Summary
rejecting a fiduciary duty challenge to a merger effected pursuant to a "Buyout Option" negotiated by a preferred stockholder at the time of its investment
Summary of this case from SV Inv. Partners v. ThoughtworksOpinion
C.A. No. 3438-VCS.
Date Submitted: November 3, 2008.
Date Decided: December 10, 2008.
John G. Harris, Esquire, RILEY RIPER HOLLIN COLAGRECO, Wilmington, Delaware, Attorney for Plaintiffs.
Jessica Zeldin, Esquire, ROSENTHAL, MONHAIT GODDESS, P.A., Wilmington, Delaware; Karna A. Berg, Esquire, HALLELAND LEWIS NILAN JOHNSON, P.A., Minneapolis, Minnesota, Attorneys for Defendants.
MEMORANDUM OPINION
I. Introduction
This case was brought in 2008 by plaintiffs who are, in reality, upset about events that transpired in 2003. In 2003, Altiva Corporation was, according to the plaintiffs themselves, struggling for survival. That year, Altiva secured a substantial capital infusion from a third party, Exactech, Inc. As part of the consideration for that capital infusion, Exactech received an option to purchase all outstanding Altiva securities at any time during a three-year period and to dictate the form that transaction took (the "Buyout Option"). The buyout price was to be determined using a contractual formula valuing Altiva based on the trailing twelve-month revenues of both Altiva and Exactech, but Altiva did bargain for a contractual floor requiring Exactech to pay no less than $25 million, minus certain liabilities, regardless of whether the formula generated a lower value.
Exactech exercised the Buyout Option in December 2007. The contractual formula did not generate a value for Altiva higher than the contractual floor of $25 million. Consistent with its contractual obligations under the Buyout Option, Altiva's board of directors executed the "Merger Agreement" under which Exactech would purchase Altiva for total consideration of $15.4 million (the "Purchase Price"), which was based on the $25 million minimum valuation of Altiva. The Purchase Price was distributed in accordance with Altiva's certificate of incorporation. Because $15.4 million was less than the total liquidation preference amounts of the outstanding preferred stock, most of the preferred stockholders received only a fraction of their preference amounts, and the plaintiffs, as common stockholders, received no payment from the Merger. The plaintiffs then initiated this action arguing, in essence, that the defendants breached their fiduciary duties by not negotiating for a higher buyout price at the time of the Merger.
In this opinion, I grant the defendants' motion to dismiss the Verified Amended Complaint (the "Complaint"). In their papers, the plaintiffs disclaim any attempt to contest the Altiva board's decision to grant Exactech the Buyout Option in 2003, conceding that any attempt to do so would be time-barred. Instead, the plaintiffs seek to condemn the Altiva board for causing Altiva to honor its contractual obligations in 2007 by assenting to the contractually required Merger.
But, the plaintiffs have failed to plead any facts supporting a reasonable inference that the Altiva board had the contractual flexibility to secure a higher price than was paid in the Merger. Instead, the plaintiffs try to ignore the existence of the Buyout Option by decrying the failure of the Altiva board to negotiate for a higher price in a situation when Altiva was contractually obligated to accept $25 million. Given the plaintiffs' failure to mount a timely attack on the Buyout Option itself, they cannot state a breach of fiduciary duty claim by arguing that the Altiva board should have caused the corporation to commit a breach of contract.
Moreover, the plaintiffs' argument that the Altiva board was conflicted is not supported by pled facts. A majority of the Altiva board members were unaffiliated with Exatech and had a financial interest, as preferred stockholders who only received 37.5% of their liquidation preference in the Merger, to get the highest price. But, those directors were constrained by the Buyout Option Altiva had granted Exatech when Altiva was in financial peril in 2003. Given that a majority of the Altiva board was independent and that the Merger resulted from what the plaintiffs admit was the implementation of contractually determined terms, the plaintiffs fail to state a claim upon which relief can be granted. The weakness of the plaintiffs' position is further underscored by their admission that even if the contractual formula had generated a value for Altiva of $50 million, that price would likely have not generated any payout for the common stockholders.
