ZURN, VICE CHANCELLOR.

Date Submitted: November 9, 2021

Marcus E. Montejo and John G. Day, PRICKETT, JONES & ELLIOT, P.A., Wilmington, Delaware, Attorneys for Plaintiffs Michael Blue, Christian Groh, and Ling Yim.

Matthew D. Stachel, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Audra J. Soloway, Jaren Janghorbani, and Maia Usui, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York, Attorneys for Defendants Dan Fireman, Christopher Akelman, Octavio Boccalandro, Fireman Capital Partners LLC, and Fireman Capital Partners III, L.P.

MEMORANDUM OPINION

ZURN, VICE CHANCELLOR.

In the fall of 2020, the board of a cannabis company worked to finalize its pending merger with a special purpose acquisition company ("SPAC"). Just as the deal was nearly complete, the target company's largest creditor stepped forward and demanded a series of favorable amendments to debt and warrant agreements, of which the creditor was the primary beneficiary. Armed with an irrevocable proxy that controlled 83% of the target's voting power, the creditor threatened to block the pending merger unless the board acceded to its demands. The company's five board members included two creditor partners and one creditor appointee. Two days later, the board approved the creditor's demanded amendments and announced the merger. The amendments diverted approximately $40 million of would-be merger consideration out of the stockholders' pockets and into the creditor's. The plaintiffs, former target stockholders and optionholders, assert claims for breaches of fiduciary duty, tortious interference, and civil conspiracy.

At the motion to dismiss stage, the defendants' primary argument is that the stockholders' claims are derivative, such that plaintiffs' standing was extinguished by the merger. This decision rejects that argument. Under longstanding Delaware Supreme Court precedent, the plaintiffs' fiduciary duty claim is direct because it alleges the merger was unfair due to the improper, material diversion of merger proceeds from the stockholders to the creditor. The defendants also challenge the merits of the stockholders' claims. This decision largely rejects those arguments as well. As to the breach of fiduciary duty claim, I conclude the creditor was the target's controller by virtue of its voting power, and, therefore, owed the target's stockholders a duty of loyalty. The creditor breached that duty by holding the merger hostage to secure its demanded amendments. But I dismiss the optionholders' tortious interference claim because it fails to plead a bona fide business expectancy. The pending motions to dismiss are therefore granted in part and denied in part.

I. BACKGROUND

The Verified Complaint (the "Complaint") in this action asserts putative class action claims relating to the January 2021 merger (the "Merger") between Left Coast Ventures, Inc. ("Left Coast" or the "Company") and TPCO Holding Corp. ("TPCO"). Plaintiffs Michael Blue, Christian Groh, and Ling Yim (together, "Plaintiffs") are former Left Coast stockholders. Their core allegation challenges a side transaction benefitting the Company's controller, which they argue rendered the Merger unfair.

A. Plaintiffs Form Their Business, Spin Off Left Coast, And Secure Financing.

In 2010, Blue and Groh, along with nonparty Brendan Kennedy, formed Privateer Holdings, Inc. ("Privateer"), an investment firm in the cannabis space. As of 2019, Privateer had four operating subsidiaries, including Left Coast. In February 2019, Privateer spun off Left Coast to its stockholders. Left Coast is a leading cannabis operator in California.

Left Coast has two classes of common stock: Class A stock, entitled to one vote per share, and high-vote Class B stock, entitled to ten votes per share. Because of this structure, the Class B stockholders control approximately 83% of the Company's outstanding voting power. The Class B shares were owned by Privateer's founders: Blue, Groh, and Kennedy. The Class A shares were more widely dispersed: many of the Company's employees, including plaintiff Yim (Privateer's Chief Accounting Officer), received Class A stock options in their compensation packages.

After the spinoff, Left Coast began to consider strategic financing options. In 2019 and early 2020, the Company raised approximately $25 million by issuing a series of convertible notes (the "2019 Notes"). The 2019 Notes were set to mature on March 28, 2021. The 2019 Notes would automatically convert into Company stock upon a "Qualified Financing," defined as the sale or issuance of at least $25 million in preferred stock.

Defendant Fireman Capital Partners, LLC ("Fireman Capital") and its affiliate, Fireman Capital Partners III, L.P. ("Fireman Capital III," and together with Fireman Capital, the "Fireman Entities") invested $10 million through 2019 Notes. It appears defendants Bassler Co Corp. ("Bassler") and Crocket Resources S.A. ("Crocket") also loaned the Company money through the 2019 Notes.

B. Left Coast Explores The Merger And Borrows More Money From Fireman Capital.

By the spring of 2020, the Company was actively engaged in talks with a potential buyer, Subversive Capital. Subversive Capital had already raised $575 million through a SPAC. Subversive Capital's affiliated SPAC entity would later become TPCO, the acquirer in the Merger. Subversive Capital planned to use the Merger to combine Left Coast and another cannabis company under the TPCO umbrella as one integrated business. Meanwhile, Subversive Capital was also negotiating a brand strategy agreement with Roc Nation, LLC, and its founder, Shawn C. Carter (professionally known as JAY-Z). Under that agreement, the new entity would become Roc Nation's "Official Cannabis Partner."

The complexity of the transactions and the COVID-19 pandemic delayed the Merger. Left Coast needed additional cash to fund its operations in the meantime. Once again, it turned to Fireman Capital. In July 2020, Fireman Capital offered the Company $10 million in bridge financing (the "July 2020 Financing"). After securing the terms of the July 2020 Financing, Fireman Capital solicited other holders of 2019 Notes to participate. Ultimately, 88% of the 2020 money came from the Fireman Entities, Crocket, and Bassler.

