IN T`HE SUPREME COURT OF THE STATE OF DELAWARE

CDX HOLDINGS, INC. §
(f/k/a CARIS LIFE § No. 526, 2015
SCIENCES, INC.), §
§ Court Be1oW - Court of Chancery
Defendant-Be1ow, § of the State of DelaWare
Appe11ant/Cross-Appe11ee, § C.A. No. 8031
§
V. §
§
KURT FOX, §
§
P1aintiff-Be1oW, §
§

Appellee/Cross-Appe11ant.

Submitted: Apri120, 2016
Decided: June 6, 2016

Before STR[NE, Chief Justice; HOLLAND, VAL[HURA, and VAUGHN,
Justices, and M:EDINILLA,! Judge, constituting the Court en Banc.

Upon appeal from the Court of Chancery. AFFIRM]L`D.

Thomas A. Beck, Esquire, (Arguea’), Gregory P. Williams, Esquire, Brock E.
Czeschin, Esquire, Susan M. Hannigan, Esquire, Rache1 E. Horn, Esquire,
MattheW D. Perri, Esquire, Richards, Layton & Finger, P.A., Wilmington,
Delaware; Michae1 C. Holmes, Esquire, Daniel L. Tobey, Esquire, Craig E.
Zieminski, Esquire, O1ivia D. Howe, Esquire, George M. Padis, Esquire, Vinson &
Elkins, LLP, Dallas, Texas, Attorneys for Defendant-Below, Appe11ant/Cross-
Appe11ee.

Christopher P. Simon, Esquire, DaVid G. Holrnes, Esquire, Cross & Sirnon, LLC,
Wilrnington, Delaware; Daniel S. Cahill, Esquire (Argued), Louis Gambino,
Esquire, Cahi11 Gambino LLP, Saratoga Springs, NeW York, Attorneys for
P1aintiff-Be1oW, Appel1ee/Cross-Appe11ant and the C1ass.

HOLLAND, Justice, for the Majority:

1 Sitting by designation pursuant to art. IV, § 12 of the Delaware Constitution and Supreme
Court Ru1es 2 and 4(a) to complete the quorum.

Caris Life Sciences, Inc. ("Caris") was a privately held Delaware
corporation. Through subsidiaries, it operated three business units: Caris
Diagnostics, TargetNow, and Carisome. Caris Diagnostics was consistently
profitable. TargetNow generated revenue but not profits. Carisome was in the
developmental stage.

To achieve the dual goals of securing financing for TargetNow and
Carisome and generating a return for its stockholders, Caris sold Caris Diagr1ostics
to Miraca Holdings, Inc. ("Miraca"). To minimize taxes, the transaction was
structured using a spin/merge structure (the "Miraca Transaction"). Caris first
transferred ownership of TargetNow and Carisome to a new subsidiary, then spun
off that subsidiary to its stockholders (the "Spinoff"). At that point, owning only
Caris Diagnostics, Caris merged with a wholly owned subsidiary of Miraca (the
"Merger").

David Halbert ("Halbert"), the founder of Caris, owned 70.4% of its fully
diluted equity. JH Whitney VI, L.P. ("Fund VI"), a private equity fund, owned
another 26.7%. Halbert and Fund VI received a proportionate equity stake in the
spun-off entity ("SpinCo"), which kept them whole for purposes of their pre-
transaction beneficial ownership of TargetNow and Carisome. In the Merger,
Miraca paid $725 million for what was left of Caris ("RemainCo."). Each share of

RemainCo. stock was converted into the right to receive $4.46 in cash. Halbert

VAL]}IURA, Justice, dissenting:

The Board of Caris, as the "Administrator" of the Company’s 2007 Stock
Incentive Plan (the "Plan"), was required to make two determinations The first
was to determine the fair market value ("FMV") of the common stock of the
Company. The second determination was to make certain capitalization
adjustments in connection with a spin-off of two of the Company’s business units.
The Court of Chancery, in my view, erred in f`mding that the Board breached these
contractual obligations. Accordingly, l respectfully dissent.

I. STANDARD OF REVIEW

Determining whether a party has breached a contractual duty of good faith
requires a court to reach a legal conclusion. This Court reviews a trial court’s legal
conclusions de novo." This Court will uphold the Court of Chancery’s factual
findings so long as they are not clearly erroneous.s The clearly erroneous standard
applies to factual determinations based on credibility and the evidence.9 This
Court also has the authority to review the entire record and reject the trial court’s

findings if they are not supported by the record or are not the product of a logical

7 Hz`ll Int’l, Inc. v. Opportunz`ty Partners L.P.,

119 A.3d 30

, 37 (Del. 2015) (citing N. River Ins.
Co. v. Mz'ne Safety Appliances Co.,

105 A.3d 369

, 380-81 (Del. 20l4)).

8 Gatz Props., LLC v. Auriga Capz'tal Corp., 59 A.3d l206, 1212 (Del. 20l2) (citation orr1itted).

9 Bank of N. Y. Mellon Trust Co., N.A. v. Liberty Medz`a Corp.,

29 A.3d 225

, 236 (Del. 201 l).

ll

and orderly deductive process.l° Here, certain of the Court of Chancery’s findings,
in my view, fail to satisfy that test,

The plaintiff, Fox, was required to prove that the Board breached its
contractual duty of subjective good faith either by demonstrating that the Board
acted in subjective bad faith or by showing that it consciously disregarded a known
duty to act.“ With respect to subjective bad faith, Fox was required to prove that a
majority of the Board did not subjectively believe in the FMV it deterrnined. If
Fox proceeded under a conscious disregard theory, he would have been required to
prove that a majority of the Board intentionally failed to form a subjective belief as
to FMV in the face of a known duty to act. 1 do not believe the record supports
either conclusion.

As to the first test, the Court of Chancery made no factual findings
supporting the conclusion that a majority of the Board acted in bad faith. That is
because the trial court concluded that the Board did not act_a conclusion with
which I disagree. Because the court never made the Board-related bad faith

findings required by the Plan, this Court is left only with incomplete factual

10 Levz`tt v. Bouvz'er, 287 A.Zd 671, 673 (Del. 1972).

11 ev3, Inc. v. Lesh,

114 A.3d 527

, 539 (Del. 2014) (citing DV Really Advisors LLC v.
Policemen’s Annuz`ly & Benefit Fund of Chicag0, Ill., 75 A.3d lOl, 110 (Del. 2013)) ("[A]
plaintiff contending that a party did not comply with its express contractual duty of good faith
would typically have to show that the party acted in subjective bad faith." (emphasis in
original)); Allen v. Encore Energy Parmers, L.P.,

72 A.3d 93

, 105-06 (Del. 2013) ("To plead a
breach of the subjective good faith standard under a conscious disregard theory, [the plaintiff
must demonstrate that the defendant] consciously disregarded its contractual duty to form a
subjective belief. lt would take an extraordinary set of facts to do that.").

findings to which we cannot properly defer.lz The trial court then erroneously
applied a good faith test solely to the actions and beliefs of Martino and Halbert,
analyzing whether they acted in good faith.l?’ If the trial court believed that the
Board had not acted, then it should have proceeded to analyze whether a majority
of the Board intentionally failed to act in the face of a known duty to act. This
typically requires an extraordinary set of facts. Such facts, as to the Board’s
conduct, are not present here.