II. Factual Background
The facts are taken, drawing all reasonable inferences in favor of the plaintiffs, from the Complaint and the associated documents that are properly before this court on a Rule 12(b)(6) motion. These documents include: 1) the Securities Purchase and Stockholder Agreements, which were attached to the Complaint, Ct. Ch. R. 10(c); 2) the Merger Agreement and its accompanying press release, which were attached to the plaintiffs' answering brief and the inclusion of which defendants explicitly endorse, Defs.' Rep. Br. at 8; and 3) the Restated Certificate of Incorporation and Notice of Appraisal Rights, which were incorporated by reference in the Complaint, Compl. ¶¶ 35, 38, and are integral to the claims that the Merger was unfair. See Vanderbilt Income Growth Assoc's v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996) (holding that a document outside the complaint will not convert a motion to dismiss to one for summary judgment where "the document is integral to a plaintiff's claim and incorporated into the complaint").
The plaintiffs are the founders of Vertebral Systems and former minority shareholders of Altiva. The plaintiffs' relationship with Altiva began in August 2003, when Vertebral sold certain spinal implant assets to Altiva for $350,000 and a 3.5% ownership interest in the form of common stock in Altiva. At the time, Altiva was a dental implant company "on the brink of financial ruin." According to the plaintiffs, the Vertebral purchase was part of a strategic plan by Altiva to move into the more lucrative spinal implant market. The rest of the plan involved finding an investor to provide a much-needed cash infusion, which Altiva found in Exactech, which is not a party to this action.
Compl. ¶ 25.
The plaintiffs argue that later events were unfair to them because the Verterbral assets were, according to them, the only reason Altiva was able to find an investor like Exactech, meaning it was the fruits of the plaintiffs' labors that saved Altiva. See Compl. ¶ 25. But, it is worth noting that Vertebral took the bulk of its consideration in cash of only $350,000, because 3.5% of the common (not even preferred) stock of what the plaintiffs themselves contend was an insolvent or nearly insolvent company cannot be deemed to have been of great value. This suggests Vertebral's own technology was of limited market appeal and value.
In October 2003, Altiva and Exactech executed the "Securities Purchase Agreement," under which Exactech invested $1 million in exchange for Series C Altiva Preferred Stock and agreed to provide Altiva with loans of up to $5 million that were convertible to Altiva Series C Preferred Stock. At the same time, Altiva, Exactech, and certain Altiva stockholders executed the "Stockholder Agreement" which, among other things, granted the Buyout Option, under which Exactech could purchase all of Altiva's outstanding securities at any time between October 2005 and October 2008. The choice of transactional form for the buyout was delegated to the "sole discretion" of Exactech. The Stockholder Agreement also laid out a formula for calculating the Buyout Option purchase price as follows:
Compl. Ex. 1 ("Stockholder Agreement") § 3.6.
Section 3.3 Calculation of Purchase Price. The Purchase Price shall equal eighty percent (80%) of the sum of (a) the Altiva Valuation (provided that in no event shall the Altiva Valuation be less than $25 million), less (b) the amount of all Indebtedness of the Company outstanding at the time of calculation thereof which, by its terms, is not convertible into shares of Common Stock plus (c) an amount equal to all cash and Cash Equivalents held by the Company as of the time of such calculation less (d) the amount of all accounts payable outstanding at the time of calculation thereof. . . .
Section 3.4 Definitions. For purposes of this Article 3, the following terms shall have the following respective meanings:
(a) "Altiva Valuation" means an amount equal to the Buyout Multiple multiplied by the Altiva Trailing Twelve Months Revenue as of the date the Purchase Price is calculated (the "Calculation Date"), provided, in no event shall the Altiva Valuation be less than $25 million. . . .
(c) "Buyout Multiple" means a multiple that (i) to the extent Exactech Multiple calculated on the Calculation Date is greater than or equal to 2.00x (the "Lower Multiple Threshold") but less than or equal to 3.00x (the "Upper Multiple Threshold"), equals the Exactech Multiple, (ii) to the extent the Exactech Multiple calculated on the Calculation Date is less than the Lower Multiple Threshold, equals the Lower Multiple Threshold less seventy-five percent (75%) of the difference between the Lower Multiple Threshold and the Exactech Multiple and (iii) to the extent the Exactech Multiple calculated on the Calculation Date is greater than the Upper Multiple Threshold, equals the Upper Multiple Threshold plus seventy-five percent (75%) of the difference between the Exactech Multiple and the Upper Multiple Threshold. Notwithstanding anything stated herein to the contrary, in no event shall the Buyout Multiple be greater than 4.00x or less than 1.50x. . . .
