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holding that dissolution is not proper if the "the business is still active (or passively investing) in one legitimate line of business"
Summary of this case from In re Seneca Investments LLCOpinion
No. C.A. No. 16315.
Date Submitted: September 23, 1998.
Date Decided: January 21, 1999.
Jesse A. Finkelstein, Esquire, and Raymond J. DiCamillo, Esquire, of RICHARDS, LAYTON FINGER, Wilmington, Delaware, Attorneys for Plaintiff.
William D. Johnston, Esquire, and Matthew G. Zaleski, III, Esquire, of YOUNG, CONAWAY, STARGATT TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael H. Kalkstein, Esquire, and David S. Elkins, Esquire, of GRAHAM JAMES LLP, Palo Alto, California, Attorneys for Defendants.
MEMORANDUM OPINION
This is an action by Plaintiff Apple Computer, Inc. ("Apple") against Exponential Technology, Inc. ("Exponential") and its top director/officers (the "Directors"). In its capacity as Exponential shareholder, Apple seeks (1) to set aside the sale of Exponential's patent portfolio (allegedly substantially all of Exponential's assets), (2) to have a custodian appointed to wind up Exponential's affairs, and (3) to nullify litigation support agreements with two defendant director/officers and Exponential's Chief Operating Officer. Exponential and its Directors argue that Apple's real motivation is to distract Exponential from its ongoing lawsuit against Apple for breach of contract brought in California state court (the "California Action"). Exponential has moved to dismiss or for partial summary judgment, and seeks to stay these proceedings.
At the relevant times, Gordon Campbell was Chairman of the Exponential Board of Directors; Donald R. Shriner was Exponential President and CEO and a director; George S. Taylor was Chief Technical Officer and a director; and Paul Dali and Eddie Kawamura were members of the board. Exponential and the Directors filed this motion together. To simplify the discussion, I refer to Exponential to describe their collective position.
I conclude that Apple has adequately pled a prima facie breach of 8 Del. C. § 271 by alleging that Exponential sold substantially all of its assets, its patent portfolio, without seeking shareholder approval. Even so, subsequent shareholder ratification would moot Apple's patent sale claim. Because it is unclear how the alleged failure of some Exponential shareholders to date their proxies would affect the ratification, however, I cannot consider partial summary judgment on that basis until the parties develop the record on this discrete question. At the same time, I conclude that a stay of counts I and II would not jeopardize Delaware adjudication of those claims, would permit the parties to use the California Action's evidentiary record on Apple's purported wrongdoing to assist valuation of Exponential's allegedly valuable chose in action against Apple, and would prevent this litigation from disrupting the California Action. Therefore, I will stay counts I and II pending the California judge's final judgment.
As for Apple's request for appointment of a custodian, I conclude that the facts as pled by Apple cannot sustain the remedy requested. Apple pleads facts showing that Exponential's management started closing operations in response to a drastically altered business environment and that management is currently pursuing a $500 million claim against Apple. I dismiss the request for appointment of a custodian for failure to plead facts showing that the Directors abandoned Exponential.
Apple claims that the litigation support agreements constitute gift or waste. Similarly, I find that the facts as alleged by Apple show that the agreements fall well within the range of reasonable compensation for services. Furthermore, Apple fails to plead particularized facts excusing it from making demand against the board. This claim too must be dismissed.
I. BACKGROUND
Apple is in the business of manufacturing and selling personal computers, bundled with Apple's proprietary operating system, MacOS. Apple also markets name-brand computer peripherals and software. The company is incorporated and headquartered in California. Chiefly known for its Macintosh, PowerPC and — most recently — iMac computers, Apple runs a distant second to Microsoft Windows, Intel Pentium chip-based machines (the Wintel platform) in the global PC market.
Exponential is a privately-held Delaware corporation based in San Jose, California. Until May 15, 1997, Exponential designed and marketed CPUs, specifically PowerPC CPUs, for the PC market. Apple was one of Exponential's original investors, its largest shareholder, and biggest customer. In April 1994, Apple purchased 1.5 million shares of Exponential's freely convertible Series A Preferred Stock at $1 per share and a warrant granting Apple the right to buy an additional 1.5 million shares of Series A at the same price. At the same time, Apple and Exponential executed an agreement to have Exponential "design, develop, prototype and test, and procure fabrication and assembly of" PowerPC CPUs according to an agreed upon schedule (the "Product Agreement").
A central processing unit ("CPU") is the microprocessing chip that serves as the "brains" of a PC. "PC" stands for "personal computer." The PowerPC CPU is a reduced instruction set chip ("RISC") designed to serve as the brains of the PowerPC "open standard" hardware architecture jointly developed by IBM, Motorola, and Apple. Apple designed a version of the PowerPC running MacOS. More information on this technology can be found at IBM, PowerPC Microprocessor product information, http://www.chips.ibm.com/products/ppc/overview/(as of Dec. 17, 1998).
This purchase constituted 25% of Exponential's outstanding preferred shares.
Compl. ¶ 12.
In October 1996, Exponential and Apple entered into a second agreement setting forth the terms by which Exponential would sell its CPUs to Apple (the "Purchase Agreement"). The parties also modified the delivery schedule appended to the Product Agreement. They agreed that Exponential would deliver a 500 megahertz CPU to Apple by April 1, 1997.
In December 1996, Apple bought 519,480 shares of Exponential Series C Preferred Stock at $3.85 per share and a warrant to buy another 750,000 at the same price. This purchase confirmed Apple's status as Exponential's largest shareholder, giving Apple just under 10% of the voting preferred shares. Apple placed one of its employees on the Exponential board.
Apple believes that its Exponential preferred holdings constituted 9.53% of all outstanding shares if calculated on a fully converted basis. Compl. ¶ 13.
In late March 1997, defendant Donald R. Shriner ("Shriner"), Exponential's President and CEO, wrote Apple's management to inform them that Exponential could not meet its April deadline for developing a 500Mhz CPU and anticipated that the CPU would not be ready until at least September. Both parties are silent as to what transpired immediately afterward, but they agree that on May 22, 1997, Exponential sent its shareholders a letter informing them that management had closed Exponential's San Jose facility and would soon decide whether to close the Austin facility as well. Exponential's management blamed Apple for its woes, stating in the letter that Apple refused to work out the parties' problems and forced Exponential out of business by effectively preventing Exponential from selling its CPUs to makers of Apple clones. The letter also stated that Exponential would seek a buyer for its patent portfolio, and Exponential did so. It sold its forty-five odd patents by auction to S3, a graphics chip maker and Delaware corporation, for over $10 million.