The trial court’s conclusions, in my view, are not entitled to deference for
another reason. The Court of Chancery implicitly rejects the trial testimony of the
directors in passages that refer to unidentified "defense witnesses" based upon a
"hindsight bias" theory it derived from certain psychological literature. The court

concludes in this regard:

At trial, the defense witnesses testified differently. Except for
Martino and Halbert, the defense witnesses seemed honestly to
believe when testifying that they thought TargetNow and Carisome

12 The trial court expressly held that "the Board did not act," and observed that "the good faith
standard arguably does not even apply." F0x v. CDx H0ldings, Inc., 2015 WL 457l398, at *26
(Del. Ch. July 28, 2015). lt then assumed that it did apply to Martino and Halbert, stating:
"Martino actually made the determjnation, and Halbert signed off, so this decision analyzes
whether they acted in subjective good faith." Id. Thus, the Court of Chancery’s statements-
contained in the "Damages" section of its Opinion_about "what the Board would have
determined to be the Fajr Market Value of a share of Caris common stock in connection with the
[m]erger, if it had adjusted the options to take into account the Spinoff and made its
determination in good faith," are not findings that the Board acted in subjective bad faith in
determining FMV. Id. at *36. Rather, the court’s decision is clear that it found that the Board
had failed to act to determine FMV.

13 The trial court’s discussion of scienter scrutir1izes the conduct of Martino and Halbert, as
opposed to the subjective beliefs and actions of each of the members of the Board.

had very little value in fall 2011.1‘1 In my view, this was a product of
hindsight bias. "Hindsight bias has been defined in the psychological
literature as the tendency for people with outcome knowledge to

believe falsely that they would have predicted the reported outcome of
an event."15

ln my view, this Court should be skeptical of court rulings predicated upon
social science studies, particularly where, as here, such theories impact a trial
court’s own post-trial impressions of the testimony offered.16 Such skepticism
seems appropriate in this case, since immediately after trial the Court of Chancery

stated that "the credibility of the people on the [B]oard who made these decisions"

was "very, very strong."1 For example, the trial court had the following

"reactions"18 after the three-day trial:

So for the defendants, l think what’s very, very strong is the
contractual standard, assuming the good faith standard is, indeed, the
operative standard, and the credibility of the people on the Board who
made these decisions.19

14 At trial, the plaintiff called Martino, Halbert, and an expert, Robert F. Reilly, as witnesses.
The defense called directors Laurie Johansen ("Johansen"), Jonathan Knowles ("Knowles"), and
Peter M. Castleman ("Castleman"). Thus, the trial court appears to be referring to the honest
beliefs of three of the four members of the Board who testified at trial,

15 Id. at *3 (quoting Hal R. Arkes & Cindy A. Schipani, Medical Malpractz`ce v. the Busz'ness
Judgment Rule.' Dij§%rences in Hindsz'ght Bias, 73 OR. L. REV. 587, 591 (1994)).

16 See, e.g., Free v. Peters,

12 F.3d 700

, 706 (7th Cir. 1993) (Posner, C.J.) (observing that review
of conclusions based on "social scientific or other data . . . is plenary"), cert. denied,

513 U.S. 967

 (1994); Dunagin v. Cz`ly of Oxford, Miss.,

718 F.2d 738

, 748 n.8 (5th Cir. 1983) (subjecting
"the ‘fact’ fmdings of a trial judge as to the latest truths in the social sciences" to the "clear1y
erroneous standard of review" is "[c]learly not" appropriate), cert. denz`ed,

467 U.S. 1259

 (1984).

A794.

18 A793 ("[T]hese are my reactions from having been here with you all for the last three days.").
19 A794.

14

And PwC, you know, I think there’s problems with PwC’s work. I
think there’s serious problems with Grant Thomton’s work. So since
I think the defendant’s position on the good faith issue and the good
faith of the people involved is, I think, as I said, quite strong, I’m

going to dilate a little bit more on the PwC and Grant Thornton
things.z°

>l= =l= =l<

This is one of these troubling things where the people at the top seem
to have tried to proceed in the correct marmer.'°~l

>l= * *

I don’t think it would be helpful -- as I said, you can present your case
[in post-trial briefmg] however you want. I don’t think it would be
helpful to make the argument that these folks intentionally tried to
harm their option holders. Having seen the people here, it’s very hard
for me to think that’s what they did. Maybe if you put it all together
and line everything up, that will be what you try to convince me of. l
have a lot of trouble thinking that’s actually what went on.”

Admittedly, there are some comments that tilt the other way, but they are

primarily focused on the aa'visors’ analyses, and none seem genuinely to discredit
the directors’ testimony or the trial court’s impressions that the Board had acted in
good faith. I recognize that the trial court’s post-trial comments may have been
designed to direct the parties to focus on certain issues for purposes of post-trial
briefmg and perhaps to encourage the parties to settle. That kind of guidance is
helpful to the litigation process. But even so, I credit the Court of Chancery’s

comments as being an accurate and sincere account of its impressions of the trial

20 A794-95.
21 A805.
22 A807.

15

testimony. The subsequent implicit discrediting of the directors’ testimony in the
Opinion, based apparently and solely on its hindsight bias theory, strains, to the
point of breal2015 WL 4571398, at *27. There are no findings that any of the Company’s directors,
other than Halbert, knew of any flaws in PwC’s or Grant Thronton’s analyses. Nor is there any
evidence in the record before this Court that the Board, including Castleman, reviewed
documents from J.H. Whitney or that the Board ever saw the Grant Thornton report used in the
transaction. See A709-l0. ln fact, Castleman was asked at trial about the November 3, 2011
J.H. Whitney VI, L.P. Annual Meeting presentation discussed by the trial court and testified that
he did not attend that meeting, had no role in the creation of the documents that went to investors
in Fund VI, and had not seen the armual meeting document prior to the litigation in this matter.
Castleman testified that he "did not think TargetNow could be sold" and that Carisome was "ten
years or 20 years" from commercialization. The trial court rejected this testimony by simply
stating, "I credit the contemporaneous docurnents." Fox, 
2015 WL 4571398, at *27 n.l5.
Johansen also testified that she was not aware of a price range that was conveyed to J.H.
Whitney for the sale of TargetNow. B734. There are no findings as to Dr. George Poste and
Stephen Green, two outside directors who never testified.

25 See Fox, 
2015 WL 4571398, at *27 (noting that "Halbert and other members of management
spoke glowingly and optimistically about Carisome’s prospects”). Johansen explained her
reference to SpinCo as a “juggemaut" by testifying, "I was referring to the fact that if the
technology were successful there was big opportunity." A762. She emphasized that "the big
‘if’ of course, was we had to prove the technology." Id. Johansen also stated that the recipients
of the email characterizing SpinCo as a juggemaut "all understood kind of the implied ‘if,’ and 1
didn’t go into explaining the email." A763. The Court of Chancery’s fmdings also reflect the
indeterminate future value of SpinCo. For example, the court concluded that, "although riskier,"
the Board thought Carisome was "likely worth more" than TargetNow, "but only if the lottery
ticket paid off." Fox, 
2015 WL 4571398, at *36. The trial court concluded: "Placing an actual
value on Carisome was extremely difficult because if it succeeded, the company would be worth
billions, but if it failed, it would be worth nothing." Ia’. at *26.

17

determinations in this case support a fmding that the directors’ testimony is
credible. And it appears the Court of Chancery’s hindsight bias theory overrode
those conclusions.

Because the Court of Chancery held that the Board did not act to determine
FMV, it did not find that a majority of the directors acted in bad faith in making
that determination Nor did it find that the Board consciously disregarded a known
duty to act. Further, knowledge of bad faith cannot be imputed from an executive
or even from a director to the entire Board on the basis of this record.z°

Accordingly, l would reverse the judgment of the Court of Chancery on this basis.

