEO of corporation whose position constituted his
principal employment was not independent for demand-futility purposes where
underlying transaction was between corporation and its controller); Steiner v. Meyerson,
1995 WL 441999, at *10 (Del. Ch. July 19, 1995) (Allen, C.) (“The facts alleged appear
to raise a reasonable doubt that Wipff, as president, chief operating officer, and chief
financial officer, would be unaffected by [the CEO and significant stockholder’s] interest
in the transactions that the plaintiff attacks.”); see Bakerman, 2006 WL 3927242, at *9
(holding that reasonable doubt existed as to ability of insider managers of LLC to address
a litigation demand focusing on the entity’s controllers); see also MCG Cap. Corp. v.
Maginn, 2010 WL 1782271, at *20 (Del. Ch. May 5, 2010) (“There may be a reasonable
doubt about a director’s independence if his or her continued employment and
compensation can be affected by the directors who received the challenged benefit.”); In
re Cooper Cos., Inc. S’holders Deriv. Litig., 2000 WL 1664167, at *6 (Del. Ch. Oct. 31,
2000) (finding reasonable doubt existed as to ability of two directors, one of whom was
also CFO and Treasurer and the other who was also Vice President and General Counsel,
to consider litigation demand addressing actions by other directors).

71
game in town, and he held all the cards. He was able to secure a deal that valued the

Company’s existing equity at only $10 million, he forced all of the existing preferred

stockholders to convert their shares into common stock and give up all of their special

rights, and he extracted Preferred Stock with powerful terms, including a 2x liquidation

preference. After the Recapitalization injected $8 million into the Company, the situation

was different. The Company had enough cash to operate for a significant period.

Moreover, the Company had received the inbound expression of interest from Snyk.

Although preliminary, that expression of interest changed the environment from one in

which no one had shown any interest that would validate the Company’s worth to one in

which a third party had expressed interest in an acquisition. It is reasonable to infer that

using the distressed-entity pricing from April for a non-distressed transaction in July was

not entirely fair.

The defendants argue in response that just before the Recapitalization closed, Rich

proposed increasing the investment round from $8 million to $10 million, but that the

Board refused. They claim that after Rich joined the Board and evaluated the Company,

he determined that the Company really did need more than $8 million. They say that Rich

did not pursue the Second Offering selfishly, but rather because the Company needed the

money.

The defendants’ account departs from the allegations of the complaint, and at the

pleading stage, the court must credit the plaintiffs’ account. In any event, the defendants’

story does not explain why it was fair to price the Second Offering on the same terms as

the Recapitalization. Even assuming that the Company needed a longer runway, it was

72
not in the same position as it was in April 2021 when Rich negotiated the terms of the

Recapitalization. One of the sayings in the start-up industry is that it’s better to raise

capital when its available than when you need it, but that does not mean you should pay

for the capital that is available as if you need it.

The defendants also argue that they did not know and could not have known in

July 2021 that the Snyk inquiry would blossom into the Snyk Merger. The level of

confidence that the Board had in the Snyk inquiry is a contested fact, but accepting that

nothing in the world is certain, that does not mean that the Board could price the Second

Offering without giving any credence to the Snyk inquiry. It is reasonable to infer that the

Snyk inquiry had importance as a signal of validation for the Company. Just as the failure

of the six-month sale process to generate any nibbles suggested that potential acquirers

did not see any value in the Company, the Snyk inquiry suggested the opposite. And it

suggested that the pricing used for the Recapitalization was outdated.

Another common saying in the investment world is that you make your money

when you buy, not when you sell. To benefit from the Second Offering, Rich, Rutchik,

and their associates did not need to believe that the Snyk inquiry would develop into a

sale. They only had to believe that the Company was worth more in July 2021 than the

valuation that Rich extracted in April. It is reasonable to infer that Rich, Rutchik, and

their associates held that belief and that they bought what they thought were undervalued

shares of Preferred Stock in the Second Offering, expecting that an undervalued purchase

price would enable them to realize a bigger gain whenever the Company was sold,

whether to Snyk or to someone else.

73
 It is reasonable to infer that the Second Offering would be subject to the entire

fairness test and that the transaction was not entirely fair. It is therefore reasonable to

infer that a derivative claim challenging the Second Offering would survive a motion to

dismiss.

iii. The Governing Law And The Option Grants

As described in the Factual Background, the Option Grants came in two flavors:

the Interested Grants to Rich, Rutchik, and Stella, plus the Disinterested Grants to

employees and advisors. The complaint provides no basis to infer that the Board was not

disinterested and independent as to the Disinterested Grants, so the business judgment

rule applies. A derivative claim challenging the Disinterested Grants would not survive a

motion to dismiss.

The opposite is true for the Interested Grants. When directors determine their own

compensation, they engage in self-interested conduct. In re Invs. Bancorp, Inc. S’holder

Litig., 177 A.3d 1208, 1217 (Del. 2017). Absent some cleansing mechanism, the decision

will “lie outside the business judgment rule’s presumptive protection, so that, where

properly challenged, the receipt of self-determined benefits is subject to an affirmative

showing that the compensation arrangements are fair to the corporation.” Telxon Corp. v.

Meyerson, 802 A.2d 257, 265 (Del. 2002).

The Interested Grants covered 3,084,203 shares and represented 51% of the total

Option Grants. Rich, Rutchik, and Stella thus granted themselves more options than they

awarded to thirty-one different employees and two advisors.

74
 Stella’s grant of 2,050,227 options represented one third of the Option Grants.

While sizable, Stella was the Company’s CEO, suggesting that there could be some basis

to find that his grant was entirely fair. The court cannot make that determination at the

pleading stage, but giving the CEO a lot of options does comport with industry practice.

Rutchik’s grant of 886,265 options seems particularly large. It comprised 15% of

the Option Grants as a whole and was larger by a considerable margin than any grant

other than Stella’s. Perhaps there is a reason why an investor and board member received

so large a grant. At the pleading stage, it is reasonable to indulge the plaintiff-friendly

inference that it was partially compensation for board service and partially a quid pro quo

for being helpful to Rich.

Rich received options on 147,711 shares, the same as the sixth-highest employee

after Stella. Perhaps that was a fair amount of compensation for a director. At the

pleading stage, it is reasonable to indulge the plaintiff-friendly inference that it was a

self-interested giveaway.

In addition to the size of the Interested Grants, there is also reason to question their

timing. They were made shortly after the Snyk inquiry, yet the exercise price was set at

$0.10 per share. Recall that in the Recapitalization, the agreed-upon value of Company’s

pre-transaction equity was $10 million. After all of the Preferred Stock was converted

into common stock, the Company’s pre-transaction equity consisted of 8,921,712

common shares. The Recapitalization itself thus implicitly valued the common stock at

$1.12 per share, and that was at a time when the Company needed new capital and did

not believe it had any meaningful prospects for a sale. Three months later, after the

75
Second Offering, the Company had $10 million on its balance sheet and had received an

expression of interest from Snyk. It is reasonable to infer that in July 2021, the

Company’s value exceeded $1.12 per common share. Yet the directors set the exercise

price for the options at $0.10 per share.