Apple argues that the contents of Exponential's letter to its shareholders is not properly before the Court because it is attached to Exponential's Dorris Affidavit and not the complaint. Although I include the facts contained in the letter as background, the details contained in the writings do not alter the core facts pled in Apple's complaint and, furthermore, Apple references the letter in its complaint: (1) "Campbell informed Exponential's shareholders in writing that Exponential had been shut down permanently;" and (2) "Exponential announced that it had auctioned off the Patent Portfolio." Comp. ¶¶ 15, 16. Therefore, under In re Santa Fe Pacific Corp. Shareholders Litig., it is proper for me to examine the contents of the letter, so long as I do not rely on its truthfulness. Del. Supr., 669 A.2d 59, 68-70 (1995) ("Without the ability to consider the document at issue, `complaints that quoted only selected and misleading portions of such documents could not be dismissed under Rule 12(b)(6) even though they would be doomed to failure.'") ( citing Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991)). Even without the embellished facts, the core facts relevant to the disposition of this motion are contained in Apple's complaint.
Exponential is using those funds to pay off creditors and to underwrite a lawsuit it filed against Apple on September 15, 1997, in California Superior Court. In the California Action, Exponential alleges Apple forced it out of business, claiming breach of contract, breach of fiduciary duty, and intentional and negligent interference with contractual relations and with prospective economic advantage. Exponential seeks damages in the amount of $500 million.
Exponential Tech. Inc. v. Apple Computer, Inc., Cal. Sup. Ct. County of Santa Clara, Case No. CV768801.
Concurrently, Exponential is winding up its CPU design-related operations. Exponential has laid off its employees and closed its doors. Effective September 24, 1997, its board approved litigation support agreements with defendants Donald Shriner and Gordon Campbell, Exponential Chairman ("Campbell"), as well as nondefendant Stephanie Dorris, Chief Financial Officer ("Dorris"). The support packages cost Exponential a minimum of $23,200 and maximum of $66,000 per month. The agreement entitles Exponential to a minimum of 342 and maximum of 502 hours of work per month. Exponential prepaid Campbell, Shriner, and Dorris for a year's worth of their minimum salary under the litigation support agreements. ( See Table 1 below.)
Shriner and Campbell receive $5,600 per month for thirty-two hours of work. Ms. Dorris is charged with not only litigation support, but continuing the winding up process. She is paid $12,000 per month for ninety-six hours work. If any one of them exceeds his or her hourly quota, each has the right to earn overtime pay at $125 per hour, but each individual's monthly salary is capped at $22,000 per month.
Apple filed a § 220 action in this Court seeking to inspect Exponential's books and records. Exponential reached agreement with Apple and turned over certain books and records. On April 13, 1998, Apple filed this action. Responding to Apple's claim that shareholder approval was required of the patent portfolio sale under 8 Del. C. § 271, Exponential asked its shareholders to ratify the sale. A majority of the common stock shareholders of record, and of the aggregated preferred stock (Series A, B, and C) shareholders of record, delivered written consents to Exponential ratifying sale of the patent portfolio. Some of the shareholders failed to date the consents.
II. PARTIES' CONTENTIONS
Apple asserts three basic claims: (1) Exponential failed to allow its shareholders to vote on its sale of the patent portfolio; (2) Exponential's management abandoned the company and a custodian should be appointed; and (3) the litigation support agreements constitute waste of Exponential's assets. The following details the nature of Apple's claims, the parties' positions as to the motion to dismiss each claim, and my decision as to each claim.
A. Sale of the Patent Portfolio
1. Apple's Claims
Apple pleads three versions of the unlawful sale of assets claim. Count I alleges that Exponential's sale of the patents violated 8 Del. C. § 271 because the patents constituted "substantially all of its assets" and the sale was not put to the shareholders for a vote, much less approved by "a majority of stockholders entitled to vote thereon." Exponential's certificate of incorporation tracks the language of § 271 and Apple's count II claims that the sale breached that provision in Exponent's certificate. Count III alleges that Exponential's management breached its fiduciary duties and violated the shareholder franchise under Blasius by denying the shareholders the opportunity to vote on the sale.
8 Del. C. § 271.
Blasius Indus., Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651 (1988).
2. Exponential's Grounds for Dismissal/Partial Summary Judgment
In its motion to dismiss, Exponential attacks the patent sale claims in four ways. First, it alleges that the sale did not constitute a sale of all or substantially all of Exponential's assets as a matter of law, so no shareholder right to approve the transaction arose. Second, it argues that Apple's failure to join S3 as a party to this action constitutes grounds for dismissal. Third, Exponential asserts that the shareholders' ratification of its patent portfolio sale after the fact moots counts I, II, and III and constitutes grounds for rendering summary judgment in its favor on those claims. Finally, Exponential alleges that as to the Directors, Apple has pled no facts showing breach of the duty of loyalty; therefore, Exponential's § 102(b)(7) certificate of incorporation provision moots all damages claims asserted against the Directors.
3. Analysis
In evaluating a complaint subject to a motion to dismiss, I must deny the motion unless I am reasonably certain that the plaintiff cannot recover under any set of facts that could be proven to support the action. Furthermore, I must accept all well-pled facts as true and grant all reasonable inferences drawn from the pleadings in favor of the plaintiff. Bearing in mind that plaintiff must give defendant only fair notice of the claim and that I am to liberally construe the complaint, my task is to dismiss only those claims that are deficient as a matter of law.
See Rabkin v. Philip A. Hunt Chem. Corp., Del. Supr., 498 A.2d 1099, 1104 (1985).
See Grobow v. Perot, Del. Supr., 539 A.2d 180, 188 n. 6 (1988).
As a preliminary matter, I note that counts I and II are identical for the purposes of this motion to dismiss. The certificate's language tracking § 271 creates a claim differing in no material way from the statutory claim described in count I. Both are directed against Exponential, not the Directors. On the other hand, count III's apparent invocation of Blasius review attempts to elevate the same factual allegations into more than a claim for breach of the duty of care and names the Directors, not Exponential, as the wrongdoers. That implication deserves scrutiny.
Apple correctly states that a board's failure to comply with § 271 (if proven at trial) is a breach of fiduciary duty. Not all breaches of a shareholder vote-related statutory duty, however, invoke Blasius. Blasius recognized that the shareholder franchise is a cornerstone of corporate democracy and cannot be subjugated to the board's desire to entrench itself. Blasius and similar cases involve tactical maneuvers by incumbent boards seeking to ward off hostile acquirers and defeat dissident slates. In Blasius itself, the incumbent board appointed new members at the eleventh hour to preclude shareholders from filling those seats by electing a hostile acquirer's candidates. Similarly, in Aprahamian v. HBO Co., the directors delayed a shareholder meeting to prevent the incumbent directors' electoral defeat. In these cases, the board's duty of loyalty was not necessarily implicated in the traditional sense of self-dealing, but the potential for entrenchment in the face of a hostile acquisition — the type of situation also implicating the Unocal standard of intermediate review — did arise. Therefore, the Court has carefully scrutinized board action implicating shareholder franchise rights in these situations because of the inherent possibility that the board will frustrate a shareholder vote in order to protect itself.
See, e.g., Williams v. Geier, Del. Supr., 671 A.2d 1368, 1377 (1996) (not applying Blasius because board took action affecting shareholder franchise in conjunction with shareholder approval of transaction).