(f) "Exactech Multiple" means a multiple calculated by dividing the Exactech Average Stock Price by the Exactech Trailing Twelve Months Revenue Per Share.
In summary, under the "Contract Price Formula," the Purchase Price would be the value of Altiva, calculated using an earnings multiple determined by Exactech's own earnings multiple, net of certain assets and liabilities. The only variables needed to calculate the Purchase Price at any time were the twelve-month trailing revenues of each company, plus Altiva's debt, cash, and accounts payable.
As part of the execution of the Securities Purchase and Stockholder Agreements, Altiva was required to restate its certificate of incorporation, and it sought the written consent of its stockholders to do so. Plaintiff Charles Hokanson signed the written consent on behalf of the Vertebral stockholders. The resulting "Restated Certificate of Incorporation" describes the liquidation preferences of the various classes of stock. Specifically, the order of priority in a liquidation was first the Series C Preferred Stock, then the Series A and Series B Preferred Stock (collectively with Series C, the "Preferred Stock"), and, finally, the common stock.
Compl. ¶ 34.
Compl. ¶ 35.
In late 2007, Exactech announced it would exercise the Buyout Option, and in December 2007, the Altiva board entered the Merger Agreement with Exactech to effectuate the buyout. The five-member board was comprised of Altiva's CEO, Craig Corrance; Exactech's CEO, William Petty; and three outside directors elected by other Altiva investors, Buzz Benson, Marc Galletti, and Trevor Moody. The Agreement was then approved by written consent of Altiva's preferred stockholders, who represented a majority of the shares entitled to vote on the Merger.
The Purchase Price was just over $15.4 million, which was not enough to pay all of the Preferred Stock liquidation preference amounts outstanding. As a result, and in accordance with the distribution schedule in the Restated Certificate of Incorporation, the Series C holders were paid in full, the Series A and Series B holders received approximately 37.5% of their preference amounts, which was the stock issuance price, and the plaintiffs, as common stockholders, received nothing when the Merger was consummated at the beginning of 2008. The Purchase Price was based on the minimum Altiva valuation of $25 million, which represented a multiple of less than 2x. The plaintiffs contend that companies similar to Altiva were selling at 4x multiples in the market for corporate control at that time.
Compl. ¶ 41.
Importantly, the plaintiffs do not contend that the Contract Price Formula generated a valuation for Altiva higher than $25 million, nor do they contend that the Altiva common stockholders would have received any value from the Merger if a 4x multiple had been used. That is, the plaintiffs concede that a merger at $50 million or even higher would likely have gone only to the benefit of the Series A and B Preferred Stockholders, who had only received 37.5% of their liquidation preference in the Merger at $25 million, and not the common stockholders.
See Tr. at 26.
III. The Complaint
The plaintiffs filed their original complaint on January 2, 2008, before the Merger was completed, against Altiva, all five of Altiva's directors at the time of the Merger, and the Chief Financial Officer of Altiva. They amended that complaint in April 2008 to provide additional facts. The Complaint in its current form is comprised of three counts: Count I alleges that the defendants breached their duty of loyalty; Count II alleges that the defendants breached their duty of care; and Count III seeks a declaratory judgment that the Merger was unfair.The factual allegations in the Complaint implicate two time periods: 2003, when the Securities Purchase and Stockholder Agreements were entered into, and 2007, when Exactech announced it was exercising its Buyout Option and the Merger Agreement was executed. In their opening brief, the defendants argued that the three-year statute of limitations for fiduciary actions barred any claim based on board actions taken in 2003. In response, the plaintiffs stated that "the fiduciary violations which form the basis of all Plaintiffs' claims relate solely to the Directors' conduct at the time of the Merger in 2007." At oral argument, the plaintiffs reiterated that they were basing their claims entirely on the defendants' actions in 2007 and 2008 and were not challenging the Altiva board's original decision to grant Exatech the Buyout Option.