A board may see fit to grant in-the-money options to employees or advisors, and

assuming that decision does not violate the terms of a governing plan document, the

board’s decision will be protected by the business judgment rule. Desimone v. Barrows,

924 A.2d 908, 934 (Del. Ch. 2007). When directors make sizable grants of in-the-money

options to themselves, the directors must establish the fairness of their actions. Using the

$1.12 per share figure as a plug number, the directors granted themselves options that

were in the money to the tune of $2,091,231, setting aside any increase in value above

$1.12 from the Company’s improved position relative to April 2021, and setting aside

any additional contingent value calculated by another method, such as the Black-Scholes

formula.35

A derivative challenge to the Interested Grants would survive a motion to dismiss

under Rule 12(b)(6).

b. A Material Amount In The Context Of The Snyk Merger

The second Primedia element is met because it is reasonably conceivable that the

value of the Interested Transaction Claims was material in the context of the Snyk

35
Because the Company is privately held, the Black-Sholes formula does not
apply directly. The point is that the options had option value, i.e., contingent value over
and above their intrinsic, in-the-money value.

76
Merger. There is no bright-line figure for materiality. Goldstein, 2022 WL 1797224, at

*11. One place to look for pleading-stage guidance is the 5% rule of thumb that laypeople

use as a rough guide. Id. Another source is the magnitude of the baskets that parties agree

to for purposes of deal-related indemnification, because the size of those limits indicates

the magnitude of loss that a party is willing to swallow before it can assert a claim to

recover. The second Primedia element asks the same basic question: How much loss

must sell-side stockholders swallow before gaining standing to assert a claim to recover

that value. Studies of basket amounts suggest a rule of thumb of 0.5% to 1%. Harris v.

Harris, 2023 WL 115541, at *12 & n.6 (Del. Ch. Jan. 6, 2023). A third place to look is

the magnitude of the cash settlement payments that the Delaware Court of Chancery has

approved to resolve litigation challenging transactions, measured as a percentage of the

transaction value. The fact that the court has approved a settlement as fair and reasonable

indicates that the amount received was material to the stockholder class that claimed to be

injured in the transaction. For example, when approving a settlement of litigation

challenging Kinder Morgan’s acquisition of El Paso Corporation, then-Chancellor Strine

described a cash settlement payment equal to approximately 0.5% of the merger

consideration as “a very large monetary settlement,” “a very substantial achievement for

77
the class,” “real money,” and a “very good settlement for the class.”36 Other settlements

involving third-party deals suggest that amounts of 1-2% are material.37

Based on the complaint and the documents it incorporates by reference, it is

possible to make some rough, pleading-stage estimates of the value of the Interested

Transaction Claims. Working backwards from the complaint’s allegations that each share

of Preferred Stock received $4.44 in the deal and each share of common stock received

$3.22, it is possible to estimate total deal consideration at $123,324,378.68 (without the

proceeds from option exercise).38

36
In re El Paso Corp. S’holder Litig., C.A. No. 6959-CS, at 36–37, 39–40 (Del.
Ch. Dec. 3, 2012) (TRANSCRIPT).
37
See Morrison v. Berry, C.A. No. 12808-VCG, at 15 (Del. Ch. July 7, 2021)
(TRANSCRIPT) (approving as reasonable a settlement payment equal to 2% premium to
deal price; “[T]he idea that the settlement was anything short of appropriate I think would
be fatuous, because this, I think, is an excellent result for the stockholder class . . . .”); In
re TIBCO Software, Inc. S’holders Litig., C.A. No. 10319-CB, at 44 (Del. Ch. Sept. 7,
2016) (TRANSCRIPT) (approving as reasonable a settlement payment equal to 1.2%
premium to deal price; “[T]he settlement is an excellent outcome for the shareholders, in
my opinion.”); see also Chester Cnty. Empls.’ Ret. Fund v. KCG Hldgs., Inc., C.A. No.
2017-0421-KSJM, at 32 (Mar. 31, 2020) (TRANSCRIPT) (approving as reasonable a
settlement payment equal to 2.3% of transaction consideration to resolve challenge to an
arm’s-length deal); Appel v. Berkman, C.A. No. 12844-VCF, at 45–46 (Del. Ch. Feb. 20,
2020) (TRANSCRIPT) (approving as reasonable and deeming “significant” a settlement
payment equal to 1.1% of transaction consideration to resolve challenge to an arm’s-
length deal); Chen v. Howard-Anderson, C.A. 5878-VCL, at 40 (Del. Ch. Aug. 26, 2016)
(TRANSCRIPT) (approving as reasonable a settlement payment equal to 1.7% of
transaction consideration to resolve challenge to an arm’s-length deal).
38
8,921,712 shares of common stock plus 6,029,555 additional shares from option
exercise = 14,951,267 shares of common.

14,951,267 shares of common * $3.22 per share = $48,143,079.74.

78
 The Company’s simple capital structure facilitates the calculations.39 Using the

waterfall of a liquidation preference for the Preferred Shares equal to two times the

purchase price of $0.61 per share, followed by a distribution of the remaining proceeds

pro rata to all holders of common and Preferred Stock, it is possible to estimate that the

Second Offering alone resulted in Rich, Rutchik, and Stella receiving $5 million more

than they would have received if the Second Offering had not taken place. That amount

represents 4% of the transaction proceeds, which is inferably a material percentage of the

transaction consideration. The following table shows the more detailed calculations.40

17,068,751 shares of Preferred Stock * $4.44 = $75,785,254.44.

Total distributions include $602,955.50 from option exercise at $0.10 per share.

$48,143,079.74 + $75,785,254.44 - $602,955.50 = $123,325,378.68.
39
For Rutchik’s share, the calculations only consider the Rutchik Trust’s
ownership of Preferred Stock, the additional shares that Rutchik purchased in the Second
Offering, and the options that Rutchik received in the Interested Grants. Rutchik appears
to control Nodozac, and the court included Nodozac’s holdings of Preferred Stock when
calculating the voting power Rutchik controlled. The plaintiffs, however, have not named
Nodozac as a defendant, and they do not appear to take issue with the amounts Rutchik
received through Nodozac, so the damages calculation excludes Nodozac’s shares when
determining Rutchik’s take.
40
As the more detailed calculations show, excluding the Second Offering affects
the defendants differently. Rich gained substantially from the Second Offering because
he acquired the bulk of the additional shares of Preferred Stock, so invalidating the
Second Offering causes him to lose $5.1 million. Rutchik held fewer shares of Preferred
Stock and participated more through his share of the Interested Grants, so he loses
$816,188. Stella only participated through common stock, so he gains by $926,026. The
calculations would differ if Rutchik’s holdings of Preferred Stock through Nodozac were
included.