Blasius, 564 A.2d at 659 (explaining "[w]hy the deferential business judgment rule does not apply to board acts taken for the primary purpose of interfering with a stockholder's vote, even if taken advisedly and in good faith.").
See id. at 663 (enjoining board's appointment of new directors because it impermissibly interfered with shareholder franchise by preventing shareholders from electing a majority of dissident directors at upcoming election).
Del. Ch., 531 A.2d 1204, 1206-07 (1987) (enjoining board from delaying director election where board's motivation was to prevent incumbents' defeat by dissident slate).
See Stroud v. Grace, Del. Supr., 606 A.2d 75, 92 n. 3 (1992) ("Board action interfering with the exercise of the franchise often arose during a hostile contest for control where an acquiror launched both a proxy fight and a tender offer. Such action necessarily invoked both Unocal and Blasius. The two `tests' are not mutually exclusive because both recognize the inherent conflicts of interest that arise when shareholders are not permitted free exercise of their franchise.").
See Aprahamian, 531 A.2d at 1206-07 ("In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards in providing for and conducting corporate elections. The business judgment rule therefore does not confer any presumption of propriety on the acts of the directors in postponing the annual meeting.").
Here, the patent sale for which a shareholder vote was allegedly required could not serve as an opportunity for entrenchment. It did not invoke either a traditional duty of loyalty conflict or an inherently suspect defense against a hostile bid or election of an insurgent slate. A sale of assets is a business decision that might trigger § 271 obligations. In the absence of a hostile acquirer or some other motivation for disenfranchising the shareholders, however, a board's unintentional failure to fulfill its supposed § 271 obligations, while perhaps constituting a breach of fiduciary duty, does not ordinarily trigger Blasius review. Therefore, Apple has failed to meaningfully distinguish count III's alleged fiduciary duty breach from the statutory duty-of-care breach alleged in counts I and II. Consequently, I treat count III as if it repleads count I (and count II), adding the Directors as defendants.
See Stroud, 606 A.2d at 91 ("The stringent standards of review imposed by Stahl and Blasius arise from questions of divided loyalty, and are well-settled.").
See Williams v. Geier, Del. Supr., 671 A.2d 1368, 1376 (1996) (holding that application of the `compelling justification' standard set forth in Blasius is appropriate only where the `primary purpose' of the board's action is to interfere with or impede exercise of the shareholder franchise).
Cf. Unitrin, Inc. v. American Gen. Corp., Del. Supr., 651 A.2d 1361, 1378-79 (1995) (holding that where a board deliberately employed legal strategies designed to frustrate or completely disenfranchise shareholders, this conduct violated Delaware law, but where the board's primary purpose was not to interfere with or impede exercise of the shareholder franchise, Blasius review was inappropriate). Based on Unitrin and Stroud, I distinguish Exponential's alleged breach of § 271 from a good faith breach of the duty of loyalty in Blasius. First of all, in Blasius, the offensive conduct, packing the board, was arguably taken in good faith only because the board misapprehended the law. Secondly, it was designed to disenfranchise the shareholders. Here, there was no such wrongful purpose involved in the sale of the patents.
My first task in evaluating Apple's allegation that Exponential and the Directors breached § 271 is to determine whether Apple pleads facts prima facie establishing that the patent sale required prior shareholder approval. To establish the framework of what type of asset sales fall under § 271, Exponential quotes Signal Companies:
The [ Signal] Court stated that `all or substantially all' of the assets are involved if:
the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation.
Defs.' Op. Br. at 16 (quoting Gimbel v. Signal Cos., Del. Ch., 316 A.2d 599, 606 (1974)).
Exponential argues that under this standard, Apple's pleadings are conclusory. Exponential maintains that Apple fails to credit Exponential with the value of its California Action and that Apple's claim that the sale of the patents struck at the heart of Exponential's business purpose ignores the fact that Apple's breach of contract already irreversibly altered Exponential's purpose. Although Exponential may prevail on these factual arguments at trial, they constitute just that — factual arguments. Arguing that Apple's pleadings are conclusory because the claims fail under the fact scenario portrayed by Exponential misinterprets Apple's pleading burden.
Apple has stated that the $10 million sale of the patents precluded Exponential from continuing in the CPU design business and constituted the sale of Exponential's most valuable asset. Apple's pleadings give notice of this claim and if I adopt its version of the facts at trial, it is within the realm of reasonable outcomes that I would agree that the patent sale should have been approved by the shareholders. For instance, Apple may be able to prove that the future, contingent value of the California Action was negligible and, furthermore, show that despite the drastically changed operating environment within which Exponential decided to sell its portfolio, the patent sale itself constituted a watershed event that fundamentally altered Exponential's business mission from designing CPUs to litigating the California Action. Under that set of facts, Apple might reasonably prevail.
Exponential also seeks dismissal of the patent sale claims because Apple failed to join S3 as a party to this action. First, I find that S3's participation in this litigation is necessary only to the extent that Apple seeks rescission of the sale. If Apple seeks that relief, it must take the appropriate steps to add S3 to this action. I cannot, however, justify dismissing the entire claim at this juncture because of this potential shortcoming.
See Russell v. Morris, Del. Ch., C.A. No. 10009, Chandler, V.C. (Feb. 14, 1990), mem. op. at 15 (holding case "is not dismissed under Rule 19(b) [where joinder is not feasible] upon failure of a plaintiff to join an indispensable party.").
Next, turning for a moment to the summary judgment standard, Exponential argues that its post-transaction ratification of the patent portfolio sale moots Apple's claims. This argument requires me to interpret our decisions on the issue of ratification. Our law divides improper acts by the board into two categories: void and voidable. Void acts, acts that are ultra vires, fraudulent, gifts, or waste, are legal nullities incapable of cure. Voidable acts, acts performed in the interest of the company, but beyond the authority of management, are also (if challenged by a shareholder or other person with standing) cause for legal relief. The difference is that if the shareholders ratify the voidable act after the fact, the ratification cures the defect and relates back to moot all claims. Apple argues that failure to allow a shareholder vote on the sale of the patent portfolio violated the shareholders' statutory § 271 rights and, thus, was a void act that cannot be later cured. Exponential points out that Apple fails to plead any facts showing that Exponential acted in bad faith by not fulfilling its purported § 271 obligations. This leads Exponential to conclude that the patent sale claims, if viable, were mooted by the shareholders' ratification. Exponential cites Michelson v. Duncan as support for this position:
Summary judgment is granted where the movant shows that no material facts are in dispute and the movant is entitled to judgment as a matter of law. Ch. Ct. R. 56. The movant's burden in this instance shall be to establish that ratification moots the claim as a matter of law (the legal standard) and show that the facts uncontrovertibly indicate that the patent sale was ratified by a majority of common and a majority of preferred shareholders (compliance with the standard). See Hurtt v. Goleburn, Del. Supr., 330 A.2d 134, 135 (1974) (interpreting movant's burden under Superior Court's virtually identical Rule 56 and holding that moving defendant in medical malpractice case had to establish standard of care for medical profession (a mixed question of fact and law) and to establish that the facts undisputedly showed defendant's compliance with that standard).