This lifeline would help keep the Company afloat while the Merger was being negotiated, but it had a cost. Fireman Capital required (1) improvements on the 2019 Notes' terms, (2) a new note to secure the new loan, (3) new warrants to purchase Class A shares, (4) additional board representation, and (5) an irrevocable proxy to vote the founders' Class B common stock, which represented 83% of the Company's outstanding voting power. After negotiations, the Company agreed to these terms.

First, the 2019 Notes were amended to favor the lenders, including Fireman Capital. These changes lowered the "Qualified Financing" threshold from $25 million to $7 million, and added additional automatic conversion events, including a SPAC transaction and an IPO. The parties also extended the 2019 Notes' maturity date to July 31, 2021; the 2019 Notes would convert automatically upon maturity. Finally, the valuation cap used to determine the number of shares issuable upon conversion was dropped from $1 billion to $175 million, subject to adjustments.

The Company also issued a new promissory note (the "2020 Note") and warrants (the "2020 Warrants"). The 2020 Note was not convertible; instead, it carried a simple interest rate of 12% per year. The 2020 Warrants gave their holders the right to purchase Class A shares at a $0.01 per share strike price.

Both the 2020 Note and the 2020 Warrants provided their holders with downside protection in the event a "Qualifying Transaction," including a de-SPAC transaction like the Merger, was not completed by November 30, 2020. If a Qualifying Transaction occurred before November 30, the Company owed 150% of the outstanding 2020 Note principle plus interest; if it did not, the 150% would balloon to 200%. The amount of shares the holder could buy under the 2020 Warrants similarly varied based on the timing of a "Qualifying Transaction." If a "Qualifying Transaction" was timely completed, the holder could purchase an amount of shares worth $10 million, multiplied by 150%, divided by the applicable share price. But if a Qualifying Transaction did not occur before November 30, the multiplier was doubled to 300%.

Finally, Fireman Capital gained two important governance levers. The first was additional representation on the Company's five-person board of directors (the "Board"). Fireman Capital appointed three members: its founder, defendant Dan Fireman; a partner, defendant Christopher Akelman; and Bassler's founder and principal Octavio Boccalandro (together, the "Director Defendants"). The other Board members were Brett Cummings, Left Coast's CEO; and Adam Dawson, elected by the Company's founders as Class B shareholders. Second, the founders, executed an irrevocable proxy to give Fireman Capital the power to vote their Class B shares (the "Class B Proxy"). By virtue of the Class B Proxy, Fireman Capital controlled 83% of the Company's voting power.

Plaintiffs allege the purpose of this structure was clear: Fireman Capital funded Left Coast's continued operations so that it could survive until the Merger, was rewarded handsomely, and gained the power to steer the Company through a successful transaction. Left Coast had a powerful incentive to close the Merger by November 30, 2020. If it did not, Fireman Capital would make money anyway, as its stake in the 2020 Note and the 2020 Warrants would become more valuable. And in any case, Fireman Capital had voting control over the Company and thus controlled the outcome.

C. On The Eve Of The Merger, Fireman Capital Demands Favorable Amendments To The 2019 Notes And 2020 Warrants.

By August 2020, the Company and Subversive Capital were negotiating the key terms of the Merger, including Fireman Capital's participation in a private placement to help fund it. Those negotiations were nearing the finish line in October 2020. Around that time, Fireman Capital began to clamor for more consideration. It complained the treatment of the Merger in the 2019 Notes and the 2020 Warrants did not reflect the minimum premium it expected to receive. Just as negotiations on the Merger were winding down, Fireman Capital demanded favorable amendments to the 2019 Notes and the 2020 Warrants (the "Amendments"). Among the Amendments was a substantial reduction in the 2020 Warrants' exercise price: from $0.01 per share to less than $0.0001 per share. The Complaint describes this reduction as one "[a]mong other changes," but does not detail any other Amendments. Fireman Capital continued to push its demanded Amendments while the Board finalized the Merger documents.

On November 22, the Board unanimously approved the Merger documents. But Fireman Capital declared it would not vote its Class B Proxy in favor of the Merger unless its demands to amend the 2019 Notes and the 2020 Warrants were met. Cummings and Dawson, the two Board members not appointed by Fireman Capital, determined the Merger's closing would be compromised unless the Board agreed. On November 24, the Board approved the Amendments; Plaintiffs assert the Board was conflicted and controlled.

Plaintiffs allege that as a result of the Amendments, $40 million in Merger consideration was diverted from the Company's common stockholders to the Defendants. Plaintiffs also plead the Amendments diverted value from the Company's optionholders to Defendants: the Amendments reduced the value received by optionholders in the Merger, and caused many of the Class A options held by Yim and others to be "underwater" and worthless. The Complaint does not detail how these outcomes were effectuated.

Also on November 24, Subversive Capital announced it had entered into definitive transaction agreements to effectuate the Merger. The Merger closed on January 15, 2021.