79
 Actual Transaction Without Second Issuance
Estimated Transaction Proceeds Excluding Option Exercise 123,325,378.68 123,325,378.68
Proceeds from Option Exercise 602,955.50 602,955.50
Total Proceeds 123,928,334.18 123,928,334.18
Preferred Stock Liquidation Preference 20,823,876.22 20,823,876.22
Rich Entities' Liquidation Preference 13,788,508.32 10,384,603.40
Rutchik Trust's Liquidation Preference 1,051,204.46 650,745.56
Net proceeds for participating holders 103,104,457.96 103,104,457.96
Fully diluted shares 32,020,018.00 28,081,077.00
Per Share Consideration 3.22 3.67
Rich Entities' Share of Per Share Consideration From Preferred 36,392,620.32 31,253,147.91
Rich Entities' Share of Per Share Consideration From Common 475,629.42 542,346.10
Rutchik Trust's Share of Per Share Consideration From Preferred 2,774,490.46 1,958,461.62
Rutchik Trust's Share of Per Share Consideration From Common 2,853,773.30 3,254,072.93
Rich Entities' Total Proceeds 57,692,125.96 52,619,370.23
Rutchik Trust's Total Proceeds 6,679,468.22 5,863,280.11
Stella's Share From Common 6,601,730.94 7,527,757.70
Defendants' Total Proceeds 70,973,325.12 66,010,408.04
Other Stockholders' Total Proceeds 52,955,009.06 57,917,926.14
Other Stockholders' Damages Relative To Actual Transaction 4,962,917.08
Damages As Percentage of Deal Consideration 4.00%

Rich Delta -5,072,755.73
Rutchik Delta -816,188.11
Stella Delta 926,026.76

Based on the court’s estimates, the Interested Grants alone resulted in Rich,

Rutchik, and Stella receiving $5.4 million more than they would have received if the

Interested Grants had not taken place. That amount represents 4.4% of the transaction

proceeds, which is again a material percentage of the transaction consideration. The

following table shows the more detailed calculations.41

41
As the more detailed calculations show, excluding the Interested Grants affects
the defendants differently. Rich received relatively few options relative to Stella and
Rutchik, so cancelling the Interested Grants causes him to gain more from his Preferred
Stock than he loses from his cancelled options, resulting in his share of the proceeds
increasing by $3.4 million. Rutchik received $3.1 million from his grant, so although
excluding the Interested Grants causes him to gain some from his Preferred Stock, he is a
net loser to the tune of $2.6 million. Stella takes the biggest hit because he only received
a share of the merger consideration through the Interested Grants, so he loses $6.6
80
 Actual Transaction Without Interested Grants
Estimated Transaction Proceeds Excluding Option Exercise 123,325,378.68 123,325,378.68
Proceeds from Option Exercise 602,955.50 294,535.20
Total Proceeds 123,928,334.18 123,619,913.88
Preferred Stock Liquidation Preference 20,823,876.22 20,823,876.22
Rich Entities' Liquidation Preference 13,788,508.32 13,788,508.32
Rutchik Trust's Liquidation Preference 1,051,204.46 1,051,204.46
Net proceeds for participating holders 103,104,457.96 102,796,037.66
Fully diluted shares 32,020,018.00 28,935,815.00
Per Share Consideration 3.22 3.55
Rich Entities' Share of Per Share Consideration From Preferred 36,392,620.32 40,151,161.26
Rich Entities' Share of Per Share Consideration From Common 475,629.42 0.00
Rutchik Trust's Share of Per Share Consideration From Preferred 2,774,490.46 3,061,033.06
Rutchik Trust's Share of Per Share Consideration From Common 2,853,773.30 0.00
Rich Entities' Total Proceeds 57,692,125.96 60,975,037.48
Rutchik Trust's Total Proceeds 6,679,468.22 4,112,237.52
Stella's Share From Common 6,601,730.94 0.00
Defendants' Total Proceeds 70,973,325.12 65,087,275.00
Other Stockholders' Total Proceeds 52,955,009.06 58,532,638.88
Other Stockholders' Damages Relative To Actual Transaction 5,577,629.82
Damages As Percentage of Deal Consideration 4.51%

Rich Delta 3,282,911.52
Rutchik Delta -2,567,230.70
Stella Delta -6,601,730.94

Based on the court’s estimates, the combination of the Second Offering and the

Interested Grants resulted in Rich, Rutchik, and Stella receiving $11.9 million more than

they would have received if the Interested Grants had not taken place. That amount

represents 9.7% of the transaction proceeds, which is again a material percentage of the

transaction consideration. The following table shows the more detailed calculations.42

million. The calculations again would differ if Rutchik’s holdings of Preferred Stock
through Nodozac were included.
42
Once again, the more detailed calculations show that excluding both the Second
Offering and the Interested Grants affects the defendants differently. With fewer shares
of Preferred Stock taking a liquidation preference, more funds fall to the pro rata
81
 Actual Transaction Without Both
Estimated Transaction Proceeds Excluding Option Exercise 123,325,378.68 123,325,378.68
Proceeds from Option Exercise 602,955.50 294,535.20
Total Proceeds 123,928,334.18 123,619,913.88
Preferred Stock Liquidation Preference 20,823,876.22 20,823,876.22
Rich Entities' Liquidation Preference 13,788,508.32 10,384,603.40
Rutchik Trust's Liquidation Preference 1,051,204.46 650,745.56
Net proceeds for participating holders 103,104,457.96 102,796,037.66
Fully diluted shares 32,020,018.00 24,996,874.00
Per Share Consideration 3.22 4.11
Rich Entities' Share of Per Share Consideration From Preferred 36,392,620.32 35,004,248.48
Rich Entities' Share of Per Share Consideration From Common 475,629.42 0.00
Rutchik Trust's Share of Per Share Consideration From Preferred 2,774,490.46 2,193,522.31
Rutchik Trust's Share of Per Share Consideration From Common 2,853,773.30 0.00
Rich Entities' Total Proceeds 57,692,125.96 55,828,124.70
Rutchik Trust's Total Proceeds 6,679,468.22 2,844,267.87
Stella's Share From Common 6,601,730.94 0.00
Defendants' Total Proceeds 70,973,325.12 58,672,392.57
Other Stockholders' Total Proceeds 52,955,009.06 64,947,521.31
Other Stockholders' Damages Relative To Actual Transaction 11,992,512.25
Damages As Percentage of Deal Consideration 9.70%

Rich Delta -1,864,001.26
Rutchik Delta -3,835,200.35
Stella Delta -6,601,730.94

Those are headline numbers. Any litigation involves risk, so the risk-adjusted

value of the Interested Transaction Claims would be lower. It also seems likely that the

defendants would be able to prove that Stella was entitled to an option grant of some

magnitude. His grant is quite large, and perhaps the plaintiffs are correct that a portion of

distribution. Although that hurts Rich, the higher per share distribution offsets the harm.
He also suffers relatively little from the cancellation of the Interested Grants. On net, he
loses $1.9 million when both issuances are excluded. Rutchik owned fewer shares of
Preferred Stock and received almost half of his proceeds from his option grant, so he does
worse than Rich and loses $3.8 million. Stella takes the biggest hit because he only
participated through the Interested Grants, so he loses $6.6 million. Here too, calculations
would differ if Rutchik’s holdings of Preferred Stock through Nodozac were included.