For a discussion of ratification issues, see In re Wheelabrator Tech., Inc. Shareholder Litig., Del. Ch., 663 A.2d 1194 (1995).
See Michelson v. Duncan, Del. Supr., 407 A.2d 211, 218-19 (1979).
It is the law of Delaware, and general corporate law, that a validly accomplished shareholder ratification relates back to cure otherwise unauthorized acts of officers and directors.
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It is only where a claim of gift or waste of assets, fraud, or ultra vires is asserted that a less than unanimous shareholder ratification is not a full defense.
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If shareholders have approved an otherwise voidable act, their approval extinguishes any claim for losses based on prior lack of authority of the directors to undertake such action.
Id. at 219-20.
Despite the seemingly dispositive language in Michelson, our Supreme Court has not uniformly held that post-transaction ratification moots a shareholder claim based on a voidable act. Those instances where the Court allowed a ratified transaction to be disputed in court involved, however, the selfish acts of a majority shareholder, acts that implicated the duty of loyalty. Here, that is not the case. Apple does not allege facts showing that Exponential's management intentionally sold off the patent portfolio to entrench itself or sold the patent to an entity controlled by management. In the light most favorable to Apple, the facts show that Exponential unintentionally, and in good faith, sold the patent portfolio without seeking shareholder approval.
See, e.g., Kahn v. Lynch Comm. Sys., Del. Supr., 638 A.2d 1110 (1994); Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929 (1985) (shifting burden of persuasion under entire fairness to plaintiff to show transaction was unfair where defendants' obtained shareholder ratification of deal).
Our Supreme Court has also held that where a board executes its functions in a grossly negligent manner, that behavior rebuts the business judgment rule and subjects the underlying transaction to entire fairness review. I conclude that Apple has pled facts that sufficiently allege Exponential completely failed to even attempt to comply with its statutory obligation to seek shareholder approval under § 271. If true, this allegation constitutes gross negligence. Therefore, without shareholder ratification, the board's breach of its duty of care would subject this sale to entire fairness review and the possibility of rescission or rescissory damages (putting aside the Directors' § 102(b)(7) defense). Nonetheless, Exponential's conduct, because it was not in bad faith, constitutes a voidable, not a void act.
See Cede Co. v. Technicolor, Inc., Del. Supr., 634 A.2d 345, 371 (1993) ("A breach of either the duty of loyalty or the duty of care rebuts the presumption that the directors have acted in the best interests of the shareholders, and requires the directors to prove that the transaction was entirely fair.").
If a board's uninformed, hasty approval of a merger constitutes gross negligence in breach of its duty of care under 8 Del. C. §§ 141 251(b), it follows that a failure to hold a shareholder vote under § 271 (and § 141) would constitute gross negligence in violation of the board's duty of care under that statute. See Smith v. Van Gorkom:
In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 Del. C. § 251(b), along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement.
Del. Supr., 488 A.2d 858, 873 (1985) (citations omitted).
Accordingly, since Apple has alleged facts that, at the motion to dismiss stage, appear sufficient to rebut the business judgment rule, the question is what effect will shareholder ratification have on the transaction? I understand the language in Michelson to support the proposition that ratification moots a good faith error such as alleged here. Even if the Directors (and Exponential) acted in a grossly negligent fashion by ignoring § 271, subsequent ratification of the patent sale by a majority of both common and preferred shareholders would invoke judicial review under the business judgment rule.
That conclusion seems particularly apt here because the harm alleged by Apple was precisely the opportunity to vote on the patent sale. Assuming § 271 was triggered, but overlooked, the ratification vote itself goes a long way in remedying the harm incurred by the erstwhile disenfranchised shareholders. Thus, I conclude that Exponential's board has already taken the step most appropriate to cure the injury alleged by Apple.
To adopt Apple's argument that the patent sale was void would in effect create a per se rule that a board's violation of § 271 could never be cured. This Court eschews inflexible rules that cannot discriminate good faith acts from disloyal conduct. See Blasius Indus., Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651, 661 (1988) ("In two recent cases dealing with shareholder votes, this court struck down board acts done for the primary purpose of impeding the exercise of stockholder voting power. In doing so, a per se rule was not applied.").
Accordingly, Apple must resort to claims of gift or waste to overcome the presumption of validity that would cloak the ratified patent sale. As to a potential waste or gift claim, Apple admitted in its complaint that the patents were sold at auction for more than $10 million and has not alleged that the transaction constituted gift or waste. Therefore, shareholder ratification would moot counts I, II, and III.
That conclusion is hypothetical, however, because Apple raises a challenge to Exponential's ratification vote. Apple charges that the signers of 3,385,723 of the preferred stock consents voting in favor of ratifying the patent sale neglected to date their consents. 8 Del. C. § 228(c) requires that "[e]very written consent shall bear the date of signature of each stockholder." That condition is imposed in order to facilitate enforcement of § 228(c)'s sixty-day time limit for returning consents (measured from return of the first signed consent to the last). Exponential does not dispute Apple's factual challenge, but argues that there is no possibility that the sixty-day limit was not fulfilled; therefore, Exponential urges that I should not accord Apple's technical dispute any weight. I cannot agree. I make no decision either way as to whether the undated consents are valid, but defer resolution of this issue to a later date. The parties need time to develop a record on this issue and to provide briefs on the legal implications of § 228(c)'s date requirement within the context of ex post shareholder ratification. For the moment, I cannot render summary judgment against counts I, II, and III when the factual basis for the shareholders' ratifying vote is controverted.
That section commands:
Every written consent shall bear the date of signature of each stockholder or member who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section to the corporation, written consents signed by a sufficient number of holders or members to take action are delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.8 Del. C. § 228(c).
Finally, Exponential argues that counts I, II, and III should be dismissed as moot under 8 Del. C. § 102(b)(7). Apple has not alleged any facts that indicate that the Exponential board's failure to seek shareholder approval was anything more than a good faith error. To the extent that counts I, II and III seek monetary damages against the individual Directors, the claims are dismissed.
See Arnold v. Society for Savings Bancorp, Del. Supr., 650 A.2d 1270, 1286-88 (1994) (applying § 102(b)(7) to disclosure claims where plaintiff failed to plead facts implicating duty of loyalty); Green v. Phillips, Del. Ch., C.A. No. 14436, Jacobs, V.C. (June 19, 1996), mem. op. at 14 (dismissing waste claim under § 102(b)(7) because plaintiff failed to plead facts showing board was interested in transaction or otherwise acting in bad faith).
Count III is brought solely against the Directors and is accordingly dismissed.