Defs.' Op. Br. at 26-27; see 10 Del. C. § 8106; Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004).
Pls.' Ans. Br. at 19.
Tr. at 23-24.
For that reason, I do not dilate on the Complaint's allegations regarding events in 2003. Rather, I focus upon the Complaint's allegations regarding the defendants' conduct in 2007, and what the defendants did and did not do when Exatech exercised the Buyout Option.
The affected allegations include the following:
¶ 52: "Defendants entered into a Securities Purchase Agreement wherein they failed to reasonably set forth a mechanism to accurately account Altiva's fair market value."
¶ 53: "Defendants failed to engage an independent firm to calculate Altiva's value prior to entering into the Securities Purchase Agreement, and thus, they failed to adequately inform themselves on this vital matter."
¶ 56: "Defendants failed to notify the shareholders of Altiva regarding the Securities Purchase Agreement, the Stockholders' Agreement or the Merger Agreement with Exactech."
In any case, all of these paragraphs are from Count II, the duty of care count, which I dismiss in its entirety due to the § 102(b)(7) exculpatory clause in the Altiva charter, as described in the next section.
In this regard, the Complaint itself has an artificial feel, because it seeks to ignore the reality created by the Buyout Option. The Complaint reads as if the Altiva board was free to deal with Exatech or not and could walk away if Exatech did not offer a price the Altiva board found attractive. Thus, the Complaint reads as if this were a garden variety merger case, alleging the Altiva board did not create a special committee of independent directors, engage a financial advisor to render an opinion as to the fairness of the Purchase Price, or preclude Petty, Exactech's CEO, from voting on the Merger as an Altiva director.
The Complaint also levels conclusory allegations that defendants Moody, Benson, and Galletti, the three outside directors who comprised a majority of the Altiva board, could not act independently of Exatech. In addition, the plaintiffs, in their brief, allege that Exatech, which owned 17% of the stock of Altiva before the Merger and had only one representative, Petty, on the Altiva board, was Altiva's controlling stockholder, based on the argument that simply because it owned more Altiva stock than any other party, it was therefore Altiva's controlling stockholder.
I will now address the defendants' argument that the Complaint fails to state a claim.
IV. Legal Analysis
The standard of review is familiar. I must dismiss the Complaint if, taking all well-pled facts as true and making all reasonable inferences in favor of the plaintiffs, I conclude that the facts fail to support a valid cause of action. In applying these principles, I need not accept as true conclusory assertions unsupported by specific factual allegations.
E.g., Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 580-81 (Del.Ch. 2006).
E.g., Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988).
In this case, the plaintiffs must allege specific facts supporting a rational inference that the defendant Altiva board members commited a non-exculpated breach of fiduciary duty. What the plaintiffs ignore here is that the Altiva board had very little, if any, discretion regarding the Merger in light of Altiva's contractual obligations under the Buyout Option.
Also, as a threshold matter, I take notice of the fact that Altiva's Restated Certificate of Incorporation contains a § 102(b)(7) exculpatory provision. Therefore, a fiduciary duty claim in this case premised on a duty of care violation cannot be sustained. Because Count II states only duty of care claims, it is dismissed.
Zeldin Aff. Ex. 2 ("Restated Certificate of Incorporation") art. 7.
See In re Lear Corp. S'holder Litig., 2008 WL 4053221, at *7 (Del.Ch. Sept. 2, 2008); McMillan v. Intercargo Corp., 768 A.2d 492, 501-02 (Del.Ch. 2000).
A. The Plaintiffs Cannot Ignore The Buyout Option
The plaintiffs assert that the defendants breached their duty of loyalty by "engaging in unfair processes and entering into the Merger Agreement without determining the fair-market value of Altiva." Moreover, the plaintiffs contend, the $25 million valuation was "merely a floor," and the directors were "duty-bound" to seek a higher price. These allegations fail to consider in a realistic way the extent to which the Buyout Option controlled this transaction.
Compl. ¶ 48.
Compl. ¶ 41.