82
it represented a reward for supporting the Recapitalization and going along with the

Second Offering. See Compl. ¶ 60. But some of it (maybe most or all of it) represented

legitimate incentive compensation for his role as CEO. All of those issues can be hashed

out later in the case. At the pleading stage, it is reasonably conceivable that the value of

the Interested Transaction Claims was material.43

43
The sophisticated parties on both sides of the v. have no doubt prepared more
accurate versions of these calculations. (After all, they have the actual distribution
waterfall.) The maximum ballpark damages figure of $11.9 million tells me that with big
law firms involved on both sides, the costs of fully litigating the case to trial (including
experts) and through an appeal could easily end up in the same neighborhood as the risk-
adjusted recovery. If the plaintiffs win, then the risk-adjusted recovery likely nets out
with the litigation costs. Meanwhile, the defendants pay twice, once to fund their
litigators and a second time to pay damages to the plaintiffs. And if the plaintiffs lose,
then there is no recovery, and both sides pay once to their litigators.

A little further exploration suggests that the lawsuit could rapidly become a
negative value proposition for both sides. The plaintiffs have not sued on behalf of a
class, so they cannot claim all of the potential damages. The plaintiffs have not said how
many shares they own, so rough calculations are again the order of the day. The plaintiffs
allege that after the Recapitalization, their “ownership interest” in the Company was
15%. Id. ¶ 35. I assume that means 15% of the fully diluted equity, as if calculating
voting power. After the Recapitalization and before the Second Offering and Option
Grants, that works out to around 331,000 shares of common stock. Assuming the
plaintiffs succeed in invalidating the Second Offering and the Interested Grants, any
damages award would be shared by (i) all of the holders of common stock who received
merger consideration (including those who exercised the Disinterested Grants) and (ii)
the holders of Preferred Stock from the Recapitalization other than the shares owned by
the defendants (I again have not excluded Nodozac). That means the denominator is
roughly 16 million shares, and the plaintiffs would be entitled to 21% of the headline
damages figure. The plaintiffs’ best-case recovery becomes $2.4 million. Big firms can
burn through that before depositions start.

The venture capital players in the case market themselves as some of the best
evaluators of risk in the world. One would think they could price the case and settle it
(unless someone is feeling emotional or wants to make a point).

83
 It is not necessary to engage in a similar analysis of the Disclosure Claim. That

claim provides an alternative vehicle to attack the Second Offering. As the preceding

discussion shows, the value of that claim is material.

c. Whether Snyk Would Assert The Derivative Claims

The third Primedia element asks whether the complaint challenging the merger

supports a pleading-stage inference that the acquirer would not assert the underlying

derivative claims and did not provide value for them. The facts of the complaint strongly

support an inference that Snyk will not assert the Interested Transaction Claims or the

Disclosure Claim.

When evaluating whether an acquirer is likely to assert a derivative claim and

therefore to have included value for that claim in the deal consideration, it is helpful to

divide the litigation assets that an acquirer might purchase and assert into two categories:

(i) external claims against third parties, such as contract claims, tort claims, and similar

causes of action (“External Claims”) and (ii) internal claims against sell-side fiduciaries

(“Internal Claims”).44 There is no reason to think either that an acquirer would not

determine disinterestedly whether to assert an External Claim or that the merger price

would not incorporate an assessment of the value of that claim.45 By contrast, there is

ample reason to think that an acquirer would never assert, and therefore would not pay

44
See Primedia, 67 A.3d at 483–84; Note, Survival of Rights of Action After
Corporate Merger, 78 Mich. L. Rev. 250, 263–70 (1979) [hereinafter Survival of Rights].
45
See Primedia, 67 A.3d at 483–84; Survival of Rights, supra, at 263–66.

84
for, Internal Claims.46 “Acquirers buy businesses, not claims,” and “[m]erger-related

financial analyses focus on the business, not on fiduciary duty litigation.” Carsanaro, 65

A.3d at 664.

There are also human dynamics at work that make suits against sell-side

fiduciaries improbable:

The acquiring company has just purchased the target company in a process
run by the same directors and officers who the acquiring corporation would
be suing. Would the deal have happened if the directors and officers
thought they would face a suit from the buyer? For companies who
regularly make acquisitions, a reputation for pursuing claims against sell-
side fiduciaries would not help their business model. Moreover, directors of
the acquired corporation may join the combined entity’s board, and senior
officers of the acquired company may become part of the ongoing
management team. Those individuals would become defendants in the
acquirer’s lawsuit.

Id.

Finally, there are legal impediments. The acquirer may have agreed contractually

as part of the deal documents not to sue the sell-side managers.47 More likely, the

acquirer will have committed to maintain the sell-side fiduciaries’ existing

indemnification and advancement rights or provide them with even broader third-party

46
Golaine v. Edwards, 1999 WL 1271882, at *5 (Del. Ch. Dec. 21, 1999) (noting
that such claims “usually die as a matter of fact”); Penn Mart Realty Co. v. Perelman,
1987 WL 10018, at *2 (Del. Ch. Apr. 15, 1987) (“I agree that it is highly unlikely that
Pantry Pride, which now controls Revlon, will seek to redress the allegedly excessive
severance payments or allegedly excessive fees and therefore these abuses (if they are
abuses) are not likely to be addressed.”).
47
See Golaine, 1999 WL 1271882, at *4 (noting the acquirer could give up the
right to sue “in the merger agreement”); Bershad v. Hartz, 1987 WL 6092, at *3 (Del.
Ch. Jan. 29, 1987) (same).

85
rights.48 An acquirer who sued would foot the bill for both sides, making litigation

economically unattractive.

Rather than litigating a claim for breach of fiduciary duty against a sell-side

fiduciary, a buyer is likely to sue for breach of the transaction agreement, in which the

seller provided the buyer with representations about the condition of the Company. In a

private company deal, a buyer almost always has a contractual right to indemnification if

the buyer believes that it did not receive the business that it paid for. Those contractual

remedies provide superior and more certain avenues of recovery for the buyer.