D. Plaintiffs File This Action.

Plaintiffs filed their Complaint on March 30. The Complaint asserts four counts, all styled as class action claims on behalf of all the Company's former stockholders. Count I claims Fireman Capital "and its affiliates," as controllers, and the Director Defendants breached their fiduciary duties by approving the Amendments. Count II claims Defendants tortiously interfered with the optionholders' expectancies in their options by approving the Amendments and causing those options to become worthless. Count III claims Fireman Capital, Crocket, and Bassler conspired in connection with the breaches of fiduciary duty alleged in Count I. Count IV claims Fireman Capital, Crocket, and Bassler conspired in connection with the tortious interference alleged in Count II.

The Fireman Entities and Director Defendants (together, the "Moving Defendants") filed the pending motions to dismiss (the "Motions") on April 21 and April 27, respectively. Crocket and Bassler have not yet appeared and did not join the Motions. It appears this is because service on them is not yet complete. The Motions argue Plaintiffs' claims are all derivative claims that Plaintiffs lack standing to assert after the Merger. The Motions also argue, in the alternative, that all four counts fail to state claims upon which relief can be granted. The parties briefed the Motions and the Court heard oral argument on November 9.

II. ANALYSIS

The standards governing a motion to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief are well settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible to proof."

Thus, the touchstone "to survive a motion to dismiss is reasonable 'conceivability.'" This standard is "minimal" and "plaintiff-friendly." "Indeed, it may, as a factual matter, ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding, but that is not the test to survive a motion to dismiss."

A. Plaintiffs' Claims Are Direct Under Tooley v. Donaldson, Lufkin & Jenrette, Inc. And Parnes v. Bally Entertainment Corp.

The Motions present an important gating issue: whether Plaintiffs' claims are direct or derivative. The Moving Defendants argue Plaintiffs' claims are derivative so they must be dismissed because the Merger extinguished Plaintiffs' derivative standing. Standing is a threshold question, so I address it first.

"A derivative suit enables a stockholder to bring a suit on behalf of the corporation for harm done to the corporation." By contrast, "a stockholder who is directly injured retains the right to bring an individual action for injuries affecting his or her legal rights as a stockholder." In distinguishing between the two, the Court looks at "the nature of the wrong alleged, not merely at the form of words used in the complaint." "Classification of a particular claim as derivative or direct can be difficult, " and the line "is often a narrow one." "Application of these principles assumes heightened significance in the post-merger context because stockholders typically lose standing to pursue derivative claims when a merger extinguishes their status as stockholders under the continuous ownership rule."Because of this rule, the distinction between direct and derivative claims "is essentially outcome-determinative of any breach of fiduciary duty claims that can be asserted in connection with the merger by the target company stockholders."

So too here: if Plaintiffs' claims are derivative, then the Merger extinguished their standing to sue and I must dismiss them. But in my view, Plaintiffs' claims are direct.

1. Distinguishing Between Direct And Derivative Claims

The Delaware Supreme Court recently reaffirmed Tooley as the operative test for whether a claim is direct or derivative. Under Tooley, that inquiry must turn solely on the following questions:

(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and

(2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?

Plaintiffs invoke Parnes v. Bally Entertainment Corp. to argue that their breach of fiduciary duty claims are direct, rather than derivative, because their attack on the Amendments is at bottom an attack on the Merger and its fairness. Here, like the cases that have gone before, it is "difficult to determine whether a stockholder is challenging the merger itself, or alleged wrongs associated with the merger." And so, like the cases that have gone before, I offer my view of the evolution of Parnes and its progeny.

Delaware law permits a former target stockholder to challenge a merger's fairness or validity through a direct claim, even after that merger extinguished the stockholder's derivative standing. In Cede & Co. v. Technicolor, Inc., our Supreme Court considered a stockholder's standing to bring a direct claim for rescissory damages based on fraud in the merger, where that stockholder had first filed a statutory appraisal action. The Court held the stockholder's original election of an appraisal action did not deprive it of the right to file a direct claim for "fraud in the merger." Kramer v. Western Pacific Industries, decided two months later, explained Cede as properly focused on challenges to a merger's fairness:

As recognized by this Court in [Cede], direct attacks against a given corporate transaction (attacks involving fair dealing or fair price) give complaining shareholders standing to pursue individual actions even after they are cashed-out through the effectuation of a merger. Specifically, this Court stated that "no one would assert that a former owner suing for loss of property through deception or fraud has lost standing to right the wrong that arguably caused the owner to relinquish ownership or possession of the property."

His principal contention for sustaining an individual, as distinguished from a derivative, claim is that the effect of the defendants' acts of waste was to reduce the common shareholders' net distributive share of an otherwise adequate tender offer price paid by [the acquirer] for taking [the target] private.

Our Supreme Court characterized that claim as one of "mismanagement resulting in corporate waste," which, "if proven, represents a direct wrong to the corporation," felt only indirectly by its stockholders. On that basis, Kramer concluded such a claim was derivative and dismissed it because after the merger, the plaintiff lacked standing.