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Count III fails to state a Blasius claim. Counts I, II, and III are dismissed under § 102(b)(7) as against the individual Directors.B. Business Abandonment Appointment of a Custodian
1. Apple's Claims
Counts IV and V of Apple's complaint ask the Court to appoint a custodian to manage Exponential. Count IV asserts a claim under 8 Del. C. § 226(a)(3) and Count V asserts an identical claim arising from Exponential's bylaws, which track § 226(a)(3). Apple alleges that Exponential's board of directors has abandoned its design and marketing of CPUs and taken steps to wind up those operations. Apple also urges me to find that Exponential's pursuit of the California Action does not constitute a legitimate business activity for the purposes of § 226(a)(3). As to the latter argument, Apple draws an analogy to situations where courts have refused to assert personal jurisdiction over juridical persons whose only business in the state was to appear in litigation. Apple believes that this Court should adopt the same reasoning that pursuing the California Action is not a business, in determining whether or not Exponential's Directors have abandoned its businesses.
See, e.g., Harman v. Stillwell, Colo. App., 944 P.2d 665, 669 (1997) ("The few decisions from other jurisdictions upon the point support the conclusion that the commencement and maintenance of a lawsuit do not constitute transacting business for the purpose of a long-arm or similar jurisdictional statute.").
2. Exponential's Grounds for Dismissal
Exponential seeks to dismiss Apple's claim for failure to plead any facts supporting a crucial element of the claim. Exponential asserts that it may affirmatively defeat a § 226(a)(3) claim by showing either that it is in the process of winding up certain of its operations and paying off debts or in the process of pursuing the California Action. Either way, it argues, Exponential is conducting legitimate business activities that preclude a finding that the Directors have abandoned Exponential.
3. Analysis
As explained below, I dismiss counts IV and V because Apple alleges facts that, under every set of provable circumstances and reasonable inferences therefrom, fundamentally contradict the essential elements of an abandonment claim. The elements of Apple's claim are contained in the language of 8 Del. C. § 226(a)(3) itself, which requires the plaintiff to show "the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets." Former Chancellor Allen noted that the operative words of § 226 are "abandoned its business." He analyzed the phrase in two parts:
Giancarlo v. OG Corp., Del. Ch., C.A. No. 10669, Allen, C. (June 23, 1989), mem. op. at 4-6.
The first part asks, to what do the words "its business" refer?
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Our law, expressly since 1967 ( see Section 102(a)(3)) and implicitly from a much earlier date, has recognized that a corporation may validly be formed in order "to engage in any lawful activity." It would be a mistake and unwarranted to conclude that the legislature intended to insert the concept of a binding, limiting, original intention through the device of Section 226(a)(3) at the very time that it amended Section 102(a)(3).
Accordingly, I conclude that "its business" does not refer to any original intention more narrow than the purposes clause of a corporation's charter. Rather, in my opinion, "its" business refers to any business within the purposes clause of the corporation's charter in which the corporation purports to be engaged.
Thus, it seems to me the dispositive question is not whether the present situation with respect to OG was or was not within the plan of its originators, but whether the corporation is engaging in any business whatsoever presently or has it "abandoned" all business.
Id.
Thus, as construed in OG Corp., business is to be widely construed to include all legitimate activities — investing, manufacturing, providing services, etc. — in which a corporation may engage.
Former Chancellor Allen went on to investigate the second aspect of business abandonment: What constitutes abandonment? He concluded that it meant the directors had ceased to manage the assets of the company and were not engaging in any activities designed to either continue in business or liquidate. What is implied in OG Corp., but frequently overlooked, is that the act of liquidating does not demonstrate that management has abandoned its corporation. It shows that management is engaging in the process of terminating its businesses. A defendant who shows at trial that the corporation is winding up can affirmatively defend against a request for appointment of a custodian. Of course, if the liquidation is taking place in an illegal or wrongful manner, that wrongdoing may disqualify the liquidation as legitimate "business" under the statute, but any wrongful business activity — such as illegal gambling — would run afoul of the corporation's charter as well as 8 Del. C. § 102(a)(3), and presumably would be disqualified as "business" under § 226(a)(3).
Id. at 7-8 ("If the directors cease to manage the assets committed to them, if they abandon the business, they may be said to forfeit their claim to control those assets.").
See Rosan v. Chicago Milwaukee Corp., Del. Ch., C.A. No. 10526, Chandler, V.C. (Feb. 6, 1990), mem. op. at 13 (noting that defendant corporation's charter "authorized it to engage in any "lawful act or activity for which corporations may be organized").
In short, OG Corp. requires a plaintiff making a § 226(a)(3) claim to show that the corporation is engaging in no legitimate business activity. The claim must fail if the defendant directors can demonstrate to the contrary, i.e., show that the business is still active (or passively investing) in one legitimate line of business or is in the process of liquidating. In the context of evaluating a motion to dismiss, I may dismiss a claim if the plaintiff includes in its pleadings facts that incontrovertibly constitute an affirmative defense to a claim.
Even if the plaintiff meets this burden, the corporation has a "reasonable time" to begin liquidating. 8 Del. C. § 226(a)(3).
Wolf v. Assaf, Del. Ch., C.A. No. 15339, Steele, V.C. (June 16, 1998), mem. op. at 8-9 (citing Kansas Reinsur. Co. v. Congressional Mort. Corp. of Texas, 20 F.3d 1362, 1366 (5th Cir. 1987) for the proposition that "when a successful affirmative defense appears on the face of the pleadings, dismissal under Rule 12(b)(6) may be appropriate").
Apple's complaint is flawed in two distinct ways. First, Apple attempts to discredit Exponential's pursuit of the California Action as a legitimate business activity. It makes the novel, but fundamentally inappropriate, analogy to cases involving a court's assertion of personal jurisdiction over somebody whose only "business" in the state has been to pursue a law suit. State courts outside Delaware have held that a juridical person who faithfully appears in court to resolve a dispute has not availed itself of the protections of that jurisdiction and, therefore, is not amenable to personal jurisdiction. I do not quibble with the proposition that due process considerations preclude a court from bootstrapping personal jurisdiction for a second lawsuit onto a litigant's appearance in earlier or ongoing litigation. That rationale, however, is completely inapposite to the issue before me.
See Harman v. Stillwell, Colo. App., 944 P.2d 665, 669 (1997); Ohio Cas. Ins. Co. v. First Nat'l Bank, Okla. Supr., 425 P.2d 934, 938 (1967) (holding that a foreign corporation was not "doing business" when it engaged in litigation in the state in determining the issue of jurisdiction and process in a suit filed against the foreign corporation.).
Indeed, there is no need to draw an answer to this issue from analogy to jurisdictional disputes in sister states. The meaning of business under § 226 has been construed to include any activity permissible under a corporation's charter and 8 Del. C. § 102(a)(3). Pursuit of a legal claim in court is well within the range of acceptable — one may even say, common — activities in which corporations engage. Therefore, by admitting to Exponential's pursuit of the California Action and its execution of litigation support agreements with the two director defendants and its COO, Apple's own pleading contains an affirmative defense to its § 226(a)(3) claim: Exponential is engaging in a legitimate business activity.