Given all of these factors, an acquirer is likely to ignore any Internal Claims

against the sell-side managers and focus on “mov[ing] forward” with the business. In re

Massey Energy Co. Deriv. & Class Action Litig., 2011 WL 2176479, at *26 n.173. In the

buyer’s hands, Internal Claims “usually die as a matter of fact.” Golaine, 1999 WL

1271882, at *4.49

48
See, e.g., Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del. 2005)
(“[M]andatory advancement provisions are set forth in a great many corporate charters,
bylaws and indemnification agreements.”); La. Mun. Police Empls.’ Ret. Sys. v.
Crawford, 918 A.2d 1172, 1179–80, 1180 n.8 (Del. Ch. 2007) (noting arm’s-length,
third-party stock-for-stock merger agreement provided significant protections for
directors and officers of acquired company who were defendants in then-pending
derivative actions, including direct contractual indemnification from the acquirer).
49
Before Lewis v. Anderson, it was understood that the acquirer’s ability to bring
Internal Claims against sell-side fiduciaries died not only as a matter of fact but as a
matter of law. A line of cases culminating in the United States Supreme Court’s decision
in Bangor Punta held that neither the acquirer nor the post-transaction entity itself could
assert Internal Claims against sell-side fiduciaries for depressing the value of the
business. See Bangor Punta Operations, Inc. v. Bangor & Aroostock R.R. Co., 417 U.S.
703 (1974). The Bangor Punta case involved sell-side managers extracting excessive
86
 The complaint’s allegations regarding the Snyk Merger, including the transaction

agreement incorporated by reference, support an inference that Snyk was buying a

value from their business before the acquisition. The Supreme Court of the United States
reasoned that because the self-dealing transactions had depressed the value of the
business, the acquirer ended up paying less to buy it. Having purchased the business for
less, the acquirer got what it paid for. The acquirer therefore had no equitable right to sue
the sell-side managers, recoup a portion of its purchase price, and effectively re-trade the
deal. Id. at 710–11. Notably, under Bangor Punta and its predecessors, this rule applied
to the acquirer both as the owner of the new business and to the extent the acquirer
sought to have the business assert the claim itself. Id. at 713; see also Midland Food
Servs., LLC, v. Castle Hill Hldgs. V, LLC, 792 A.2d 920, 929–35 (Del. Ch. 1999)
(explaining and applying the Bangor Punta doctrine); Golaine, 1999 WL 1271882, at *4
n.16 (“Depending on the circumstances, the new acquiror may be barred from causing the
target corporation [to sue its former fiduciaries] under . . . the [Bangor Punta] doctrine.”);
Courtland Manor, Inc. v. Leeds, 347 A.2d 144, 147 (Del. Ch. 1975) (same). In Lewis v.
Anderson, however, the Delaware Supreme Court declined to apply the Bangor Punta
doctrine to a surviving corporation and held that the post-transaction entity could assert
Internal Claims against the sell-side fiduciaries. 477 A.2d at 1050–51. That decision
spawned a series of difficult issues about direct versus derivative claims that have
bedeviled the Delaware courts ever since. Compare Gentile v. Rossette, 906 A.2d 91, 99–
100 (Del. 2006) (recognizing dual-natured claim for dilution), with Brookfield, 261 A.3d
at 1255 (overruling Gentile); compare also In re Tri-Star Pictures, Inc. Litig., 634 A.2d
319, 330 (Del. 1993) (using special injury test and recognizing direct claim based on
stockholder-level dilution) with Tooley, 845 A.2d at 1033 (overruling Tri-Star and special
injury test); compare also Spectra Energy, 246 A.3d at 138–39 (recognizing direct
challenge to merger based on extinguishment of standing to assert derivative claim), and
Parnes v. Bally Ent. Corp., 722 A.2d 1243, 1244–46 (Del. 1999) (permitting direct
challenge to merger based on diversion of consideration that otherwise would have
supported derivative claim), with Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 352 (Del.
1988) (holding that challenge to a transaction that diverted merger consideration was
derivative). To climb again onto a personal soapbox, a far better doctrinal solution would
be for Delaware law to apply Bangor Punta, hold that a buyer does not acquire Internal
Claims, and allow a sell-side plaintiff to continue to litigate an Internal Claim that existed
at the time of the merger for the benefit of the participants in the seller’s pre-merger
capital structure in order of their priority (which generally will mean for the benefit of the
class of common stockholders as they existed at the effective time).

87
business, not a business plus the right to assert the Interested Transaction Claims and the

Disclosure Claim against the sell-side fiduciaries. See Ex. 9. The representations and

warranties in the merger agreement concerned the Company’s business, and Snyk

bargained for a contractual indemnification regime supported by an escrow fund so that it

could recover post-closing if the Company was not in its as-represented condition.50

Unlike the plaintiffs, Snyk had no reason to be concerned about the Second

Offering or the Interested Grants. The Company represented that its capital structure

included those shares and options, and Snyk went forward with the acquisition on that

basis. See id. § 3.5. Snyk also agreed that for a period of six years after the closing, it will

cause the post-transaction entity “to fulfill and honor in all respects the obligations of the

Company to Persons who on or prior to the Effective Time are or were directors or

officers . . . pursuant to any indemnification provisions under the Charter Documents and

pursuant to any indemnification agreements.” Id. § 6.15(b).

It is reasonable to infer that Snyk will not cause the Company to challenge the

Second Offering or the Interested Grants by asserting the Interested Transaction Claims

or the Disclosure Claim. The third and final element of the Primedia test is met.

50
See id. art. 8. The high-level statement above the line about the nature of the
indemnification right is a gross oversimplification of the complex suite of provisions that
the parties negotiated to govern post-closing indemnification claims, which included
various qualifiers, limitations, baskets, and caps.

88
 2. Whether The Challenge To The Snyk Merger States A Viable Claim

Meeting the Primedia test establishes that the plaintiff has standing to challenge a

merger based on its failure to provide value for derivative claims. The existence of

standing to sue does not mean that a complaint necessarily states a claim on which relief

can be granted. See Parnes, 722 A.2d at 1246 (“Although we conclude that the Parnes

complaint directly challenges the Bally merger, it does not necessarily follow that the

complaint adequately states a claim for relief.”). The court must separately analyze

whether there are grounds to second-guess the merger.

“Any board negotiating the sale of a corporation should attempt to value and get

full consideration for all of the corporation’s material assets,” including litigation assets.

Massey Energy, 2011 WL 2176479, at *3; accord Merritt v. Colonial Foods, Inc., 505

A.2d 757, 764 (Del. Ch. 1986) (Allen, C.). “The degree to which a court will examine a

board’s success at this task depends on the standard of review.” Primedia, 67 A.3d at

486. If the business judgment rule applies to the decision to approve the merger, then the

court will not second guess the board’s effort.51 If the entire fairness standard applies,

then a plaintiff who has already gained standing to sue by pleading facts supporting an

51
See, e.g., In re Countrywide Corp. S’holders Litig., 2009 WL 846019, at *8
(Del. Ch. Mar. 31, 2009) (applying business judgment rule to decision of majority-
independent board regarding merger that would affect significant pending derivative
claims where company was widely held), aff’d, 996 A.2d 321 (Del. 2010); Porter v. Tex.
Com. Bancshares, Inc., 1989 WL 120358, at *5–6 (Del. Ch. Oct. 12, 1989) (applying
business judgment rule to decision of majority-independent board to approve arm’s-
length, third-party merger that would affect standing to bring claims for
mismanagement).