A decade later in Parnes, our Supreme Court preserved direct standing for former target stockholders attacking the fairness of a merger by attacking a side transaction. To state such a direct claim, "a stockholder must challenge the validity of the merger itself, usually by charging the directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair price." Parnes relied on Kramer to distinguish a "derivative claim for mismanagement related to a merger" from a "direct claim for unfairness in the merger terms." The Parnes plaintiff claimed the target company's chairman, who controlled the merger negotiations, insisted on a series of side payments in exchange for his support of any potential merger transaction. He made his demands known to all potential acquirers, potentially driving away superior bids. The Court reasoned the plaintiff adequately alleged that (1) the chairman "breached his fiduciary duty of loyalty by preferring himself over [the target company] and its stockholders," and (2) the other directors breached their duties of loyalty by "acquiescing in [the chairman's] self-interested negotiations and by approving a merger at an unfair price." On that basis, Parnes concluded the plaintiff challenged the fairness of the merger's process and price, and so stated a direct claim. Our Supreme Court recently discussed the difference between Parnes and Kramer:

Although the [Kramer] plaintiff alleged that wrongful transactions associated with the merger reduced the amount paid to the target's stockholders, "it did not allege that the merger price was unfair or that the merger was obtained through unfair dealing." That "such a claim is asserted in the context of a merger does not change its fundamental nature." Thus, in Kramer what the plaintiff failed to plead was a challenge to the merger itself rather than attack the side benefits secured by some merger participants.

In short, the Parnes plaintiff succeeded where the Kramer plaintiff did not because the Parnes claim attacked both the side benefits and the fairness of the merger itself.

I review Parnes and its progeny for guidance in identifying direct attacks on a merger through side transactions, recognizing that "Delaware Courts have

First, the $20 million payment was immaterial in the context of the $8.3 billion merger; even if that payment was wrongfully directed to KKR, its absence did not affect the merger price's fairness. A claim for diverted merger consideration must challenge a material amount to be direct.

Second, the payment to KKR did not come out of stockholders' pockets, but rather increased the acquiror's total acquisition costs. "[I]f plaintiffs fail to allege facts that convince the court that the side transactions rendered the underlying [merger] unfair to the target's stockholders and instead simply allege that the acquiror's cost of acquisition was made higher, the plaintiffs fail to state an individual claim."

Third, consideration-diminishing side payments must be "improper" to be actionable in a direct claim. But distinguishing side payments that "improperly" divert merger proceeds and thus taint the merger's fairness from "proper" diversions of merger proceeds is a strange exercise. Surely every plaintiff would contend that any diversion of merger consideration to an insider is improper. Golaine offered an illustration that bears repeating:

It cannot be that the mere fact that an insider (or the affiliate of an insider) received a payment in connection with the merger in itself provides a sufficient basis for a target stockholder plaintiff to state an individual claim based on the simple syllogism that:

1. the payment was part of the total consideration the acquiror was willing to pay;

2. the target board had a duty to ensure that the payment's worth was spread equally to all the stockholders; and

3. the target board's failure to do so therefore constituted unfair dealing tainting the merger.

This syllogism is nearly identical to the principal argument advanced by the plaintiff in Kramer. . . . The Court emphatically rejected this argument, which was premised in part on the payment of eighteen million dollars of allegedly excessive or unnecessary merger fees and expenses.

Under Parnes and Kramer, the target stockholder plaintiff must, at the very least, allege facts showing that the side payment improperly diverted proceeds that would have, if the defendant directors had acted properly, ended up in the consideration paid to the target stockholders.

Golaine observed that this distinction turns, in large part, on the merits of a plaintiff's underlying breach of fiduciary duty claim: "The analysis of whether such side transactions tainted the fairness of the transaction to the target stockholders becomes in large measure a judgment about whether it was appropriate or not for those side transactions to occur." Thus, "Parnes can be straightforwardly read as stating the following basic proposition: a target company stockholder cannot state a claim for breach of fiduciary duty in the merger context unless he adequately pleads that the merger terms were tainted by unfair dealing."

I read Golaine to offer three ways in which a side transaction must differ from its syllogism in order for an attack on the transaction to constitute a direct attack on the merger's fairness. The side transaction must divert assets stockholders were otherwise going to receive. The side transaction's effect on the merger's price or process must be material, so as to have affected the merger's fairness. And the diversion must be "improper," as gauged under essentially a merits inquiry, turning on whether the side transaction was a product of misconduct like a breach of fiduciary duty. Merely "mentioning a merger in the complaint does not talismanically create a direct action. Instead, there must be a causal link between the breach complained of and the ultimate unfairness of the merger."

Three recent cases applied Golaine's indicia of an attack on merger fairness via a side transaction, searching for a material, improper diversion of merger consideration from target stockholders. In Houseman v. Sagerman and In re Straight Path Communications Inc. Consolidated Stockholder Litigation, the plaintiff successfully stated a direct claim. Brokerage Jamie Goldenberg Komen Rev Tru U/A 06/10/08 Jamie L Komen Trustee for the Benefit of Komen v. Breyer dismissed the plaintiff's claim as derivative.

In Houseman, the challenged side transaction was the target board's amendment of its stock option plan "to treat stock options as common stock upon a change in control, and to vest warrants which would otherwise have lapsed." In doing so, the target's board "divert[ed] to directors over $300,000 (and perhaps significantly more) of the previously-negotiated merger consideration." The board decided to enter into the allegedly self-dealing side transaction after the merger price had been fixed, so "the extracted payments necessarily came at the expense of other [target] stockholders," calling the fairness of the merger consideration into question. Both the underlying warrants and their renegotiation "arose in a context which constituted self-dealing," thus "conferring a benefit on the directors not shared by the stockholders." And the diversion, constituting at least $300,000 in value, was material in the context of a small merger where the target board could not justify spending $250,000 on a fairness opinion. Therefore, the claim was direct.