Secondly, Apple takes the mistaken tack of showing Exponential's winding up process as proof that Exponential is in need of a custodian. As I stated before, the act of winding up or liquidating is grounds for not appointing a custodian. Apple pleads that Exponential laid off its employees, ceased operations, informed shareholders of the shutdown, and sold its patent portfolio, without pleading any (nonconclusory) facts alleging wrongdoing. Once again, Apple has alleged facts constituting an affirmative defense to § 226(a)(3). Those winding up functions show that Exponential has not failed within a reasonable period to take steps to dissolve, liquidate, or distribute its assets. The fact that Apple objects to Exponential's approach to winding up — in particular, Exponential's decision to pursue the California Action before finally liquidating — is of no import. It takes more than allegations that a business is closing down in a reasonable fashion to state a claim under § 226(a)(3).
As discussed later (§ III.C.3), Apple's references to Exponential's balance sheet and insinuations of wrongful asset transfers are conclusory.
* * *
By admitting that Exponential is winding up certain operations and continues to pursue the California Action, Apple has pled facts that fatally undercut its § 226(a)(3) claim. Accordingly, I dismiss counts IV and V.
C. Litigation Support Agreements
1. Apple's Claims
Apple asserts two claims in count VI. First, it insinuates that the Directors are frivolously expending Exponential's dwindling resources. Second, it alleges that Exponential wasted corporate assets by agreeing to the litigation support agreements.
2. Exponential's Grounds for Dismissal
Exponential points to the balance sheet used by Apple to document Exponential's supposedly dwindling asset base. It argues that the same sheet shows Exponential paid down its outstanding liabilities and increased shareholder equity in the period during which Apple alleges that Exponential's assets dwindled. As to the litigation support agreements, Exponential contends that Apple has failed to demonstrate that the board was incapable of fairly and independently examining Apple's derivative waste claim. Exponential adds that the agreements are so reasonable that no Court could ever find them to constitute waste.
Apple responds to the demand futility argument by insisting that a majority of the board members, namely, Campbell, Shriner, and Taylor, who approved the agreements, were not disinterested. Exponential admits that two directors, Campbell and Shriner, were interested. But Exponential disputes Apple's argument that defendant George S. Taylor, director and former Chief Technical Officer ("Taylor"), was beholden to Campbell as an Exponential cofounder and, therefore, incapable of rendering an independent decision. Apple also offers the allegedly wasteful nature of the litigation support agreements as evidence that the Exponential board was incapable of exercising proper business judgment.
3. Analysis
The rigorous standard for pleading elements of a waste claim contrasts with the liberal approach for evaluating dismissal of a waste claim. A count can be dismissed for failure to state a claim if no set of facts as alleged in the complaint support the relief sought. What this effectively means is that the Court must consider the various factual permutations possible within the framework of the plaintiff's allegations and conclude whether any one conceivable set of facts could possibly merit granting plaintiff relief. If so, the claim cannot be dismissed.
A claim of waste requires a diametrically opposite analysis. It requires the Court to determine whether the corporation has bestowed an asset upon another in exchange for something so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid. This strict standard requires the Court to apply a reasonable person standard and deny a claim of waste wherever a reasonable person might deem the consideration received adequate. When this difficult standard is applied in the liberal context of a motion to dismiss, in order for the complaint to survive the motion, the Court must find that in any of the possible sets of circumstances inferable from the facts alleged under the complaint, no reasonable person could deem the received consideration adequate. Conversely, if in each possible set of factual circumstances inferable from Apple's allegations, I can conclude that a reasonable person would deem the litigation support (and winding up) services received by Exponential as adequate value in exchange for the fees paid to Shriner, Campbell and Dorris, I must dismiss the claim.
See Grobow v. Perot, Del. Supr., 539 A.2d 180, 189 (1988).
See Steiner v. Meyerson, Del. Ch., C.A. No. 13139, Allen, C. (July 18, 1995) ("If under the circumstances any reasonable person might conclude that the deal made sense, then the judicial inquiry ends.").
The facts as alleged by Apple are straightforward and not susceptible to a wide range of possible permutations. I evaluate Count VI assuming that Shriner, Campbell, and Dorris will receive the maximum amount possible under the litigation support agreements, $66,000 per month total. In return, Exponential can expect 502 hours of winding up and litigation support work. Apple makes no credible allegations that this compensation will bankrupt Exponential or that Shriver, Campbell, and Dorris lack the ability or intent to provide their support services. Instead, Apple chooses to pillory Exponential's pursuit of the California Action and to insinuate that the litigation support agreements are extravagant extras donated to Shriver, Campbell, and Dorris in return for nothing. Apple's conclusory rhetoric cannot overcome the factual import of Apple's own allegations. Shriver, Campbell, and Dorris agreed to perform litigation support services and, in Dorris' case, to assist Exponential's operational shutdown. The exact pecuniary value of these services is hard to measure, but 502 hours of service per month falls well within the range of reasonable value to receive in exchange for consulting fees of $66,000. I need not evaluate the merits of the California Action itself to conclude that the lawsuit's existence constitutes a reasonable business purpose for entering into the litigation support agreements, and Exponential's undisputed shutdown merits employ of Dorris' efforts to wind up Exponential's operations. Under the allegations contained in Apple's complaint — ignoring its antagonistic aspersions — there is no factual scenario that would defeat my determination that the litigation support agreements are reasonable in scope and amount. Therefore, Apple's claim fails as a matter of law.
By assuming the largest possible transfer of Exponential funds to Shriner, Campbell, and Dorris, I examine Apple's claim under the set of facts most favorable to the conclusion that the services received in return for that expenditure constitutes waste. If I were to assume either the minimum prepaid salary or any amount in between, I discern no material impact on my analysis here.
As for Apple's generalized assertion that Exponential's assets are dwindling, conclusory remarks about dwindling assets and citations from a balance sheet do not constitute proper pleading of a waste claim. Except for the litigation support agreements, Apple does not document what assets were traded away or what inadequate consideration might have been received. The issue is not the size of the Exponential assets conveyed in contrast to the amount of assets remaining in Exponential, but the size of Exponential assets conveyed in comparison to the value received in exchange. Therefore, this "general waste" claim cannot survive Exponential's motion to dismiss.
Insofar as Apple's evidence of "general waste" is background information to its specific litigation support agreement claim, that background information does not alter my earlier conclusion that the specific claim is deficient as a matter of law.
Finally, I conclude as an additional basis for dismissing count VI that Apple fails to plead facts demonstrating demand futility. To assert a derivative claim, Apple must comply with Chancery Court Rule 23.1 and rebut the presumption of proper business judgment by pleading particularized facts raising "a reasonable doubt that (a) the directors were disinterested and independent, [or] that (b) the challenged action was otherwise the result of a valid exercise of business judgment." Apple pled neither with particularity.
Benerofe v. Cha, Del. Ch., C.A. No. 14614, Chandler, V.C. (Sept. 12, 1996), mem. op. at 13.