89
inference that the merger consideration did not include value for the derivative claims

will have stated a claim on which relief can be granted.52

The analysis in this case is straightforward. Rich, Rutchik, and Stella were the

directors who approved the Second Offering and the Interested Grants. Their actions gave

rise to the Interested Transaction Claims and the Disclosure Claim, which were assets of

the Company. Orbit/FR, 2023 WL 128530, at *4 (explaining that a controller’s pre-

transaction looting of the company gave rise to “a chose-in-action as an asset belonging

to Orbit[] for breach of fiduciary duty”). Rich, Rutchik, and Stella then approved a sale of

the Company to Snyk that inferably did not afford any value to those assets, and the

merger simultaneously conferred a benefit on the directors by extinguishing the sell-side

stockholders’ standing to assert the Interested Transaction Claims and the Disclosure

Claim. All three members of the Board were therefore interested in the Snyk Merger, and

52
See In re Orbit/FR, Inc. S’holders Litig., 2023 WL 128530, at *4 (Del. Ch. Jan.
9, 2023) (holding that stockholder had stated a direct claim challenge to a merger where
the complaint alleged that a controller had systemically looted the company, giving rise
to a claim for breach of fiduciary duty belonging to the company, then purchased the
company at an unfair price, in part because the merger consideration afforded no value to
the derivative claim); Primedia, 67 A.3d at 486–88 (holding that plaintiff stated a claim
where the merger extinguished standing to pursue a derivative claim against a controlling
stockholder and therefore conferred a unique benefit on the controlling stockholder,
warranting scrutiny under the entire fairness test); Merritt, 505 A.2d at 765 (applying
entire fairness test where merger would affect significant pending derivative claims
against controlling stockholder); see also Kohls v. Duthie, 765 A.2d 1274, 1284–85 (Del.
Ch. 2000) (declining to apply entire fairness test where merger would affect pending
derivative claim against CEO and large stockholder, but where transaction was approved
by special committee and conditioned on tender of 85% of shares).

90
the entire fairness test applies. Cf. id. at *4 (applying entire fairness test where the

interested defendant was a controller).

For the reasons already discussed, it is reasonably conceivable that the

consideration received by the stockholders who were not affiliated with the directors was

not entirely fair because the directors approved a merger that diverted consideration to

themselves through the shares of Preferred Stock issued in the Second Offering and the

options granted in the Interested Grants. That is another way of saying that the

consideration did not afford value for the Interested Transaction Claims and the

Disclosure Claim. It is therefore reasonably conceivable that the Snyk Merger was not

entirely fair. The plaintiffs have stated a claim on which relief can be granted.

F. Count VII: The Claim That The Rich Entities Breached Their Fiduciary
Duties By Approving The Snyk Merger

In Count VII, the plaintiffs assert a claim against the Rich Entities for breach of

fiduciary duty in connection with the Snyk Merger that parallels the claim against the

directors in Count VI. For reasons similar to Count VI, Count VII states a claim on which

relief can be granted. Having addressed these issues laboriously for Count VI, this

decision will take a more abbreviated approach to Count VII.

Initially, the plaintiffs have standing to assert the challenge to the Snyk Merger set

out in Count VII under the Primedia test. The first element of the Primedia test is met

because a viable derivative claim existed against the Rich Entities based on the Second

Offering. That issuance was inferably an interested transaction with controlling

stockholders and subject to the entire fairness test. Before the Second Offering, the Rich

91
Entities could exercise all of the Preferred Stock blocking rights and controlled one third

of the Company’s voting power. They also had the ability to appoint two of the

Company’s five directors and affect the selection of the third. And in terms of the actual

facts on the ground at the time of the Second Offering, the Rich Entities controlled two

out of three directors, giving them mathematical control of the Board. That aggregation

of power makes it reasonably conceivable that the Rich Entities owed fiduciary duties as

the Company’s controlling stockholders at the time of the Second Offering. See, e.g.,

Voigt v. Metcalf, 2020 WL 614999, at *11–22 (Del. Ch. Feb. 10, 2020).

As a purchaser of shares in the Second Offering, the Rich Entities stood on both

sides of the transaction and have a burden to establish that it was entirely fair. It is

reasonably conceivable that the Rich Entities did not pay a fair price in the Second

Offering because the Rich Entities purchased shares of Preferred Stock at the same price

and on the same terms that Rich had extracted three months before, when the Company

was running out of cash, had no other options, and lacked bargaining leverage. It is

reasonably conceivable that the Second Offering was not the product of fair dealing

based on a variety of factors, including that the transaction unfolded in secret, the votes

necessary to approve the transaction came from interested parties, and there was a lack of

full disclosure. In Weinberger, the Delaware Supreme Court held that the entire fairness

standard requires compliance with the duty of disclosure.53 On the facts of the case, it is

53
Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983); accord Rabkin v.
Philip A. Hunt Chem. Corp., 498 A.2d 1099, 1104 (Del. 1985) (“[The] duty of fairness
certainly incorporates the principle that a cash-out merger must be free of fraud or
92
reasonably conceivable that the failure to disclose the existence of a preliminary, inbound

inquiry could contribute to a lack of fair process. Taken as a whole, it is reasonably

conceivable that the Second Offering was not entirely fair.

The second and third elements of the Primedia test are met for the reasons

discussed previously. The potential recovery from a challenge to the Second Offering is

material in the context of the Snyk Merger, and it is reasonable to infer that Snyk would

never assert the claim.

Having shown that standing exists to assert Count VII, the plaintiffs next must

plead that Count VII states a viable challenge to the Snyk Merger. That challenge is

viable because the Snyk Merger generated a unique benefit for the Rich Entities, the

Company’s controlling stockholders, by extinguishing the plaintiffs’ standing to assert a

derivative claim challenging the Second Offering.

misrepresentation.”). The Weinberger decision referred to the duty of disclosure as the
“duty of candor.” 457 A.2d at 711. The Delaware Supreme Court coined this phrase in
Lynch v. Vickers Energy Corp., 383 A.2d 278, 279, 281 (Del. 1977). Delaware decisions
used it consistently until Stroud, when the Delaware Supreme Court criticized the term as
potentially misleading and clarified that the duty of candor “represents nothing more than
the well-recognized proposition that directors of Delaware corporations are under a
fiduciary duty to disclose fully and fairly all material information within the board’s
control when it seeks shareholder action.” 606 A.2d at 84. After Stroud, the prevailing
Delaware terminology shifted from the “duty of candor” to the “duty of disclosure.” But
for this history, it would be nice to use the term “duty of candor” to refer to the Malone
obligation to speak honestly and completely, while saving the “duty of disclosure” for the
obligation to disclose all material information reasonably available when requesting
stockholder action.

93
 After the Second Offering, the Rich Entities still could exercise all of the Preferred

Stock blocking rights, still had the ability to appoint two of the Company’s five directors

and affect the selection of the third, and had increased their share of the Company’s

outstanding voting power from one third to 43%. And in terms of the actual facts on the

ground at the time of the Snyk Merger, the Rich Entities still had mathematical control

over the Board. That aggregation of power supports a reasonable inference that the Rich

Entities owed fiduciary duties as the Company’s controlling stockholders at the time of

the Snyk Merger. See, e.g., Voigt, 2020 WL 614999, at *11–22.