II. THE BOARD’S ACTIONS AND SUBJECTIVE BELIEFS

A. The Terms of the Plan and Merger Agreement

A brief review of certain features of the transaction and related documents
are important in explaining my conclusion that the Board acted in satisfaction of
the Plan’s requirements. ln 20ll, Caris transferred ownership of Carisome and
TargetNow to a new subsidiary. That subsidiary was then spun off to the
Company’s stockholders. Thereafter, Caris owned only a third business unit, Caris
Diagnostics (the "AP Business"), and merged with a wholly owned subsidiary of

Miraca. ln the merger, Miraca paid $725 million for what remained of Caris after

26 Cf Desimone v. Barrows, 924 A.Zd 908, 943 (Del. Ch. 2007) ("I also reject [the plaintiff"s]
contention that knowledge on the part of any one board member can be imputed to other board
members as a result of their shared board or committee service. . . . Delaware law does not
permit the wholesale imputation of one director’s knowledge to every other for demand excusal
purposes." (citations ornitted)).

18

TargetNow and Carisome were spun off. Each share of RemainCo stock was
converted into the right to receive $4.46 in cash. Option holders were to receive
the difference between $5.07 per share and the exercise price of their options,
minus 8% that would be placed into an escrow account contemplated by the
Agreement and Plan of Merger with Miraca (the "Merger Agreement"). Of the
$5.07, $0.61 was attributed to the spun-off entity. Caris’ $5.07 option price was
driven by the $725 million merger price and PwC’s $65 million valuation of
SpinCo.

The Plan provides that each option holder is entitled to receive for each
share covered by an option the amount by which the FMV of the share exceeds the
exercise price. As defmed by Section 2.25 of the Plan, FMV is "the value of the
Common Stock as determined in good faith by the Administrator . . . ."27 The Plan
does not define "good faith." Further, Section 3.3 of the Plan affords the
Administrator the broad discretion "to make any and all other determinations

which it determines to be necessary or advisable for administration of the Plan."zs

27 A8l4.
28 A817. Section 3.3 of the Plan affords the Board broad administrative authority. In relevant
part, Section 3.3 provides:

3.3 Specific Powers. ln particular, the Administrator shall have the authority:
. . . (iii) to authorize any person to execute, on behalf of the Company, any
instrument required to carry out the piuposes of the Plan; . . . (ix) to amend any
outstanding Awards, including for the purpose of modifying the time or manner
of vesting, the purchase price or exercise price, or the term of any outstanding
Award; . . . and (xii) to exercise discretion to make any and all other

l9

Under Section 3.4 of the Plan, "[a]ll decisions made by the Administrator"
pursuant to the provisions of the Plan are "final and binding on the Company and
[participants in the Plan], unless such decisions are determined to be arbitrary and
capricious."

Section 123 of the Plan states that the Company, "to the extent permitted by
applicable law, but otherwise in the sole discretion of the Administrator," may
provide for the cancellation of outstanding options in exchange for "the difference
between the Fair Market Value and the exercise price for all shares of Common
Stock subject to exercise (z'.e., to the extent vested) under any outstanding
Option[.]"” Section 12.1 of the Plan requires that the Board, as Administrator,
make capitalization adjustments in connection with the spin-off of the TargetNow
and Carisome business units. Specifically, the Plan mandates that the Board
account for the spin-off by adjusting the exercise price of the options "to reflect
any increase or decrease in the number of issued shares of Common Stock or
change in the Fair Market Value of such Common Stock resulting from such

transaction . . . ."3°

determinations which it determines to be necessary or advisable for administration
of the Plan.

Id.
29 A835-36.
30 A835.

20

and Fund VI received their share of the cash, representing the value of their pre-
transaction beneficial interest Caris Diagnostics. Through the Miraca Transaction,

Halbert and Fund VI received total proceeds of approximately $560 million. They

financed SpinCo by reinvesting $100 million.

Most of the remaining approximately 2.9% of Caris’s fully diluted entity
took the form of stock options that were cancelled in connection with the Merger.
Under the terms of the 2007 Stock Incentive Plan (the "Plan"), each holder was
entitled to receive for each share covered by an option the amount by which the
Fair Market Value ("FMV") of the share exceeded the exercise price. The Plan
defmed FMV as an amount determined by the Caris board of directors (the
"Board"). The Plan required the Board, as the Plan Administrator, to adjust the
options to account for the Spinoff. Under the terms of the Plan, the Board’s good
faith deterrninations, as the Administrator, were conclusive unless arbitrary and
capricious.

Caris told the option holders that they would receive the difference between
$5.07 per share and the exercise price of their options, minus 8% that would go to
an escrow account contemplated by the merger agreement. Of the $5.07, $4.46

was for RemainCo.; the remaining $0.61 was for SpinCo.

The Merger Agreement contemplates the Board actions required by the Plan,
as well. Section 2.11(a) provides: "Effective as of immediately prior to the
Closing, the Company shall take all necessary actions pursuant to the [] §~flan (and
the underlying option grant agreements) . . . ."31 Further, Section 2.l1(b) provides
that "[t]he [] Plan shall terminate as of the Ejj’ective Tz`me, and no holder of
Company Options issued pursuant to the [] Plan or any participant in the [] Plan
shall have any rights thereunder . . . ."32 The "Effective Time," as defined by the
Merger Agreement, is the time that the Certificate of Merger is accepted for filing
by the Secretary of State or a later date specified in the Certificate of Merger and

agreed upon by the parties to the transaction. In this case, it was November 22,

201l.

B. The Board Determined F air Market Value

The following facts suggest to me that the Board did determine the FMV of
the stock. I observe preliminarily that at trial, Johansen, who served as President
of Caris Diagnostics and Vice Chairrnan of the Board, testified that, "under the
terms of the [] [P]lan, the [B]oard is required to use good faith in determining fair
market value."33 She stated that the Board visited with legal counsel "to

understand how [it] discharged [its] duty of good faith in determining fair market

31 Al224 (emphasis added).
32 Al225 (emphasis added).
33 A766.

21

4

value."3 The Company’s legal counsel recommended that the Board "hire an

independent advisor" to assist the directors in determining FMV.” "And that’s

what [the Board] did[] to determine fair market value," according to Johansen.“

1. T he October 5 Board Meetz'ng

On October 5, 2011, the Board held a telephonic meeting. All members of
the Board were present. Also present at the meeting were Citi, PwC, legal counsel,
and other Company executives The meeting was convened to consider the Merger
Agreement and a spin-off of the TargetNow and Carisome business units. During
the meeting, Citi made a presentation to the Board concerning the equity waterfall
mechanics that would be used to effect the adjustment of the options mandated by
the Plan as a result of the spin-off."

According to the October 5 minutes, PwC presented the valuation of the

TargetNow and Carisome business assets to the Board. "[PwC] discussed the

8

TargetNow, Carisome and intangibles valuations."3 Prior to the meeting, the

34
35 A767.
36 
37 A789.

38 A1191. With respect to the October 5, 2011 PwC presentation to the Board, the minutes also
state:

The Board engaged in discussion with [PwC] to understand the assumptions and
the methodology valuation. As required by the Merger Agreement with Miraca
Holdings, Inc., the Board acknowledged the requirement of obtaining a second
independent valuation of the TargetNow, Carisome and related business assets
and instructed management to engage another reputable firm. [PwC] and Mr.
Martir1o discussed that a second valuation would be sought from Grant Thornton.