Years later in Straight Path, this Court considered a claim that the target's controller used his leverage to extract a nonratable benefit in a side transaction. The controller threatened to block the pending merger unless the target agreed to settle indemnification claims against one of his affiliates for pennies on the dollar. If successfully pursued, those indemnification claims would have made up for a penalty of twenty percent of the merger consideration owed to regulators. The controller also bought some of the company's assets for approximately one-tenth of their value, preventing that value from being realized in an arm's-length merger.The Court found the controller "manipulated the sales process" and "improperly diverted merger consideration that otherwise would have gone to the stockholders" to the controller, effectively depriving the company's stockholders of half a billion dollars of merger consideration in a $3.1 billion merger. The Court concluded plaintiffs stated a direct claim. Vice Chancellor Glasscock certified his conclusion for interlocutory appeal, noting the plaintiff's claim challenged the total merger consideration target stockholders received, but not the sufficiency of the merger price itself. Despite this distinction, the Delaware Supreme Court summarily affirmed his decision.

Houseman and Straight Path stand in contrast to this Court's recent decision in Komen. There, the challenged side transaction was the target board's compensation committee's decision to issue "performance awards" and restricted stock units to several insiders, including top executives. The plaintiff alleged that transaction swamped existing stockholders and their right to merger consideration.

The Komen Court concluded the plaintiff's claim "basically boils down to the [Golaine] syllogism," and that it was derivative for want of its impact on the merger's fairness. Its "critical deficiency" was "the lack of any factual allegations suggesting a causal link between the [executives'] receipt of the challenged compensation awards and any unfair dealing in negotiating the terms of the [merger]." Unlike Straight Path (or Parnes), Komen presented no allegation that the executives "refused to negotiate or impeded the negotiation of a transaction unless and/or until they received the challenged stock awards." Though the Komen plaintiff criticized the process leading up to the compensation committee's decision, it did not challenge the merger negotiations or allege that the side transaction impacted those talks.

The Komen plaintiff's claim was also derivative because the awards were immaterial, as in Golaine but in contrast to Straight Path, Parnes, and Houseman.The challenged compensation awards were worth $82.4 million-approximately one-tenth of one percent of the total merger consideration. Concluding that the side transaction did not "support the notion that Defendants tainted the sale process or the negotiations of the [merger] such that they caused anything to be taken off the table that otherwise would have gone to all of [the target's] stockholders," the Komen Court held the plaintiff's claims were derivative.

***

In sum, the rule statement from Parnes remains perhaps the rule's best formulation: a target stockholder retains direct standing after a merger has closed to challenge the fairness or validity of the merger itself. Where a stockholder challenges a merger by attacking a side transaction, the Court remains focused on merger fairness. The Court must distinguish between direct challenges to a merger's fairness and derivative challenges to wrongs merely associated with the merger. Golaine, as applied in Houseman, Straight Path, and Komen, instructs that to be direct, the side transaction must divert merger consideration from stockholders, rather than from the acquirer; the diversion must be "improper," that is, the product of misconduct by the defendants; and the diversion must materially affect the merger's process or price, calling the merger's fairness or validity into question.

2. Count I's Breach Of Fiduciary Duty Claim Is Direct.

With this rule in mind, I consider whether Plaintiffs' breach of fiduciary duty claim is direct or derivative. In my judgment, it is direct.

"[A]lthough not a model of clarity" on all the details, Plaintiffs' allegations challenge the Merger's fairness, following the trail blazed in Golaine as applied in Houseman and Straight Path. Plaintiffs allege the Board's decision to approve the Amendments diverted merger proceeds to a controller in a way that tainted the merger's fairness and materially reduced the merger consideration for Left Coast's other stockholders. The Complaint explains that after Merger negotiations were substantially complete, Fireman Capital threatened to derail the deal and withhold its approval unless the Board agreed to its demanded Amendments. Those threats had teeth: the Class B Proxy gave Fireman Capital enough voting power to block the Merger. And if the Merger did not happen by November 30, the Company would owe Fireman Capital substantially more cash and stock under the 2020 Note and the 2020 Warrants. To close the Merger and enjoy more palatable repayment terms, the Company had to agree to Fireman Capital's demands. The Board gave in, diverting approximately $40 million in Merger consideration to Fireman Capital and the other Defendants. These allegations allege improper diversion of material merger consideration that stockholders would otherwise enjoy, and so, challenge the Merger's fairness and allege a direct claim.

First, the parties do not seriously dispute that Fireman Capital's alleged leveraging of its power to block the Merger to extract a unique benefit, or the Board's accession to those demands, was improper. As alleged, Fireman Capital, the proverbial "800-pound gorilla, " hijacked Merger negotiations and threatened to block the Merger unless the Board approved its favorable Amendments. In other words, Fireman Capital was able to wield its influence to extract a benefit for itself at the expense of Left Coast's stockholders. That Fireman Capital did not actually use its Class B Proxy to block the Merger does not mean its threats to do so are not improper. Straight Path recognized "that a controller's right to refuse to support a transaction does not imply a right to exploit minority stockholders" and that a controller's threats to block a merger unless it received a special benefit are actionable as breaches of fiduciary duty. Plaintiffs also allege a majority of the Board was aligned with Fireman, and that the minority independent directors could not say "no."

This misconduct surrounding the Amendments was intertwined with the Merger: Fireman Capital threatened to withhold its proxy, effectively derailing the deal, unless and until the Company acceded to its demands. These threats are reminiscent of those in Parnes and Straight Path, in which threatening the merger process linked the side transaction with the merger transaction.