Exponential's board was comprised of five members. Exponential concedes that Campbell and Shriner were interested in the litigation support agreements. Apple claimed that a majority of the board was incapable of rendering proper business judgment and tries to substantiate this assertion by alleging that Taylor was not independent. Apple alleges that Taylor was not independent because "Campbell and Taylor founded Exponential together." Apple would have me conclude that this one sentence pleads particularized facts establishing that Taylor did not maintain his independent discretion in approving the litigation support agreements because he was beholden to Campbell as an Exponential cofounder. Apple's allegation is conclusory. The factual predicate, that Taylor and Campbell are cofounders, falls far short of raising a reasonable doubt as to Taylor's disinterestedness. Apple fails to plead facts that even suggest that a third Exponential director was incapable of exercising proper business judgment in approving the agreements.
Compl. ¶ 46(b).
See Benerofe, supra note 48, mem. op. at 17 (finding "the fact that the corporation has one controlling shareholder does not, as a matter of law, establish that its directors are dominated or controlled by that shareholder").
Apple's second attempt at proving demand futility is to argue that the board's approval of the allegedly wasteful agreements itself constituted gross negligence. If so, the board's failure to inform itself adequately of the nature of the agreements and exercise due care in approving them would serve as grounds for excusing Apple's failure to make demand. I have already concluded that the agreements did not constitute waste, but fell well within the parameters of the board's business judgment. Apple makes no particularized allegations of why the agreements were wasteful or how the board grossly neglected its duties in approving them. Therefore, Apple's conclusory attacks on the litigation support agreements cannot rebut the presumption of validity that attaches to those agreements. Apple has failed to allege gross negligence on the part of the Directors sufficient to excuse Apple from making demand.
Id. at 20 (weighing presumption of business judgment rule against particularized facts alleging gross negligence).
Consequently, by failing to allege particularized facts raising a reasonable doubt as to the board's due care or disinterestedness in approving the litigation support agreements, Apple has failed to comply with Rule 23.1 and for this reason, too, I must dismiss count VI.
* * *
Count VI is dismissed for failure to plead facts demonstrating waste and, additionally, for failure to meet the pleading requirements of Chancery Court Rule 23.1.
D. Motion to Stay
1. Exponential's Grounds for Stay
Exponential bases its request for a stay as to counts I and II on the need to consider the outcome of the California Action in determining whether the value of that litigation as a chose in action precluded application of § 271 to the patent sale. Exponential believes that a stay is merited under McWane or forum non conveniens.
McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng'g Co., Del. Supr., 263 A.2d 281 (1970).
2. Apple's Counter-Argument
Apple disputes the applicability of McWane because the California Action and this suit raise substantially different claims. Apple adds that the heavy burden placed on a movant under forum non conveniens precludes issuance of a stay. Apple advances the following reasons for denying the stay: (1) this action raises questions of Delaware law; (2) Exponential's failure to show prejudice in collecting evidence and bringing witnesses to Delaware mitigates against staying this action; (3) the dissimilarities between the California Action and this suit preclude deferring to that court's adjudication; and (4) this Court's expertise and expeditious treatment of § 226 matters compels rapid resolution here. Furthermore, Apple argues that even under McWane, the California Action cannot provide a basis for a stay because the California court is incapable of acting promptly and because the California court cannot grant all the relief requested in this action. Apple adds that a stay would enable the Directors to continue squandering Exponential's assets.
Because I concluded above that Apple has not pled facts showing waste or abandonment of Exponential and its assets, Apple's argument that the Directors are squandering assets is unpersuasive and I do not address it further.
3. Analysis
This Court applies identical elements in evaluating a motion to stay under McWane and under forum non conveniens:
(1) The applicability of Delaware law;
(2) The relative ease of access to proof;
(3) The availability of compulsory process for witnesses;
(4) The pendency or non-pendency of a similar action or actions in another jurisdiction;
(5) The possibility of a view of the premises, if appropriate; and
(6) All other practical considerations which would make the trial easy, expeditious and inexpensive.
What distinguishes these standards is the background presumption against which the elements are applied. Under McWane, this Court evaluates the motion in light of our policy of discouraging forum shopping and preserving the plaintiff's original choice of a non-Delaware forum; if the elements support the movant's request, "discretion should be freely exercised in favor of the stay." Under forum non conveniens, however, the presumption is that the Delaware action will proceed, and "[t]he burden rests with the defendant to prove `the combination and the weight of the factors to be considered balance overwhelmingly in favor of the defendant.'"
McWane, 263 A.2d at 283.
Macklowe v. Planet Hollywood, Inc., Del. Ch., C.A. No. 13689, Steele, V.C. (Oct. 4, 1994), mem. op. at 8-9 (citations omitted).
Despite the different emphasis, McWane and forum non conveniens serve the same purpose: to entertain "considerations of comity and the necessities of an orderly and efficient administration of justice" and to avoid "the wasteful duplication of time, effort, and expense that occurs when judges, lawyers, parties, and witnesses are simultaneously engaged in the adjudication of the same cause of action in two courts." Moreover, both standards invoke the trial court's discretion. Where granted, a motion to stay is not a final decision on the merits, but an interlocutory order. Thus, appellate review of the trial court's decision is limited. The Supreme Court defines its task in this situation as restricted to a determination of whether the trial judge abused his or her discretion. General Foods Corp. v. Cryo-Maid, Inc. stands for the proposition that the trial judge's decision to grant or deny the motion, if supported by a reasonable interpretation of the facts, shall not be disturbed.
McWane, 263 A.2d at 283.
Del. Supr., 198 A.2d 681, 684 (1964) ("Our function is not to substitute our judgment. . . . We can only examine the record to determine if possible whether or not there could be a reasonable difference of view upon the propriety of his act.").
Indeed, Cryo-Maid epitomizes the lenient appellate review of a non-final stay granted under forum non conveniens. The Court noted that the trial judge found that the parties' incorporation in Delaware had been used to assert Delaware jurisdiction over a contract dispute that took place in Illinois and that invoked New York state law. The Cryo-Maid Court found that the Chancellor seemed persuaded that plaintiff's motivation in choosing Delaware as the forum was to harass defendant as part of its strategic jockeying in the matter. The Court noted, on the other hand, that the Delaware action was first filed, a factor traditionally mitigating against a stay, and that the Delaware plaintiff would need to add counterclaims in Illinois to get the relief sought in Chancery. Balancing these factors, the Court held that the decision to stay or not stay resided with the trial judge and even if the Supreme Court disagreed with the result, it would not reverse the trial judge's grant of a stay.
Id. at 682, 684.
Id.
Id. at 684.
Id. at 685 ("The matter is one to be determined as a discretionary act in the light of all facts and circumstances and in the interest of expeditious and economic administration of justice. The Vice Chancellor has decided upon this basis and there is in this record nothing which shows him clearly to have been wrong."). But cf. McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng'g Co., Del. Supr., 263 A.2d 281, 283 (1970) (reversing trial court's refusal to stay later-filed Delaware action as abuse of discretion). McWane expressly affirms the Cryo-Maid Court's holdings, so I will rely on the wide authority vested in me by that decision. Id. at 284.