The Merger Agreement was meant to effectuate an option held by Exactech, not to negotiate a new change of control transaction. The change of control occurred in 2003, when the Option was granted. The material decisions about the transaction, including the price and transaction form, were made then and cannot be challenged now. Essentially, all that was left to do in 2007 when Exactech decided to exercise its Buyout Option was apply the Contract Price Formula, sign the documents necessary to effect Exactech's chosen transaction form, and distribute the purchase money to Altiva's stockholders. Critically, the plaintiffs do not assert that the Purchase Price was less than what was due to Altiva stockholders under the Contract Price Formula, and they have offered no justification that the directors could have cited for deviating from the Contract Price Formula. Nor do the plaintiffs assert that the distribution of the Merger proceeds was inconsistent with the liquidation preferences laid out in Altiva's Restated Certificate of Incorporation, under which the common stockholders were last in a line of liquidation preferences.
Parties cannot repudiate their contracts simply because they wish they had gotten better terms. The Buyout Option and its underlying Contract Price Formula were the cost of capital for Altiva at a time when, as plaintiffs acknowledge, it was facing financial ruin. The $25 million minimum valuation was a protective provision that Altiva was able to negotiate for the sake of its shareholders, and it protected them here. The fact that it was not enough to ensure a payout to all Altiva shareholders is not a license to deny Exactech the benefits of its bargain.
Compl. ¶ 25.
Moreover, there is no indication that if the directors had refused to allow Exactech to exercise the Buyout Option unless it paid a higher price, the plaintiffs would have been any better off. The Series A and B Preferred Stockholders only received 37.5% of their liquidation preference, so any additional value the Altiva board did negotiate would first go to making the Preferred Stockholders whole. It would take substantial additional value to pay the remaining 62.5% of the Preferred Stock liquidation preferences. The plaintiffs concede that even if Altiva was valued at $50 million, twice as much as the Contract Price Formula dictated, the common stockholders may not have received anything for their shares. This leaves the plaintiffs with the unsustainable argument that the Altiva directors were "duty-bound" to invite a breach of contract suit from Exactech in order to put the common stockholders in the same position they would be in if the Altiva directors complied with their contractual obligations.
Tr. at 26.
Thus, once the reality that the plaintiffs have tried to ignore is confronted, the outcome of this motion becomes inevitable. Because the plaintiffs are not challenging the validity of the Buyout Option itself, have conceded that Purchase Price was consistent with the Contract Price Formula, and have not contested that the proceeds were distributed in accordance with the Altiva Restated Certificate of Incorporation, the plaintiffs are left with no basis to challenge the Altiva board's actions in agreeing to the Merger. Altiva was contractually obligated to enter into the Merger, and the Altiva board could not fail to do so without causing the company to dishonor a contract. The plaintiffs have cited no authority suggesting that the Altiva directors were mandated to cause the company to breach a contract and avoid the Merger. On this basis alone, the motion to dismiss must be granted.
I separately dismiss the claims against defendants Grant and Altiva Corporation because the plaintiffs have made no attempt to allege why these parties would be liable for the events in dispute. The plaintiffs offer no facts regarding the involvement of Grant, who was Altiva's CFO but not a board member, in the Merger, and they offer no reason why they have a fiduciary duty claim against Altiva, which is the subject corporation itself.
For the sake of completeness, I will now address the plaintiffs' arguments regarding the directors' interestedness and lack of independence, which have little, if any relevance, to this unusual context. The weakness of these other arguments, particularly the plaintiffs' challenge to the motives of the Altiva independent board majority, however, does provide additional support for dismissing this case. As shall be seen, the plaintiffs have pled no basis to infer that a majority of the Altiva board somehow had a motive to enter into a suboptimal Merger with Exactech.
In addition to the arguments regarding director interest and independence, the plaintiffs assert in the Complaint that the defendant directors breached their duty of loyalty by failing to "disclos[e] all aspects of the Merger to Plaintiffs." Compl. ¶ 48. The defendants responded to this charge in their opening brief. Defs.' Op. Br. at 22-26. The plaintiffs did not address their disclosure argument in any way either in their answering brief or at oral argument, and have therefore waived it. See Emerald Partners v. Berlin, 2003 WL 21003437, at *43 (Del.Ch. Apr. 28, 2003) ("It is settled Delaware law that a party waives an argument by not including it in its brief."), aff'd, 840 A.2d 641 (Del. 2003).