22

Company’s chief legal officer distributed what he identified to the Board as PwC’s
"valuation of SpinCo."39 PwC also provided the Board with a draft valuation
memorandum, the subject of which was: "Valuation analysis of certain
trademarks, assets, and businesses of Caris Life Sciences."‘l° The memorandum
provides that the Company "engaged PwC to perform a valuation analysis of; [sz'c]
l. Caris US’ TargetNow business (‘TN Business’); 2. Caris US’ Carisome business
(‘Carisome Business’); 3. The ‘Caris Life Sciences,’ ‘Caris,’ ‘CarisPath,’
‘CarisDiagnostics,’ and ‘Pathology Partners’ trademarks (‘Trademarks’); and 4.
Other intangible assets (‘Other Assets’) used in the operation of the anatomic
pathology business (‘AP Business’), TN Business, and Carisome Business."‘“
With respect to PwC’s valuation of TargetNow, the memorandum provided:

"Based upon this analysis, PwC determined a final carrying value of USD 47.23

Id. There are no fmdings suggesting that the PwC presentation did not occur or that the minutes
are an inaccurate account of the Board’s discussion. Compare Fox, 
2015 WL 4571398, at *15-
17 ("On October 5, 2011 the Board met telephonically with Citi, PwC, its legal counsel, and
Caris executives to consider and approve an Agreement and Plan of Merger with Miraca. . . .
The minutes of the October 5, 2011 meeting reflect that the Board recognized the need to adjust
the exercise price of the stock options to reflect the value of the Spinoff."), with RBC Capital
Mkts., LLC v. Jervis, 129 A.3d 8l6, 835 (Del. 2015) ("The trial court found, however, that the
description of the process in the minutes was false . . . ." (internal quotation marks ornitted)), and
In re Rural Metro Corp. S’holders Lz'tz`g., 
88 A.3d 54, 72 (Del. Ch. 2014) ("The minutes . . . have
the feel of a document drafted in anticipation of litigation, and the rose-colored description of the
sale process that appears in the minutes does not match up with what actually took place.").

39 A1148.

40 Al 161.

41 A1162.

23

million for the whole of the TN Business."42 As to PWC’s valuation of Carisome,
the memorandum set forth: "Based on this analysis, PwC determined a final value
for the Carisome Business of USD 17.79 million."43 At the October 5 meeting, the

uncontroverted record is that PwC reviewed its valuations with the Board, and the

Board authorized a final transaction based upon those valuations.44

On the basis of the $65 million valuation provided by PwC and the
additional information provided by Citi, the Board held an executive session at the
October 5, 2011 meeting during which it "voted and unanimously approved and
adopted" resolutions that authorized the Merger Agreement and the Separation and

Distribution Agreement (the "Separation Agreement"). The October 5 resolutions

also provided the following recital:

WHEREAS, pursuant to Section 12.1 of the Corporation’s 2007
Stock Incentive Plan (the "Cor__ooration Stock Plan") and the
underlying option grant agreements, subject to the consummation of
the Distribution ana' prior to the consummation of the Merger, the
Corporation shall proportionately adjust each outstanding option to
purchase shares of the Corporation’s common stock (the "Options") to
take into account the Distribution, provided, however, that any
fractional shares resulting from the adjustment shall be eliminated[.]45

42 A1163 (emphasis added).
43 
44 A1 191; A1399; A764-72. Cf F0x, 
2015 WL 4571398, at *32 ("At trial, the defense witnesses

wisely tried to distance themselves from Grant Thomton’s work by conceding that it was flawed
and arguing that no one relied on it.").

45 A1193 (emphasis added). The October 5, 2011 resolutions also set forth the following
recitals:

24

The Board resolved "that, subject to the consummation of the Distribution, the
exercise price of each Option shall be proportionately adjusted to take into account

the Distribution . . . ."46

On November 22, the Board authorized the cancellation of the options with
the understanding that the PWC fair market valuation would be used. Johansen’s
testimony supports this conclusion. She testified as follows:

A. This is [sic] unanimous consent of our [B]oard signed at the
time of closing of the transaction.

Q. And what did the written consent accomplish?

A. This approved the distributions contemplated by the
[S]eparation [A]greement where we issued the new stock to the
existing stockholders as well as the adjustments to that option,
the option plan.

Q. How did the [B]oard value TargetNow and Carisome in
connection with the spin-off and the cash-out of the options?

A. So under the terms of the incentive plan, the [B]oard is required
to use good faith in determining fair market value. And at that
time, there was a lot going on, but we were working with
Shearman & Sterling for all of the transaction. And we visited

 

WHERE./.&.S, pursuant to Section ll.l of the Corporation Stock Plan, immediately

prior to the consummation of the Merger, the Board will accelerate the vesting of
each Option such that each Option is fully vested;

WHEREAS, upon the consummation of the Merger, all of the Options will be
cancelled and converted into the right to receive the consideration set forth in . . .
the Merger Agreement[.]

A1 194.

46 Al l95. The Board also resolved "that, immediately prior to the consummation of the Merger,
each Option shall have its vesting accelerated and shall be deemed fully vested[.]" Id.

25

with them about trying to understand how we discharged our
duty of good faith in determining fair market value.

And their recommendation, which we agreed with, was that we
should hire an independent evaluation, to find an expert who
had experience in evaluating these very difficult-to-evaluate or
early-stage venture-backed companies that had significant
losses and mounting loses like we had with TargetNow, or
Carisome, which was just an experimental idea that we hoped
might someday have value.

So they recommended that we hire an independent advisor, and
we agreed, of course, that made sense. And that’s what we
did[] to determine fair market value. We relied on the report of
the experts.

There is no fmding by the trial court as to why Johansen’s testimony is not
credible.‘" Based on the $725 million purchase price for the AP Business
representing $4.46 per share and the $65 million valuation for SpinCo representing
$0.61 per share, the FMV of each option was $5.07.48 Thus, the Board confirmed
the determination of FMV by written consent on November 22, 201 l.

2. T he Board Was Entz'tled to Rely on PwC ’s Valuation

The trial court took issue with Caris’ reliance on the PwC valuation, finding

47 Laurie Johansen had business and law degrees from the University of Texas. After graduating
from law school, she worked as a corporate associate at Akin Gump Strauss Hauer & Feld LLP.
Thereafter, she was the general counsel and corporate secretary for a public company. ln that
capacity, she was responsible for the company’s M & A and corporate finance proj ects.

48 Grant Thornton clearly played a secondary and minimal advisory role, as reflected by the
amount of work performed and the amount of compensation earned by them. See A802
(observing that the cost of Grant Thomton’s engagement amounted to $22,000). Although there
are legitimate criticisms of the advisors’ analyses, the question for me is whether the Board
reasonably relied on the advice of PwC. The unaddressed testimony recounted above,
particularly Johansen’s, convinces me that it did.

26

that it was a transfer tax valuation instead of a fair market valuation.49 But at trial,
Halbert, the Chairrnan and CEO of Caris, testified that PwC was engaged "to get to
a fair market value, arm’s -- what an arm’s-length third-party would pay for the
asset . . . ."5° He stated that he "understood" from PwC’s October 5, 2011
presentation that "they were doing a fair market value"” and that they were
providing the Board with valuations of the TargetNow and Carisome businesses.$‘°'
According to Halbert, the original report he received from PwC maintained a cover
sheet that said "fair market value of the business enterprise."53 The Caris
Chairrnan and CEO also testified that, on October 5, the Board "believed it to be
that [PwC was] attempting to provide a fair market value number valuation for the[
TargetNow and Carisome] businesses in an arm’s-length way."54 When asked

whether his understanding ever changed, Halbert said, "No."55
Similarly, Johansen and Knowles both testified at trial that they understood

PwC to be providing the Board with an FMV for TargetNow and Carisome.