Although nominally an arm’s-length deal, the Snyk Merger conferred a unique

benefit on the Rich Entities by extinguishing the plaintiffs’ standing to assert a derivative

claim. Orbit/FR, 2023 WL 128530, at *4. The Rich Entities therefore have the burden of

proving that the terms of the Snyk Merger were entirely fair. It is reasonably conceivable

that because the Snyk Merger did not afford any value to the Company’s derivative

claim, the Snyk Merger was not entirely fair.

Count VII therefore states a claim on which relief can be granted.

G. Count VIII: The Claim That The Rutchik Trust Aided And Abetted The
Fiduciary Defendants In Breaching Their Duties In Connection With The
Snyk Merger

In Count VIII, the plaintiffs assert a claim against the Rutchik Trust for aiding and

abetting breaches of fiduciary duty by the directors and the Rich Entities when entering

into the Snyk Merger. This claim parallels the claim against the directors in Count VI and

the claim against the Rich Entities in Count VII, but seeks to implicate the Rutchik Trust

on a theory of aiding and abetting. Having reviewed the issues surrounding the Snyk

94
Merger twice, this decision again takes a more abbreviated approach. To the extent Count

VIII passes muster, it does so barely.

The initial question is one of standing. The first element of the Primedia test asks

whether it is reasonably conceivable that the Rutchik Trust could have aided and abetted

the directors and the Rich Entities in breaching their fiduciary duties in connection with

the Second Offering, thereby giving rise to a derivative claim. To plead a reasonably

conceivable claim for aiding and abetting, the complaint must allege facts to support four

elements: (i) the existence of a fiduciary relationship, (ii) a breach of the fiduciary’s duty,

(iii) knowing participation in the breach by a non-fiduciary defendant, and (iv) damages

proximately caused by the breach. Malpiede, 780 A.2d at 1096.

In light of the court’s rulings regarding the directors and the Rich Entities, the only

element at issue is knowing participation. That element involves two concepts:

knowledge and participation. To establish knowledge, “the plaintiff must demonstrate

that the aider and abettor had actual or constructive knowledge that their conduct was

legally improper.” RBC, 129 A.3d at 862 (internal quotation marks omitted). “[T]he

question of whether a defendant acted with scienter is a factual determination.” Id. Under

Rule 9(b), a plaintiff can plead knowledge generally; “there is no requirement that

knowing participation be pled with particularity.” Dent v. Ramtron Int’l Corp., 2014 WL

2931180, at *17 (Del. Ch. June 30, 2014). For purposes of a motion to dismiss under

Rule 12(b)(6), a complaint need only plead facts supporting a reasonable inference of

knowledge. See id.; Wells Fargo & Co. v. First Interstate Bancorp., 1996 WL 32169, at

95
*11 (Del. Ch. Jan. 18, 1996) (Allen, C.) (“[O]n the question of pleading knowledge,

however, Rules 12(b)(6) and Rule 9(b) are very sympathetic to plaintiffs.”).

The knowledge element is easily satisfied. When a plaintiff alleges that a third-

party acquirer knowingly participated in a breach of fiduciary duty by sell-side directors,

Delaware law imposes an appropriately high pleading burden because an acquirer is

expected to bargain in its own interest. E.g., In re Rouse Props., Inc., Fiduciary Litig.,

2018 WL 1226015, at *25 (Del. Ch. Mar. 9, 2018) (explaining that the buyer was

“entitled to negotiate the terms of the Merger with only its interests in mind; it was under

no duty or obligation to negotiate terms that benefited [the seller] or otherwise to

facilitate a superior transaction for [the seller]”). A plaintiff must plead meaningful facts

to support an inference that the acquirer attempted to create or exploit conflicts of interest

on the board or otherwise conspired with the directors to engage in a fiduciary breach.

See Malpiede, 780 A.2d at 1097–98; In re Del Monte Foods Co. S’holders Litig., 25 A.3d

813, 837 (Del. Ch. 2011). Policy reasons also lead Delaware to impose a high pleading

burden when a plaintiff alleges that a third-party advisor aided and abetted sell-side

directors in breaching their duties. Singh v. Attenborough, 137 A.3d 151, 152–53 (Del.

2016).

A case involving an affiliate of an allegedly culpable fiduciary presents a different

situation.54 The claim is simply that Rutchik caused an entity that he controlled to take

54
See, e.g., In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 818 (Del. Ch.
2022) (inferring at pleading stage that affiliate of interested controller who acted as
financial advisor for transaction aided and abetted breach of duty by controller); La. Mun.
96
action to support his efforts to effectuate an interested transaction in which he breached

his duty of disclosure and extracted value from the Company for himself. Knowledge of

that breach is imputed to the Rutchik Trust because Rutchik both controlled it and acted

on its behalf.

On the dimension of participation, Rutchik allegedly breached his duties by (i)

approving a transaction as a director that would benefit Rich and himself, (ii) voting his

shares of Preferred Stock in favor of the transaction by executing the Written Consent,

(iii) failing to disclose material information when soliciting Other Signatories to the

Written Consent, and (iv) extracting value at the expense of the Company and its other

stockholders by purchasing shares in the Second Offering. The Rutchik Trust participated

in the second and fourth steps: The Rutchik Trust was the entity that held the shares of

Preferred Stock and voted them when Rutchik executed the Written Consent on its

Police Empls.’ Ret. Sys. v. Fertita, 2009 WL 2263406, at *7 n.27 (Del. Ch. July 28, 2009)
(inferring at pleading stage that affiliated entities that controller used to effectuate an
interested transaction knowingly participated in the breach and were subject to viable
claim for aiding and abetting); see also In re Dole Food Co., Inc. S’holder Litig., 2015
WL 5052214, at *39 (Del. Ch. Aug. 27, 2015) (holding after trial that affiliated entities
that controller used to effectuate an unfair transaction knowingly participated in the
breach of duty and were jointly and severally liable with controller for aiding and
abetting the breach); In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745,
at *38 (Del. Ch. May 3, 2004) (same); Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc.,
1995 WL 694397, at *15–16 (Del. Ch. Nov. 21, 1995) (Allen, C.) (denying a motion to
dismiss aiding and abetting claims against controlling stockholder and his affiliates where
the complaint alleged “overarching control” by the stockholder such that the court could
“infer[] ‘knowing’ participation” by his affiliates).

97
behalf, and the Rutchik Trust was the entity that purchased shares of Preferred Stock in

the Second Offering.

The aider and abettor must knowingly assist another in committing a wrongful act.