B. The Plaintiffs Have Not Pled Facts Demonstrating That A Majority Of The Altiva Board Was Interested In The Merger
When the Merger was approved, Altiva's board was comprised of five members: defendants Petty, Corrance, Moody, Benson, and Galletti. Corrance, as Altiva's CEO, was the only inside director. The rest were outside directors chosen by Altiva investors who owned large amounts of Altiva's Preferred Stock. Petty was Exactech's CEO and that company's one representative on the Altiva board. The other three directors, Moody, Benson, and Galletti, represented various holders of the Series B Preferred Stock.
The record is unclear whether these investors also owned Altiva common stock.
As the defendants acknowledge, Petty was clearly conflicted in this transaction because, as Exactech's CEO, he sat on both sides of the transaction. The plaintiffs contend that the remaining directors were "substantially self-interested" because they would "retain their respective management positions in the Post-Merger Altiva." They go as far as to say that, despite the substantial loss these defendants incurred on their investments in Altiva, the defendants would "not be adversely affected by accepting the proposed Merger consideration, which represents a fraction of Altiva's present value, because they will more than make-up the deficit when they cross over to the other side of the transaction and assume their Post-Merger positions."
Tr. at 9.
Compl. ¶ 39.
Compl. 40.
The problem with this allegation is two-fold. First, the Complaint offers no rational basis for inferring that any director other than Corrance had a management position at Altiva to retain. The plaintiffs point to the press release that announced the Merger, which touted that "Exactech's first acquisition includes Altiva's experienced spinal management team." But, the plaintiffs have conceded that there is no reason to believe that Altiva's "experienced spinal management team" would include outside directors who represented now-cashed out investors. Nor do the pleadings support an inference that Moody, Benson, or Galletti remained as directors of the Post-Merger Altiva. The Merger Agreement, injected into the briefing by the plaintiffs, designates the directors of Exactech's merger subsidiary as the new directors of the Post-Merger Altiva. The plaintiffs do not plead any facts to support an inference that Altiva's outside directors would have been appointed to the board of Exactech's merger vehicle.
Pls.' Ans. Br. Ex A.
Tr. at 15-17.
Defs.' Rep. Br. at 8-9.
Second, the plaintiffs have not demonstrated that any interests a majority of the directors had in the Post-Merger Altiva were material. Directors are interested in a transaction if they appear on both sides of a transaction or expect to derive a financial benefit from it which does not "devolve[] upon the corporation or all stockholders generally." This type of side benefit must be material to the director such that it is "improbable that the director could perform her fiduciary duties . . . without being influenced by her overriding personal interest. . . ."
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
In re General Motors Class H S'holders Litig., 734 A.2d 611, 617 (Del.Ch. 1999).
Even taking the charitable view that the plaintiffs have suggested that Corrance, Altiva's CEO, could not consider the Merger objectively given his status as a full-time executive and his expectation of continued employment with Exactech, the Complaint would still leave the disinterestedness of three directors, a majority of the board, unchallenged. The plaintiffs have not made a well-pled allegation that Moody, Benson, or Galletti remained as directors of the Post-Merger Altiva, much less had a management position. And, even if the plaintiffs had properly alleged that these three directors retained their board seats, that alone would not be enough to create a disqualifying interest. As a general matter, usual and customary directors' fees do not constitute a material financial interest. The plaintiffs in this case have not alleged that board seats at the Post-Merger Altiva carried high compensation or that the compensation would have been material to these particular directors. In fact, the plaintiffs have not alleged anything at all regarding director compensation levels in the Pre-Merger Altiva or the Post-Merger Altiva. The plaintiffs have thus failed to demonstrate that the majority of the Altiva directors faced a material, conflicting interest when they approved the Merger Agreement.
Even as to Corrance, the Complaint is lacking. The Complaint pleads no facts regarding Corrance's Pre-Merger compensation, his Post-Merger compensation or contractual rights, or his overall economic circumstances.
See Orman v. Cullman, 794 A.2d 5, 28-29 (Del.Ch. 2002) ("No case has been cited to me, and I have found none, in which a director was found to have a financial interest solely because he will be a director in the surviving corporation.") (emphasis in original); Krim v. ProNet, Inc., 744 A.2d 523, 528 n. 16 (Del Ch. 1999) ("[T]he fact that several directors would retain board membership in the merged entity does not, standing alone, create a conflict of interest.")
See Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988) ("[A]llegations [that directors are paid for their services], without more, do not establish any financial interest."); Moran v. Household Int'l, Inc., 490 A.2d 1059, 1074-75 (Del.Ch. 1985) ("Where a majority of the directors are independent or outside directors receiving no income other than usual directors' fees the presumption of good faith is heightened.").
Indeed, if Altiva's outside directors had any financial interest in this transaction, it would seem to have been aligned with those of other Altiva investors. Benson, Moody, and Galletti were not only directors, but they and their affiliates were also substantial stockholders in Altiva's Series B Preferred Stock. As such, they stood to lose substantial sums on their investments when they agreed to merger consideration that was adequate to pay only 37.5% of the liquidation preference amounts, which was the stock issuance price, on their Preferred Stock. There is no basis in the Complaint for inferring that these directors would have any reason not to bargain for a higher price in order to mitigate their financial losses if that option were at all feasible.
Compl. ¶ 39.
C. The Plaintiffs Have Not Pled Facts Demonstrating That Exactech Was A Controlling Stockholder
The plaintiffs have also made the striking argument that Exactech, as owner of 17% of Altiva's stock before the Merger, was a controlling stockholder of Altiva. The only fact they cite in support of this argument is that Exactech was Altiva's largest, single shareholder. Under "well established" Delaware jurisprudence, "a stockholder that owns less than half of a corporation's shares will generally not be deemed to be a controlling stockholder, with concomitant fiduciary responsibilities." Only where a plaintiff demonstrates actual exercise of control over corporate conduct will a holder of less than 50% of a corporation's stock be deemed a controller. The plaintiffs provide no authority for why, absent actual exercise of control, an otherwise minority holder should be considered a controller simply because it is the largest holder.
Notably, under the Merger Agreement, the Series B Preferred Stockholders received $4.5 million in the Merger, representing 37.5% of their liquidation preference amount. This suggests that the Series B Preferred Stockholders collectively had a greater financial stake than Exactech, which had invested $1 million in equity and up to $5 million in loans. See Pls.' Ans. Br. Ex. A ("Merger Agreement") § 2.02(d)(iii).
Weinstein Enterprises, Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005).
See id.; Citron v. Fairchild Camera Instrument Corp., 569 A.2d 53, 70 (Del. 1989); Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987).
The plaintiffs instead contend that Exactech controlled Altiva through Petty, its one representative on the five-person board. Specifically, the plaintiffs assert that Petty dominated and controlled the other directors, who were "particularly susceptible to [Petty's] influence given that none of them were financially independent of Petty and Exactech and were motivated to whatever would keep them in their future employer's good graces." And, the plaintiffs, argue, Petty's domination and control is obvious from the decisions made by the directors, because there could be no other reason to fail to exclude Petty from the merger discussions and to accept the minimum valuation of $25 million than the directors' desire to please Petty.
Pls.' Ans. Br. at 16.
As discussed above, the plaintiffs have not pled any facts supporting a rational inference that the majority of the directors were swayed in this transaction by their interest in securing a role at the Post-Merger Altiva or were in any way financially dependent on Petty or Exactech. And, the argument that the directors' behavior indicates conflicted loyalties is yet another manifestation of the plaintiffs' attempt to ignore the realities of the Altiva board's contractual obligations to Exactech. The Complaint offers no reasonable basis for inferring that directors' behavior was the product of anything other than an acknowledgment of the effect Altiva's contractual duties had over their decisions.
The plaintiffs also argue that the three outside directors benefited because their affiliates had the option to take their 37.5% share as stock in the Post-Merger Altiva. That option provides no rational reason for the outside directors not to seek 100% on the dollar if they had leverage. A 62.5% haircut is quite a buzz cut, and not one materially eased by the chance to receive stock rather than cash. Furthermore, the Merger Agreement indicates that Exactech stock was available only to the Series A Preferred Stockholders, but the outside directors represented Series B Preferred Stockholders, who received only cash consideration. See Merger Agreement § 2.01(d).
V. Conclusion
For the foregoing reasons, the Verified Amended Complaint is dismissed in its entirety. IT IS SO ORDERED.