49 The trial court’s finding that "[0]verwhehning evidence in the record makes clear that in
rendering its decision, PwC did not determine the fair market value of TargetNow and
Carisome" should not be read to mean that it found that no valuation determination had been
made. F0x, 
2015 WL 4571398, at *13. Rather, the Court of Chancery found that the valuation
provided was a transfer pricing valuation of intellectual property. Again, while the Board did not
act perfectly, it did act. And there is no finding that a majority of the directors acted in
subjective bad faith.

5° A504.

51 A430.

52 A554.

53 A431.

54 A554.

55 A555.

27

According to Johansen, the Board asked PWC to provide it with "a fair market

value analysis because we needed to have one done under the stock option plan.

So they were -- that is what I understood them to be providing to the [B]oard."“’

When asked whether the Board "ever discuss[ed] the fair market value of Caris at
the time the options were repurchased," Knowles testified that the Board "did
discuss the [PwC] -- I think it was [PwC] who did a valuation."”

As to the Board’s good faith reliance on the PWC valuation and what they
were told, the Court of Chancery commented as follows at the conclusion of trial:

. . . I do think PWC did a tax-style intellectual property valuation. The
standard of fair market value may be the same, but when valuation
professionals approach these things, they do things with different
mindsets.

There’s very striking changes between what the [B]oard was told that
PWC was doing, i.e., valuing the [C]ompany, and what PwC then
actually said it did in its fmal, which was valuing the assets, and what
PwC’s methodologies of analysis demonstrated it did, which was
value the assets in the same way that they had previously done
transfer tax valuations.

That’s very good for the [B]oard in terms of the [B]oard ’s good faith.
It’s very hard when the [B]oard is told something to think that the
members of the [B]oard or, here, the [P]lan administrators, acted in
bad faith when they were told by PwC that we ’re doing something that
they really didn ’t do. 58

56 A768.
57 13753-54.
58 A795-96 (emphasis added).

28

Boards are permitted to consult with financial advisors when determining a
company’s value. Here, the directors also unquestionably relied upon their own
views of the Company’s value. There are no findings by the trial court that a
majority of the Board knew of any flaws in PwC’s or Grant Thornton’s analyses.”
Nor are there any findings that the directors acted in bad faith in relying, to the
extent that they did, on PwC.

3. T he Board ’s Vz`ews on the Value of SpinCo

Each of the directors who were asked about PwC’s valuation at trial testified
that it was optimistic. Carisome and TargetNow encountered significant
difficulties in developing effective products. With respect to TargetNow in
particular, Halbert testified that it was losing between 2 and $4 million a month.6°
While the Company was nonetheless "hopeful" that it might be able to obtain "a
big number" in a sale of the TargetNow business,“ Halbert testified that "we
would have sold at basically any price" and that the Company was not "price
sensitive."” With respect to Carisome, Halbert testified that the Company would
have sold the business unit "at a certain price, for sure. lt was just you don’t have
anything marketable. So why would somebody buy it? So they would buy it for

59 In fact, the trial court concluded that the Board never saw the Grant Thomton report. See F0x,
2015 WL 4571398, at *4 (finding that Martino and Halbert "knew that the Board never saw the
Grant Thomton report").

60 A555.

61 A462.

62 

29

some unknown reason and it would have to be a very low price. So there’s no
reason to sell it because it would be very, very cheap."63 Halbert testified that, in
201 l, he preferred to "roll the dice and keep going and see if we can make
something out of [Carisome]. That’s why I wouldn’t sell at that time."“ Further,
he stated that, in 201 l, the Company was "[h]opefiil" that Carisome would develop
a marketable product, but that it "couldn’t get anything to work. So if nothing was
working, it was a difficult time from that standpoint."“ The absence of a Carisome
product, Halbert testified, "was the challenge for the valuation."“

Directors Knowles, Johansen, and Castleman, each testified at trial that
PwC’s fair market valuation was in line with or higher than their subjective beliefs
as to the value of SpinCo. Knowles testified that the valuations for the TargetNow
and Carisome businesses presented by PwC to the Board on October 5, 2011 were
both high.67 As to TargetNow, Knowles stated that PwC’s $47.23 million

valuation was "high" because of "the very substantial investment that would be

63 A434.

54 A437.

65 A533.

66 A546.

67 During his deposition, Knowles was asked whether it was his "understanding that [PwC]
provided a fair market value of the assets of Caris[.]" B754. He responded as follows: "The
definition of fair market -- market value is what you could sell it for, in my view. So if you ask
me do I think that what was left of Caris after the disposal of the AP business was salab1e, then I
have a memory -- I can’t remember what the numbers were, but I remember thinking that it
would be very difficult to sell it for that kind of price." B755. Further, when asked whether he
had "any opinion at the time of the option repurchase in November of 2011 what the value of --
the fair market value of [sic] TargetNow business and Carisome business was[,]" he stated that
he "remember[ed] thinking that [PwC’s] was a relatively generous valuation in the context of
market value . . . ." Id.

30

Plaintiff’s Contentions

The plaintiff-below, Kurt Fox ("Fox"), sued on behalf of a class of option
holders. According to Fox, Caris breached the Plan because members of
management, rather than the Board, as the Plan Administrator, determined how
much the option holders would receive. He also contended that regardless of who
made the detennination, the $0.61 per share attributed to SpinCo was not a good
faith determination and resulted from an arbitrary and capricious process. Finally,
he contended that the Plan did not permit Caris to withhold a portion of the option
consideration as part of the escrow holdback contemplated by the merger
agreement.

Trial took place from December 3-5, 20l4. Fox had the burden of proving
his contentions by a preponderance of the evidence. The parties introduced 217
exhibits, depositions for nine witnesses, and presented live testimony from five fact
witnesses and one expert. After trial, Caris was permitted to supplement the record
with two additional exhibits

Court of Chancery Decisi0n

The Plan required and directed the Administrator (the entire Board) to use
good faith to determine and properly adjust the options to account for the FMV of
SpinCo. These were contractual obligations, not fiduciary responsibilities, under

the Plan. The Court of Chancery determined, as a matter of fact, that the Board, as

required to make it a seriously profitable product."68 Further, when asked whether
he viewed PwC’s $17.79 million valuation of the Carisome business to be
reasonable, Knowles testified that, in "light of the data, both at that time clinical
and preclinical, I think this is too high."69 Knowles stated that, in making a
valuation detennination, it was necessary to "bear in mind" that there was "a
substantial proportion of even research people who didn’t believe that this
approach would give viable diagnostics. . . . This is absolutely cutting-edge
science. You know, that’s not usually worth a lot until you have clinical data.""°
At trial, Johansen testified that oncologists were "resistant" to the
TargetNow product and that insurance companies "didn’t want to pay for it.""
Accordingly, Johansen stated that, in 20ll, "TargetNow was still losing money,
and losses seemed to be accelerating as opposed to narrowing."” She observed
that "there was no minimum price [for TargetNow]. I think for a lot of us on the
[B]oard, we felt that just getting it off of our books, because it was losing money,
just -- we would be willing just to almost give it away because -- or even shut it
down, because it was not -- it was a highly complex and distracting business that

was losing money and mounting losses."73 As to Carisome, Johansen testified at

68 A675.
69 A676.
7° Id.

71 A745.
72 A748.
73 A756.

31

trial that the company "was just an experimental idea that we hoped might

4

someday have value."7 According to Johansen, in 20ll, Carisome "was just

basically an experiment . . . or series of mini-experiments, but there was no product
offering. There was nothing really there more than a hope that, someday, we might
have a successful offering, but there was nothing really to sell."75 Ultimately,
Johansen testified that PwC’s valuation conclusions for TargetNow and Carisome
"were very fair, that they were fair on the side of being generous because of the
losses that we had in TargetNow and the state of the Carisome research."""’
Castleman’s views of TargetNow and Carisome were less optimistic than
those of Halbert, Knowles, and Johansen.77 At trial, Castleman testified that his
view, in 201 l, "was you shut Target[Now] down and you fire everyone in
Carisome except for ten R&D people, and you run this as an R&D company. . . .