Next, the parties do not dispute that the diversion via the Amendments was material. Plaintiffs repeatedly allege the Amendments diverted $40 million in Merger consideration from the stockholders' pockets and into Fireman Capital's.The parties appear to agree the Merger consideration's value was in the range of $120 million to $130 million. Subversive Capital's prospectus offered consistent numbers. A $40 million diversion is material to a transaction of that size. This material diversion stands in stark contrast to the immaterial side transactions in Golaine and Komen, both of which represented less than one percent of the overall merger consideration. "The [P]laintiffs are entitled to an inference that the [Amendments] diverted a material amount of consideration, giving them standing to sue individually."

Finally, the Amendments' timing vis-à-vis the Merger negotiations indicates the diverted consideration would have otherwise gone into stockholders' pockets, calling the Merger's fairness into question. Thus, unlike in Golaine, the Complaint does not "simply allege that the acquiror's cost of acquisition was made higher," but instead conceivably asserts that the Amendments "rendered the underlying [Merger] unfair to [Left Coast's] stockholders." This is so even without a facial challenge to the overall Merger price, as clarified in Straight Path.

The Moving Defendants attempt to avoid these indicia of a direct attack on merger fairness by pointing to irrelevant factual similarities with Komen, and distinctions from Straight Path and Houseman. These efforts are unavailing. First, in Komen, the Court noted that the challenged transaction did not solely benefit the executive recipients, distinguishing it from other Parnes cases where all the side transaction's benefit went to the defendants. In Komen, this fact suggested the challenged compensation changes were innocuous and simply "among those 'countless issues' that legitimately would need 'to be figured out' during a sale process." In an attempt to paint the Amendments as similarly innocuous, the Moving Defendants point out the Amendments benefited all the creditors holding 2019 Notes and 2020 Warrants, not just Fireman Capital. This fact does no work here. While the Amendments benefited all those holders, they overwhelmingly benefited Fireman Capital. It appears the Fireman Entities' interest accounted for approximately 62% of the July 2020 Financing. Most of the other money in the July 2020 Financing came from defendants Bassler and Crocket. This stands in contrast to Komen, where the alleged controller executives received only 26% of the challenged side transaction's benefit.

The Moving Defendants also seize on the Komen complaint's "critical deficiency": the lack of a causal link between the challenged awards and any unfair dealing in the merger itself. The Komen plaintiffs did not challenge the bona fides of the sales process leading up to the merger. The Moving Defendants point out that Plaintiffs also do not challenge the process by which the Company selected and negotiated with Subversive Capital. But this case has the same links to the Merger process Komen noted were absent there but present in Parnes, Straight Path, and Houseman. As in Parnes and Straight Path, Plaintiffs offer "facts to support a reasonable inference that the [controller] refused to negotiate or impeded the negotiation of a transaction unless and/or until they received the challenged [benefits]." And as in Houseman, "the directors engaged in self-dealing to extract additional payments after the merger consideration had been fixed such that the extracted payments necessarily came at the expense of other stockholders."Fireman Capital threatened to derail the Merger at the eleventh hour unless its demands were satisfied. And this threat came after the Board approved the Merger documents and the consideration had already been fixed.

Finally, the Moving Defendants try to distinguish Houseman, noting that in that case, both the original issuance of the warrants and their post-merger amendments arose from self-dealing. The Moving Defendants see less impropriety here, where the original issuances of the 2019 Note and 2020 Warrants were in the ordinary course. Again, this minor factual distinction is irrelevant. Houseman does not stand for the proposition that direct claims may only be stated against repeat or systematic offenders. Houseman focused on the merger-related transaction, noting that it was the second transaction that "conferr[ed] a benefit on the directors not shared by the stockholders." That the self-dealing in Houseman also predated the merger only buttressed the conclusion that the side transaction there was improper.

In sum, Count I satisfies the Parnes exception for a post-merger direct claim by a former target stockholder. Plaintiffs have successfully alleged an improper side transaction intertwined with the Merger rendered the Merger itself unfair by diverting material consideration that would have otherwise gone to Left Coast's stockholders. Because that claim calls the Merger's fairness into question, it is direct.

3. Count II's Tortious Interference Claim Is Direct.

Evaluating the nature of Plaintiffs' tortious interference claim is a bit easier. Though the Moving Defendants sought to dismiss the entire Complaint as deficient under Parnes, Plaintiffs' tortious interference claim is not implicated by that line of cases. Rather, it calls for a straightforward application of Tooley. To repeat, the direct/derivative inquiry under Tooley turns solely on the following two questions:

(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and

(2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?

The harm complained of in Count II was suffered by the Plaintiffs as optionholders. To show an individual harm, a plaintiff "must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation. In other words, the stockholder's claimed direct injury must be independent of any alleged injury to the corporation." Here, Plaintiffs' claim for tortious interference implicates an individual harm, separate from any injury to the Company itself. In fact, it is separate from any injury they would suffer as stockholders. The gravamen of Count II is that Defendants' malfeasance rendered options held by Yim and other optionholders worthless.Defendants' actions may have harmed the Company as well. But the opportunity to profit from the options belonged to the optionholders, not the Company. Interfering with that opportunity thus harmed the optionholders independently of any injury to the Company. Similarly, the benefit of any recovery from Count II would run to the optionholders as individuals. Plaintiffs seek an award of money damages to remedy the alleged tortious interference. "They, rather than the Company, would receive the benefit of that recovery." Thus, Plaintiffs' tortious interference claim in Count II states a direct, rather than derivative, claim.