Exponential now calls upon me to exercise that discretion. I must first decide whether to evaluate Exponential's motion under McWane or forum non conveniens. This threshold question turns on whether or not the out-of-state action is first filed and involves the same or similar parties disputing the same or similar issues. If the out-of-state action is not first filed or it involves significantly different parties or issues, forum non conveniens applies.
In this matter, the only remaining claims are the § 271 patent sale claims in counts I and II. The California Action, although filed before this action and involving substantially the same litigants, is a breach of contract and breach of fiduciary duty action arising from Exponential and Apple's business relationship. Therefore, the nature of the actions is sufficiently disparate to preclude application of the McWane analysis. Exponential must meet the significant burden established by Cryo-Maid.
a. The Applicability of Delaware Law
Apple's remaining claims arise from § 271 and the language in its certificate tracking the statute. Therefore, this dispute centers around questions of Delaware law best decided by this Court. It does not, however, require a summary proceeding, a factor that would emphasize the need to proceed with this matter immediately. For this element to factor in favor of Apple, I must conclude that by granting the stay, I relinquish the opportunity to decide these questions of Delaware law. In this instance, however, the California Action would not resolve those issues. I am reassured that when the stay lifts at the conclusion of that trial, it will be this Court to which the litigants turn for resolution of the § 271 claims and, consequently, accord this factor no weight.b. The Relative Ease of Access to Proof
Exponential argues in favor of a stay because the California judge's award in that action will help this Court determine whether Exponential's chose in action had significant value at the time of the patent sale. I am not persuaded that the ultimate outcome of that trial will change this Court's analysis of the Directors' § 271 duties. To the extent that the value or non-value of Exponential's claim against Apple will affect this Court's evaluation of whether the patents constituted substantially all of the assets of Exponential, that value must be calculated based on what the Board knew at the time of the patent sale. To factor the eventual outcome of the litigation into the propriety of their valuation of the chose in action would effectively require the Directors to look into a crystal ball and predict the future. What triggers § 271 is a sale of substantially all the company's assets. If the chose in action constituted enough value at the time of the sale to preclude application of § 271, that value must be determined as it was perceived at that time.In this sense, however, evidence gathered in the California Action should be useful in resolving this § 271 dispute. (The opposite would not be true.) Exponential and Apple are in the process of establishing an evidentiary record in the California Action documenting and rebutting each other's alleged wrongdoing. This record of alleged wrongdoing will reflect what the parties knew at the time of the patent sale about Apple's alleged breach of contract and fiduciary duty. Relying on not only that evidence, but the California Court's assessment of that evidence's credibility and import will help the parties document what the Board knew about the California Action when the patents were sold. That knowledge in turn will enable me to me assess whether the chose in action's value precluded application of § 271 to the patent sale. Therefore, granting the stay would assist creation of a full record upon which to resolve Apple's § 271 claims. It would also save the litigants the time and effort wasted when simultaneously engaging in discovery for two related matters. A stay will prevent duplicative waste of effort by allowing the litigants here to review the California Action's record before embarking upon further discovery in this matter.
c. The Availability of Compulsory Process for Witnesses
Neither party addressed serious concerns as to this issue in their briefs. I conclude that this element is irrelevant.
d. The Pendency or Non-Pendency of a Similar Action or Actions in Another Jurisdiction
This inquiry is broader ranging than the threshold issue of whether to apply McWane or forum non conveniens. It embraces tactical issues as well as the question whether the two actions will be duplicative. I have already determined that the substantive dispute of the California Action is not the same as the § 271 claims.
I did not conclude, however, that there is no strategic nexus between the two actions. Exponential accuses Apple of pursuing this action to disrupt Exponential's California Action. In particular, it criticizes Apple's request to appoint a custodian as a strategic attempt to topple its litigation opponent's leadership. I did not factor this argument into my evaluation of Exponential's motion to dismiss because ulterior motives are irrelevant to my disposition of the parties' legal rights.
In the course of evaluating the most efficient scheduling of these parties' Delaware dispute, however, I do not think that it is an abuse of discretion to factor in the fortuitously coincidental, if not strategically advantageous, timing of Apple's suit. In doing so, I am not sanctioning Apple for pursuing the Delaware action. I will, however, note that Exponential's efforts vis-à-vis the California Action will be diverted to defending this action, if both proceed at the same time. Therefore, the presence of the earlier-filed California Action, while not deserving of the McWane analysis, does weigh in favor of a stay.
e. The Possibility of a View of the Premises if Appropriate
This element is irrelevant.
f. All Other Practical Considerations Which Would Make the Trial Easy, Expeditious, and Inexpensive
No other considerations have been addressed by the parties.
* * *
Having evaluated each factor, I will balance them to determine whether Exponential has shown that the circumstances overwhelmingly favor granting a stay.
• Although Apple's § 271 claims should be tried in Delaware, this element is of no consequence because the California court will not decide the substantive issues involved in this action and Apple will have its day in a Delaware court.
• Gathering of proof will be facilitated by a stay because conclusion of the California Action will provide a record to assist valuation of that action as it existed at the time of the patent sale;
• Pendency of a similar action in California favors a stay in order to allow the parties to focus on one matter at a time and avoid any fortuitous distractions that might arise from pursuing both actions simultaneously; and
• Elements c, e and f are immaterial.
All of these factors favor granting the stay. The only countervailing prejudice to Apple would be the delay implicit in the stay. I conclude that the facts overwhelmingly support Exponential's motion and I stay counts I and II in accord with "considerations of comity and the necessities of an orderly and efficient administration of justice."
See Dimeling, Schreiber Park v. Packaging Indus. Group, Inc., Del. Ch., C.A. No. 1157-K, Chandler, V.C. (Nov. 15, 1991), mem. op. at 4 ("The doctrine [of forum non conveniens] empowers a Court to decline jurisdiction whenever considerations of convenience, expense and the interests of justice dictate that litigation in the forum selected by the plaintiff would be unduly inconvenient, expensive or otherwise inappropriate.") (citing Monsanto Co. v. Aetna Casualty and Surety Co., Del. Super., 559 A.2d 1301, 1304 (1988)).
McWane, 263 A.2d at 283.
4. Summary
Counts I and II against Exponential are hereby stayed pending judgment in the California Action. I add the proviso that either party may submit a request for reconsideration of this order, if at any time it appears that the California Action is not proceeding towards a timely resolution because of the opposing party's delay, the California court's administrative backlog, or any other legitimate reason (except the requesting party's own intransigence.)
III. CONCLUSION
For the reasons set forth above, I dismiss counts I and II against the individual directors and counts III, IV, V, and VI, in their entirety, and I conditionally stay counts I and II against Exponential.
IT IS SO ORDERED.