But make it what it is, which is an R&D company, instead of combining those two

74 A767.

75 A760.

76 A769.

77 In my view, the record evidence before this Court does not support the conclusion that any of
the directors were entirely unaware of his or her obligations under the Plan. Of the Company’s
six directors, the trial court found only that Knowles "did not know that the Plan existed." Fox,
2015 WL 457l398, at *23. But during his deposition, Knowles was asked whether "anybody
from the Caris [B]oard" discussed with him the "cancellation or repurchase of options under
th[e] Plan." B753. Knowles answered: "There was a proposal presented to the [B]oard." B753.
Further, when asked whether he had "any idea what was paid" for the options, Knowles
responded as follows: "I wouldn’t remember. I would believe that I had been part of that -- I
had heard a presentation and been part of that discussion. But I don’t remember." Id. Knowles
nonetheless expressed independent views as to FMV. Also, Knowles arrived from Finland the

evening before trial and was deposed from 7:30 p.m. until 10:30 p.m. that same night, three years
after the Board acted pursuant to the Plan.

32

companies, which were, again, bleeding 60, $70 million a year of cash.""s As to
TargetNow specifically, Castleman reiterated that he believed it "should be shut
down."79 He testified as follows: "I thought it was a losing company. I still
believe that. It’s still in the same position it was four years ago, and it would be a
dreadful IPO."S° Castleman also testified that he did not view Carisome to be
"highly valuable" in 2011, observing that the company "did not have a product."sl
He stated that he believed that Caris0me was "potentially highly valuable," but that
he did not "agree that it was a highly valuable business" in 2011.82

Where a board is subject to a contractual obligation to make a determination
in "good faith" and the contract does not define good faith, the "determination will
be considered to be in good faith unless" it "went ‘so far beyond the bounds of
reasonable judgment that it seems essentially inexplicable on any ground other
than bad faith."’83 This is a purely subjective standard. In its Opinion, the trial
court dismissed the independent directors’ testimony and beliefs as to valuation
based not on any express negative credibility determinations, but on its hindsight

bias theory. This implicit rejection stands in stark contrast to its own post-trial

reflections, where it stated:

78 A705.
79 A723.
80 Idaho
81 A711.
82 

83 DI/'Realty Advisors, 75 A.3d at 110 (quoting Brinckerhojj v. Enbridge Energy Co., Inc., 
67
A.3d 369, 373 (Del. 2013)).

33

I almost, ironically, think the [B]oard would be infinitely better off
had they never hired Grant Thornton or PWC and just made the type
of judgmental assessment like they testified to on the stand. Because,
obviously, this was a tough company to value. There is no question
about that, and I’m very sympathetic to that.84

For me, the trial court’s blanket rejection of thoughtful and consistent testimony by
directors who were sequestered during trial does not logically follow from the
evidence or from the court’s own favorable post-trial impressions of the directors’

testimony.

Further, instead of focusing on the subjective beliefs of the directors accused
of wrongful conduct, the Court of Chancery’s credibility findings centered on
Martino, Halbert, PWC, and Grant Thornton. I believe this is also problematic,
since there is no basis to attribute their conduct to the whole of the Board. Indeed,

the court found that neither Martino nor Halbert were acting as the Board’s

84 A80l. In various contexts, other courts have recognized the inherent difficulty in valuing
medical science companies and calculating market value and potential profitability when such
companies do not yet have marketable products. See, e.g., AlphaMed Pharms. Corp. v. Arriva
Pharms., Inc., 432 F. Supp. 2d 13l9, 1345 (S.D. Fla. 2006) ("[O]nly a minuscule percentage of
drugs in development ever reaches the commercial market-and of those, only a subset ever
prove profitable for their manufacturer. Accordingly, reliance on a multitude of assumptions is
enderr1ic to any valuation of the prospective profitability of new pharmaceutical products."
(intemal citation orm`tted)), a ’d, 294 F. App’x 501 (1 lth Cir. 2008). ln the pharmaceutical
context, Delaware courts have recently wrestled with expectation damages awards for breach of
a contractual obligation to negotiate in good faitli. See PharmAthene, Inc. v. SIGA Techs., Inc.,
2011 WL 4390726 (Del. Ch. Sept. 22, 2011), a ’d in part and rev ’d in part, 
67 A.3d 330 (Del.
20l3), remanded to 
2014 WL 3974167 (Del. Ch. Aug. 8, 2014), a ’d, 
132 A.3d 1108 (Del.
2015); see also z`d. at 1139-54 (Valihura, J., dissenting) (concluding in the dissent that
expectation damages for breach of preliminary agreement to negotiate in good faith were
speculative and too uncertain, contingent, and conjectural). Here, the molecular diagnostics
technology market was emerging and both TargetNow and Carisome’s products endured

significant "setbacks," rendering the valuation exercise difficult and highly speculative. See Fox,
2015 WL 4571398, at *6-7.

34

agents.85 Ultimately, the Board’s determination of FMV was not so far beyond the

bounds of reason as to be inexplicable on any ground other than bad faith.

C. T he Board Determined the Adjustment

Nor do I believe that the record supports the conclusion that the Board
breached the Plan as to the required adjustment. The Plan required the
Administrator to proportionately adjust the exercise price of the options to reflect
the change in the FMV of the Company’s common stock as a result of the spin-off
of TargetNow and Carisome.% Because the Plan granted participants options to
purchase Caris stock, both the number of shares underlying a participant’s award
and the exercise price were adjusted. As explained by the Company, by dividing
the implied residual equity value of pre-spin-off Caris by the implied equity value
of the merger consideration, the adjustment factor was calculated to be l.l37.87
The strike price for the options was then divided by l.l37, and the number of
issued and outstanding options was multiplied by l.l37.88 Accordingly, the strike
price for the options was reduced and the number of options issued and outstanding

prior to the Effective Time was deemed to be increased, although the additional

85 See, e.g., z'd. at *23 ("The Board could have empowered Halbert as a one-person committee. lt
didn’t.").

85 See May 5, 2015 Letter at 5-6, Fox v. CDx Holdings, Inc., C.A. No. 803l-VCL (Del. Ch. July
28, 20l5) ("Rather, such adjustments were made to ensure that the amount paid to option holders
by virtue of the Option Payment (wl1ich was based on the number of options that were actually
issued and outstanding immediately prior to the Effective Time) included the value of the

TargetNow and Carisome assets distributed to stockholders as part of the spin-off.").
87 Id. at 4-5.

**M. ars.
35

options "were not actually issued since all options were cancelled and the Plan
[Was] terminated at the Effective Time."89 The adjustment ensured that the option
holders received a payout that included the value of SpinCo.