4. The Conspiracy Claims In Counts III And IV Are Direct.

Because Counts I and II are direct, Plaintiffs' civil conspiracy claims in Count III and Count IV are also direct. "Civil conspiracy is not an independent cause of action; it must be predicated on an underlying wrong." Here, the wrongs underlying the conspiracy claims in Counts III and IV are direct. Count III alleges Fireman Capital, Crocket, and Bassler conspired to commit the breaches of fiduciary duty complained of in Count I. Because our law casts those breaches as causing a direct harm to the Plaintiffs, a claim that other defendants participated in a conspiracy to commit them is also direct. Similarly, Count IV alleges a civil conspiracy to commit the tortious interference alleged in Count II. Since the underlying harm there was to optionholders, not the Company, it follows that a conspiracy to commit that harm should also be treated as a direct claim. That Plaintiffs added additional defendants as co-conspirators does not transform an otherwise direct claim into a derivative claim.

B. Plaintiffs Pled Fireman Capital Is A Controller.

Having concluded the Complaint pleads direct claims, I move next to its merits. Count I alleges that "each of the Defendants" owed fiduciary duties to the Company's common stockholders: Plaintiffs contend Fireman Capital "and its affiliates" were the Company's controllers, owing fiduciary duties. The Moving Defendants counter this claim by arguing both that Fireman Capital was not a controller and that the Fireman Entities, Crocket, and Bassler did not combine to form a control group. Plaintiffs' answering brief did not pursue a control group theory and instead, solely argued Fireman Capital was a controller. I consider only whether Plaintiffs pled that Fireman Capital, standing alone, is a controller against whom a breach of fiduciary duty claim will lie. They have.

"Delaware law imposes fiduciary duties on those who effectively control a corporation." The premise for contending that a controller owes fiduciary duties "is that the controller exerts its will over the enterprise in the manner of the board itself." The controller analysis "must take into account whether the stockholder, as a practical matter, possesses a combination of stock voting power and managerial authority that enables him to control the corporation, if he so wishes." This exercise regards substance over form; it does not matter whether control is exercised directly or indirectly. "The question whether a shareholder is a controlling one is highly contextualized and is difficult to resolve based solely on the complaint.""[T]here is no magic formula to find control; rather, it is a highly fact specific inquiry."

"One method of pleading control sufficient to impose fiduciary duties is to allege that a defendant has the ability to exercise a majority of the corporation's voting power." Delaware law is well-settled that a stockholder who can exercise more than 50% of a company's voting power is a controller. A majority stockholder's control flows principally from its voting power, which translates into the power to "alter materially the nature of the corporation and the public stockholders' interests."

Plaintiffs argue Fireman Capital is a controller because the Class B Proxy allows it to exercise 83% of the Company's outstanding voting power. The Moving Defendants concede that if Fireman Capital owned the stock associated with the Class B Proxy, it would be a controlling stockholder. The Moving Defendants try to cast Fireman Capital more as a creditor than as a stockholder. They cite Hamilton Partners, L.P. v. Highland Capital Management, L.P. for the proposition that "[i]n contrast to a controlling stockholder, a corporation's creditor- even one that owns a majority of the corporation's debt-does not owe fiduciary duties to stockholders." But Fireman Capital holds both debt and the Class B Proxy. The fact that it secured that voting power via its creditor-debtor relationship with the Company is inconsequential. Fireman Capital has control because it can vote most of the Company's stock, not because it holds most of the Company's debt.

The Moving Defendants also contend Fireman Capital cannot be a controller because it is not a stockholder. As an initial matter, Plaintiffs point to two allegations in the Complaint that describe Fireman Capital as the Company's "controlling stockholder." This allegation is plainly conclusory as to the "controlling" description, and Plaintiffs could have pled facts supporting Fireman Capital's status as a stockholder. But at bottom, I take Plaintiffs' allegation that Fireman Capital is a stockholder as true for purposes of this opinion.

And whether Fireman Capital owns any or all of the stock it can vote is of no moment. It is true that stock ownership is the traditional vehicle through which outsiders gain voting power. But holding stock is not a prerequisite to exercising voting control that carries the weight of fiduciary duties. The United States Supreme Court has recognized that a nonstockholder which exercises control over a corporation through a subsidiary that controls the majority of the corporation's voting power is itself a controller. Fireman Capital's Class B Proxy gives it the "ability to exercise a majority of the corporation's voting power." Based on that fact alone, Fireman Capital is a controller. To hold otherwise would elevate form over substance. And so, Plaintiffs have pled Fireman Capital is a controller owing fiduciary duties alongside the Director Defendants.

The next step is to consider whether Plaintiffs have pled the Company's fiduciaries breached their duties. The Moving Defendants have not meaningfully disputed that they have. "A controlling stockholder owes fiduciary duties to the corporation and its minority stockholders, and it is prohibited from exercising corporate power (either formally as directors or officers or informally through control over officers and directors) so as to advantage itself while disadvantaging the corporation." "The purpose of controlling stockholder liability is to make sure that controlling stockholders do not use their control to reap improper gains through unfair self dealing or other disloyal acts." Plaintiffs have pled breaches in the Director Defendants' decision to approve the Amendments and in Fireman Capital's role in causing the Amendments to be approved, as I explained above in finding these actions to be improper for purposes of Parnes.