The means by which an aider and abettor provides assistance need not be independently

wrongful. What nevertheless gives me pause is that the actions taken by the Rutchik

Trust do not distinguish its conduct from other holders of Preferred Stock who did the

same thing, and it seems unlikely that the plaintiffs could state claims for aiding and

abetting against all of the non-fiduciaries who participated in the Second Offering. The

principal difference is that the Rutchik Trust was Rutchik’s affiliate, whereas the other

holders of Preferred Stock were not. That distinction matters, and the cases upholding

claims against the affiliates that a conflicted fiduciary used to effectuate a transaction

indicate that the Rutchik Trust is a proper defendant on a claim for aiding and abetting.55

A better framing of the claim might be civil conspiracy. The two forms of

secondary liability are quite similar, and this court has not been a stickler for

terminology. See Albert, 2005 WL 2130607, at *10 (“While the plaintiffs caption their

claim as aiding and abetting breach of fiduciary duty, the court treats it as a claim for

civil conspiracy. Claims for civil conspiracy are sometimes called aiding and abetting.”).

Delaware decisions have largely equated the two theories, noting that they often cover the

55
See, e.g., MultiPlan, 268 A.3d at 818; Fertita, 2009 WL 2263406, at *7 n.27;
see also Dole, 2015 WL 5052214, at *39; Emerging Commc’ns, 2004 WL 1305745, at
*38; Carlton, 1995 694397, at *15–16.

98
same ground and that the distinctions usually are not material.56 Our cases have viewed

aiding and abetting as the larger, more encompassing theory, observing that “[b]ecause it

focuses on assistance, rather than agreement, aiding-abetting rests on a broader

conceptual base, one which may overlap conspiratorial conduct, or exist independent of

it.” Anderson v. Airco, Inc., 2004 WL 2827887, at *4 (Del. Super. Nov. 30, 2004)

(footnote omitted); see Great Hill, 2014 WL 6703980, at *22 (“[I]t seems likely to me

that civil conspiracy is, in many cases, to borrow a term, a ‘lesser-included’ claim within

an aiding and abetting claim . . . .”).

56
See Malpiede, 780 A.2d at 1098 n.82 (noting in reference to underlying claim
for breach of fiduciary duty that “[a]lthough there is a distinction between civil
conspiracy and aiding and abetting, we do not find that distinction meaningful here”);
Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at
*22 (Del. Ch. Nov. 26, 2014) (noting in reference to underlying claim for fraud that
showing aiding and abetting would necessarily require showing “the elements of civil
conspiracy were satisfied,” and therefore “the aiding and abetting fraud claim may be
duplicative of the civil conspiracy count”); Quadrant Structured Prods. Co. v. Vertin, 102
A.3d 155, 203 (Del. Ch. 2014) (“A claim for conspiracy to commit a breach of fiduciary
duty is usually pled as a claim for aiding and abetting, and although there are differences
in how the elements of the two doctrines are framed, it remains unclear to me how the
two diverge meaningfully in substance or purpose.”); Triton Constr. Co., Inc. v. E. Shore
Elec. Servs., Inc., 2009 WL 1387115, at *17 (Del. Ch. May 18, 2009) (finding that claim
for aiding and abetting breach of fiduciary duty duplicated claim for civil conspiracy);
Benihana of Tokyo, Inc. v. Benihana, Inc., 2005 WL 583828, at *7 (Del. Ch. Feb. 4,
2005) (equating claim for aiding and abetting breach of fiduciary duty with conspiracy to
commit breach of fiduciary duty), aff’d, 906 A.2d 114 (Del. 2006); Weinberger v. Rio
Grande Indus., Inc., 519 A.2d 116, 131 (Del. Ch. 1986) (“A claim for civil conspiracy
(sometimes called ‘aiding and abetting’) requires that three elements be alleged and
ultimately established . . . .”); Gilbert v. El Paso Co., 490 A.2d 1050, 1057 (Del. Ch.
1984) (identifying the same elements for “a claim of civil conspiracy” as for aiding and
abetting), aff’d, 575 A.2d 1131 (Del. 1990).

99
 There remains an important difference in emphasis between the two theories:

“[A]iding and abetting is a cause of action that focuses on the wrongful act of providing

assistance, unlike civil conspiracy that focuses on the agreement.” WaveDivision, 2011

WL 5314507, at *17. The theories align in that one way to establish knowing

participation is to show “an understanding between the parties ‘with respect to their

complicity in any scheme to defraud or in any breach of fiduciary duties.’” In re

Comverge, Inc. S’holders Litig., 2014 WL 6686570, at *18 (Del. Ch. Nov. 25, 2014)

(quoting Goodwin v. Live Ent., Inc., 1999 WL 64265, at *28 (Del. Ch. Jan. 25, 1999)).

As between Rutchik and the Rutchik Trust, there was a single human mind—

Rutchik’s—that both engaged in the breach of duty and caused the Rutchik Trust to act in

support of it. There were two distinct legal persons who could conspire together, and they

possessed more than just an agreement or understanding with respect to their complicity

in a breach of fiduciary duty; there was unity of thought. That is sufficient to support a

claim for conspiracy, pled in this setting as a claim for aiding and abetting.

With the first element of the Primedia test met, the second and third elements are

again easy. This decision has determined that the value of a derivative claim challenging

the Second Offering is material in the context of the Snyk Merger. This decision also has

determined that it is not reasonably likely that Snyk would assert the claim. The plaintiffs

therefore have standing to assert the challenge to the Snyk Merger asserted in Count VIII.

Assessing whether Count VIII states a claim on which relief can be granted

presents the same problems as the underlying derivative claim. The only element at issue

is knowing participation. Rutchik allegedly breached his duties by (i) approving the Snyk

100
Merger as a director, (ii) voting his shares of Preferred Stock in favor of the transaction,

and (iii) receiving value in the form of the merger consideration. Rutchik’s knowledge is

attributed to the Rutchik Trust, and the Rutchik Trust participated in the second and third

steps as one of the entities through which Rutchik engaged in those steps. But once again,

the actions taken by the Rutchik Trust do not distinguish its conduct from other holders

of Company equity. The difference is that the Rutchik Trust was Rutchik’s affiliate.

As before, the reasoning of cases in which this court has imposed liability on the

entities that fiduciaries control and through which they engage in transactions under a

theory of aiding and abetting indicates that the claim against the Rutchik Trust should

proceed beyond the pleading stage. So does the alternative framing of the claim as one in

which Rutchik and the Rutchik Trust engaged in a conspiracy. If nothing else, it likely

will be necessary for the Rutchik Trust to be a party to the case for purposes of relief. As

one of the entities through which Rutchik held his Preferred Stock, the Rutchik Trust

received a disproportionate share of the merger consideration, and it is logical that if the

plaintiffs prevail, then a remedial order would extend to the Rutchik Trust.

Count VIII states a claim on which relief can be granted.

III. CONCLUSION

Counts III, IV, and V are dismissed for lack of standing. The plaintiffs have stated

claims on which relief can be granted in Counts I, II, VI, VII, and VIII. This decision has

not reached the defendants’ separate argument that even if Counts VI, VII, and VIII

allege facts supporting viable claims, the plaintiffs cannot assert those claims because of

the Covenant Not To Sue.

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