In accordance with Section 2.09 of the Merger Agreement, on November 18,
201 l, the Company delivered to Miraca a good faith estimate of the purchase price
in connection with the merger (the "Estirnated Purchase Price"). The Merger
Agreement also required that the Company, no later than three business days prior
to the closing, "prepare and deliver to [Miraca] a schedule setting forth the
respective amounts of the consideration payable at the Closing to each holder of
Company Equity Securities" on a holder-by-holder basis (the "Closing
Consideration Schedule").9° The Company also delivered an Officer’s Certificate,
dated November 16, 201 l, executed on behalf of Caris by Martino, certifying that
the Estimated Purchase Price and the Closing Consideration Schedule were
calculated in good faith.91 Specifically, the Officer’s Certificate states that, "[t]he
undersigned hereby certifies that, as of the date hereof, the information set forth in
the Estimated Purchase Price and the Closing Consideration Schedule was

calculated in good faith in accordance with the Merger Agreement and the

89 
90 A1220.
91 AR411.

36

Governing Documents of the Company."” lt states further that Martino executed
it "on behalf of the Company and not in his personal capacity."

On November 22, 201 1, the Board entered into a Unanirnous Written
Consent pursuant to 8 Del. C. § l41(f) (the "Consent").” The Consent reflects that
Caris entered into the Merger Agreement, dated as of October 6, 201 l, with Miraca
and that, as a condition of the merger, Caris entered into a Separation Agreement,
dated as of November l6, 2011, with wholly owned subsidiaries of the Company.°"
The recitals state that the Board desired to declare the payment of the distribution
as contemplated by the Separation Agreement, and as resolved by the Board on
October 5, 2011. Pursuant to Section 2.1 l(b) of the Merger Agreement, the
Consent also recites that the Plan would terminate as of the Effective Time of the
merger, which was ultimately November 22, 2011. lt further recites that pursuant
to Section l2.1 of the Plan, Caris shall take all necessary actions "to
proportionately adjust all outstanding Company Options to take into account the

Distribution . . . ."95

Consistent with these recitals, the Board unanimously consented to the

following resolutions:

92 1a
93 A1399.

94 The Board approved the Separation Agreement on October 5, 2011. Id.
95 Al400.

37

RESOLVED, that the Board hereby declares the payment of the
Distribution as contemplated by the Separation Agreement and as
resolved by the Board on October 5, 2011;

RESOLVED, that as of the Effective Time, the [] Plan shall terminate
in accordance with its terms and no person shall have any rights under

the [] Plan thereafter, other than as set forth in the Merger Agreement
or by applicable Law;

RESOLVED, that, effective upon, and subject to, the consummation
of the Distribution, each Company Option shall be proportionately
adjusted in accordance with Section l2.l of the [] Plan and the
underlying option grant agreements to take into account the
Distribution; provided that any fractional shares resulting &om such
adjustment shall be eliminated; and

RESOLVED, that all actions taken by the Board or any officer(s) of
the Corporation prior to the date hereof, in connection with the
transactions contemplated hereby, and in order to effectuate the

purpose and intent of the forgoing [sz`c] resolutions be, and hereby are,
ratified and approved.%

I agree with the Court of Chancery’s conclusion that simply because a

resolution says something will be done does not make it so. But the evidence in
the record shows that, in accordance the mandate of the Board’s resolutions, Caris’
officers and advisors prepared a spreadsheet setting forth the consideration that
each option holder would receive after adjusting the options and factoring in the

Company’s complicated equity structure.97 Johansen testified at trial that the

 

96 
97 A789; AR410-35. The October 5 resolutions should not be faulted for failing to document the
adjustment to the options, as the Merger Agreement and ancillary documents contemplated that

any action with respect to the options would be taken immediately prior to the Effective Ti1ne,

which was November 22, 201 1.

38

Board approved an adjustment of the exercise price for the options to take into
account the spin-off.98

Further, it appears to me that the Court of Chancery’s Opinion is intemally
inconsistent with respect to its discussion of whether and how the adjustment was
deterrnined. The court states that, in combination with an October 6, 2011
discussion of the value of the common stock of the Company, an email exchange
between Halbert and Martino resolving to utilize the PwC valuation for purposes
of the transaction "was the extent of the determination for both the Fair Market
Value of a share of common stock and the aa’justvnent of the stock options for

)999

purposes of the [spin-o]f]. Yet it also recounts that "[a]fter trial, Caris was

permitted to supplement the record with two additional exhibits."l°° These
submissions were made pursuant to an extended discussion between counsel and
the Court of Chancery during post-trial arguments regarding the adjustment that
was made. In simultaneous submissions, dated May 5, 2015, the parties further

addressed the mechanics of the option adjustment. The trial court found that the
Company’s supplemental submission "coniirmed that Caris" had adjusted the

options "as described during post-trial oral argument."l°l While the parties may

98 A765 (Q. "And also did the [B]oard approve an adjustment of the exercise price for the
options to take into account the distribution of New Caris stock‘?" A. "Yes.").

99 Fox, 
2015 WL 4571398, at *23 (emphasis in original and added).

1°° Id. ar *3.

101 Id. at *34. lt is not evident from the record before this Court that Fox ever sought to
understand the mechanics of the adjustments, the waterfall, or whether an adjustment to the

39

have contributed to the confusion by suggesting that the options had been treated
differently in the pre-trial proceedings, an adjustment, as authorized by the
November 22, 2011 Consent, was made by Martino and the Company’s advisors.
ln view of the foregoing, I believe the evidence demonstrates that the Board,
as it was authorized to do pursuant to Section 3.3 of the Plan, delegated the
complex computational task of determining the adjustment to the options to
Martino and the Company’s advisors.l°z The Board approved these actions in its
November 22 unanimous consent. That approval is unquestionably Board action.
Although the Court of Chancery concluded that the Board failed to make the
adjustment, it nonetheless recognized that Caris "handled the options" by adjusting
the exercise price.l°'°’ Sections 3.3 and 3.4 of the Plan gave the Board broad
authority in its administration of the contract, and the delegation of the adjustment
was within the Board’s discretion "to make any and all . . . determinations which it

determines to be necessary or advisable for administration of the Plan" and not

 

o=.;

options had in fact occurred. Nor is there evidence that Fox questioned Martino and Citi, who

created the equity waterfall, about the closing mechanics.

102 Johansen testified that the Board was not responsible for developing the waterfall mechanics
to effect the adjustment, A789. Rather, this complicated exercise was delegated to Martino and
"the fmance staff working with the bankers and [the] accountants." Id. According to Johansen,
Martino "spent many countless hours trying to sort through it all because of the complexity." Ia’.

In my view, this is the type of task that a Board is justified in delegating to its CFO and advisors,
and the Plan permits that delegation.

103 Fox, 
2015 WL 4571398, at *33-34.
40

the Plan Administrator, never made any determination of the value the option
holders would receive under the Plan, and failed to adjust the options for the
spinoff. The Court of Chancery concluded that certain directors were not even
aware of their duties as the Plan’s Administrator or the Plan itself and merely
deferred to Halbert _ Caris’ Chairman, CEO and 70.4% stockholder. The Court
of Chancery found that Caris’ CFO/COO Gerard Martino ("Martino") made the
options-value determination to obtain a tax-free spinoff rather than to determine
FMV for the Plan and that determination received perfunctory sign-off by Halbert.

The Court of Chancery found that regardless of who made the value
determination, FMV was not determined, and the value received by the option
holders was not determined in good faith. ln addition, the Court of Chancery
found the evidence used to support the decided value was determined by Martino
through a process that was "arbitrary and capricious." The Court of Chancery
began its 82 page opinion with the following su;rnmary:

The evidence at trial established that the Board did not
make the [Fair Market Value] determination it was
supposed to make. Gerard A. Martino, the Executive
Vice President, Chief Financial Officer, and Chief
Operating Officer, made the deterrninations, then
received perfunctory signoff from Halbert. The evidence
at trial further established that the number Martino
picked for SpinCo was not a good faith determination of
Fair Market Value. lt was the figure generated by
PricewaterhouseCoopers ("PwC"), the Company’s tax
advisor, using an intercompany tax transfer analysis that
was designed to ensure that the Spinoff would result in

5

"arbitrary and capricious."l°‘l The Board, therefore, determined the adjustment in a

manner that satisfied its obligations under the Plan.