Fireman Capital's procurement of the Amendments triggers entire fairness review. The business judgment rule's protection is rebutted when a controller engages in a conflicted transaction.

Conflicted transactions include those in which the controller stands on both sides of the deal (for example, when a parent acquires its subsidiary), as well as those in which the controller stands on only one side of the deal but competes with the common stockholders for consideration. In either circumstance, entire fairness review will apply ab initio.

This Court has identified three examples of conflicted transactions where the controller competes with common stockholders for consideration:

(1) where the controller receives greater monetary consideration for its shares than the minority stockholders; (2) where the controller takes a different form of consideration than the minority stockholders; and (3) where the controller gets a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders.

Here, as in Straight Path, Fireman Capital competed with Left Coast's common stockholders by extracting a different benefit (the Amendments) out of the Merger consideration. As in Straight Path, entire fairness applies. Whether entire fairness should apply to the Merger or only the Amendments is not entirely clear to me from our existing case law. The answer to this question may inform the scope of discovery. In order to begin as we mean to go on, I ask the parties to confer on a stipulated supplemental briefing schedule to address the scope of Fireman Capital's burden under entire fairness. The Motions are denied with respect to Count I.

C. Count II Fails To State A Claim For Tortious Interference.

In Count II, Plaintiffs allege all Defendants tortiously interfered with the Class A optionholders' "reasonable probability of receiving positive value for their options from the Company." The Complaint casts this claim as simply "tortious interference"; briefing revealed Count II asserts tortious interference with a prospective economic relationship. The parties agree that "to state a claim for tortious interference with a prospective business opportunity, a plaintiff must allege: 1) the reasonable probability of a business opportunity; 2) the intentional interference by defendant with that opportunity; 3) proximate causation; and 4) damages." These elements must be considered "in light of a defendant's privilege to compete or protect his business interests in a fair and lawful manner." Among other arguments, the Moving Defendants argue Plaintiffs have not established the first element, the reasonable probability of a business opportunity. I agree.

In order to adequately plead the first element, a claimant must allege "a bona fide expectancy." This element is sometimes framed as requiring "a plaintiff [to] identify a specific party who was prepared to enter into a business relationship but was dissuaded from doing so by the defendant." For a business opportunity to be "reasonably probable," it "must be something more than a mere hope or the innate optimism of the salesman or a mere perception of a prospective business relationship." The claim will be dismissed for failure to establish a reasonable probability of a business opportunity if the opportunity is too speculative and a plaintiff "cannot rely on generalized allegations of harm." The probability of a business opportunity "must be assessed at the time of the alleged interference."

Plaintiffs' identified business opportunity is their hoped-for upside on their option contracts. The Moving Defendants argue that because options are contracts, Plaintiffs' claim sounds in tortious interference with a contract, which the Moving Defendants argue Plainitffs cannot successfully plead. Plaintiffs argue their expectancy exists just beyond the option contract: Count II does not claim the Amendments breached their contracts' terms, but instead claims the Amendments frustrated those contracts' purposes by depriving optionholders of value.

Even if one can hold an actionable expectancy over and above one's contractual expectations, Plaintiffs have not sufficiently pled an actionable expectancy. Plaintiffs rely exclusively on the conclusory allegation that they had a "reasonable probability of receiving positive value for their options from the Company." This bare statement is insufficient to establish a bona fide expectancy. Plaintiffs plead no facts to quantify that expectancy, to support its existence, or to explain why it was reasonable to hold it. Rather, it appears their expectancy is based on a "mere hope" that their options would be in the money. Options, like other derivative securities, inherently involve risk. Plaintiffs' speculation or hope that they picked the right side of their bet is not, standing alone, sufficient to establish a reasonable probability of a business relationship. The Motions are granted with respect to Count II.

D. The Motions Do Not Establish A Basis To Dismiss Count III.

Count III asserts that Fireman Capital, Crocket, and Bassler conspired to commit the breaches of fiduciary duty underlying Count I. Plaintiffs must plead three elements to state a claim for civil conspiracy: "(1) a confederation or combination of two or more persons; (2) an unlawful act done in furtherance of the conspiracy; and (3) actual damage." The Moving Defendants seek to dismiss Count III because it fails to allege knowing participation by Fireman Capital.While knowing participation is an element of the closely related tort of aiding and abetting, it is not an element of civil conspiracy. Reading the Motions charitably, I take the Moving Defendants to argue that Fireman Capital did not take an unlawful act in furtherance of the conspiracy. For the reasons outlined in my discussion of Count I, I disagree. The Moving Defendants offer no other basis to dismiss Count III. The Motions are denied with respect to Count III.

E. Count IV Fails To State A Claim For Civil Conspiracy.

Count IV asserts that Fireman Capital, Crocket, and Bassler conspired to commit the tortious interference underlying Count II. Plaintiffs cannot establish such a claim. The second element makes clear that "[c]ivil conspiracy is not an independent cause of action; it must be predicated on an underlying wrong."Lacking a well-pled underlying claim for tortious interference, Count IV cannot state a claim. The Motions are granted with respect to Count IV.

III. CONCLUSION

For the foregoing reasons, the Motions are GRANTED in part and DENIED in part. The Motions are GRANTED with respect to Counts II and IV. The Motions are DENIED with respect to Counts I and III. The parties shall submit a stipulated implementing order within twenty days of this decision. They shall also submit a stipulated briefing schedule on the scope of Fireman Capital's entire fairness burden.