III. CONCLUSION

I believe the Court of Chancery erred, as set forth above. I respectfully

dissent.

104 See A8l7-l8. I do not address whether the trial court erred in employing the arbitrary and
capricious standard developed in the context of decisions by administrative agencies. The
question of whether the Board’s decisions under the Plan were "arbitra.ry and capricious" was not
identified in the parties’ pre-trial order as one of the issues to be litigated at trial. I would have
concluded that the argument was waived. Thus, I do not address the possibility that the Plan
might have been breached under an arbitrary and capricious standard where, for example, the
Board acted in subjective good faith but the valuation might have been manipulated.

41

zero corporate level tax. Martino told PwC where to
come out, and he supplied PwC with reduced projections
to support the valuation he wanted. PwC’s conclusion
that SpinCo had a value of $65 million conflicted with
Martino’s subjective belief from earlier in the year that
TargetNow alone was worth between $150 and $300
million. lt likewise conflicted with the views held by
Halbert, Fund Vl, and the Company’s financial advisor.
lt contrasted with higher values that a different
accounting f1rm, Grant Thornton LLP, generated for the

same businesses in a series of valuation reports prepared
during 2011.

Miraca questioned PwC’s valuation and insisted on
a second opinion from Grant Thornton. Martino and
PwC met with Grant Thornton before the firm started
work. Two days later, Martino sent an email to Halbert
that precisely anticipated the range of consideration per
share that the two reports would support. Grant Thornton
then proceeded to prepare a valuation that largely ~ and
admittedly! - copied PwC’s analysis. Grant Thornton’s
answer came in just below PwC’s. The valuation was not

determined in good faith, and the process was arbitrary
and capricious.

Finally, the plain language of the Plan did not
permit Caris to withhold a portion of the option
consideration in escrow. The merger agreement was not
the contract that governed the relationship between the
option holders and Caris. The Plan was.

Caris breached the Plan. The class is entitled to
damages of $16,260,332.77, plus pre- and post- judgment
interest at the legal rate, compounded quarterly, from
November 22, 20ll until the date of payment.

Appellant’s C0ntenti0ns

The appellant argues that the Court of Chancery committed legal error by

focusing on an officers’ (specifically Martino’s) conduct, instead of the Board’s

6

conduct; finding a breach of the Plan contract’s subjective good faith standard; and
measuring damages by what it decided an objectively reasonable Board would
have done. The appellant also contends that the Court of Chancery erred by
imposing a heightened standard of review on the Plan’s contractual good faith
determinations; applying an arbitrary and capricious test on top of the good faith
standard; and by defining the Plan contract’s arbitrary and capricious standard
based on the federal Administrative Procedures Act. Finally, the appellant submits
that the Court of Chancery erred in valuing SpinCo based on outdated data;
concluding that the underlying motivation in valuing SpinCo was to achieve zero
taxes by using projections that were "falsely low"; and by calculating damages
without making a determination as to the goodwill associated with SpinCo.
Standard of Review

After a trial, findings of historical fact are subject to the deferential ‘clearly
erroneous’ standard of review. That deferential standard applies not only to
historical facts that are based upon credibility determinations but also to findings
of historical fact that are based on physical or documentary evidence or inferences
from other facts. Where there are two permissible views of the evidence, the
factfinder’s choice between them carmot be clearly erroneous.z When factual

findings are based on determinations regarding the credibility of witnesses, the

2 Bank of N. l/'. Mellon T rust Co., N.A. v. Lz'berty Media Corp., 
29 A.3d 225, 236 (Del. 2011).
7

deference already required by the clearly erroneous standard of appellate review is

enhanced.3

Judgment Affirmed

As the Administrator of the Plan, the Board was required to perform certain
obligations. The Court of Chancery found that "the Board did not make the [FMV]
determinations it was supposed to make" under the Plan. Instead, the Court of
Chancery found that Martino separately determined the option h0lders’ value. The
court rejected the defense theory, which attempted to equate a Board resolution
approving the Miraca Transaction with Plan performance by the Board in its role
as Administrator. The Court of Chancery found that the Board did not perform the

Plan Administrator’s contractual obligations solely by noting in resolutions that

such obligations exist:

The minutes of the October 5, 2011 meeting reflect that
the Board recognized the need to adjust the exercise price
of the stock options to reflect the value of the Spinoff.
But the Board never set the adjusted price. The
resolutions adopted at the meeting state:

RESOLVED, that, subject to the consummation of the
Distribution [z'.e., the Spinoff], the exercise price of each
Option shall be proportionately adjusted to take into
account the Distribution;, [sic] provided, however, that
any fractional shares resulting from the adjustment shall
be eliminated[.]

>I< >|< >l=

3 Cea'e & C0. v. Techm`color, Inc., 
758 A.2d 485, 491 (Del. 2000) (citing Anderson v. Cz`ty of
Bessemer City, N.C., 
470 U.S. 564, 575 (1985)).

8

The Board just as easily could have passed a resolution
saying "the Company shall be in compliance with all of
its contractual commitments." Passing such a resolution
would not make it so."

The Court of Chancery also found that the Board subjectively believed
TargetNow and Carisome had a FMV of "around $300 million" based upon
extensive contemporaneous evidence. Although several defense witnesses tried to
disavow such evidence, the Court of Chancery assessed their credibility, reviewed
the contemporaneous evidence and decided not to credit their unsubstantiated trial
testimony.

The Plan called upon the Board to determine FMV in good faith and to
adjust the options to reflect the Spinof`f. Because the Board did not act, the Court
of Chancery stated the "good faith standard arguably does not even apply."
Assuming it did apply, it was not clear to the Court of Chancery to whom it should
be applied. The Court of Chancery concluded that Martino actually made the
value deterrnination, and Halbert signed off. Accordingly, the Court of Chancery’s
decision analyzed whether Martino and Halbert acted in subjective good faith:

The operative question is whether the $65 million value

they placed on SpinCo reflected their subjective belief
about the value of TargetNow and Carisome. lt did not.

* >l< >|<

Assuming for purposes of analysis that Martino and
Halbert did believe subjectively in the valuation they

4 Fox v. CDXHoldings, Inc., 
2015 WL 4571398, at *17, *24 (Del. Ch. July 28, 2015) (emphasis
in original).

9

selected, the process they followed was nonetheless
arbitrary and capricious.

This Court must give deference to findings of fact by trial courts when
supported by the record, and when they are the product of an orderly and logical
deductive reasoning process, especially when those findings are based in part on
testimony of live witnesses whose demeanor and credibility the trial judge has had
the opportunity to evaluate.5 The record in this appeal compels an application of
that standard of appellate review. Accordingly, the judgment of the Court of

Chancery is affirmed on the basis of and for the reasons stated in its July 28, 2015

decision.6

Cross-Appeal

Fox contends that a typographical error or mistake inadvertently altered the
damages calculation. We will not address that claim of error in the first instance
on appeal. Fox may raise that matter with the Court of Chancery after the mandate
is issued in this appeal.

Conclusion

The judgment of the Court of Chancery is affirmed

5 Nz`xon v. Blackwell, 626 A.Zd 1366, 1378 n.l6 (Del. 1993).
6 Fox v. CDXHoldings, Inc., 
2015 WL 4571398 (Del. Ch. July 28, 2015).

10

CDX Holdings, Inc. v. Fox