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observing necessity for litigants to develop a record sufficient to draft pleadings with particularized allegations to survive motion to dismiss
Summary of this case from Duffield Assoc. v. Meridian Archi.Opinion
Civil Action No. 18336.
Decided Date: October 2, 2000.
Stuart Grant, Grant Eisenhofer, P.A., 12 N. Market St., Suite 500 Wilmington, DE. 19801-2577.
Pamela S. Tikellis Chimicles Tikellis LLP, P.O. Box 1035 Wilmington, DE. 19899.
Joseph A. Rosenthal, Rosenthal, Monhait, Gross Goddess, P.A., P.O. Box 1070, Wilmington, DE. 19899.
Stephen C. Norman, Potter Anderson Corroon, P.O. Box 951 Wilmington, DE. 19899.
William O. LaMotte, III, Morris, Nichols, Arsht Tunnell P.O. Box 1347, Wilmington, DE. 19899.
Henry E. Gallagher, Jr., Connolly, Bove, Lodge Hutz P.O. Box 2207, Wilmington, DE. 19899.
Dear Counsel:
Plaintiff TCW Technology Limited Partnership brings this action individually, derivatively and as a class action on behalf of the public shareholders of Digex, Inc., a Delaware corporation. TCW, a Digex shareholder, seeks to enjoin a proposed merger between WorldCom, Inc. and Intermedia Communications, Inc. ("ICI"). ICI is the controlling shareholder of Digex. TCW now requests an order authorizing expedited discovery, as well as briefing and a hearing date, for a preliminary injunction motion that it intends to file. For the reasons I set forth more completely below, I grant TCW's motion to expedite this matter.
TCW is joined in its motion to expedite by lead counsel in several similar lawsuits filed against ICI. Unlike TCW, these other lawsuits also name WorldCom as a defendant.
I.
Digex, a Delaware corporation, was founded in 1996 and is engaged in the managed web hosting business. ICI acquired a controlling interest in Digex in July 1997. It currently owns 62 percent of Digex's outstanding common stock and holds 94 of its voting rights. Digex has performed well since 1996. Over the last year, Digex's stock price has increased by more than 2-1/2 times, rising from $32.50 per share on September 1, 1999 to more than $84 per share on September 1, 2000. ICI stock, by contrast, fell more than 13 percent over the same period, from $26.50 per share on September 1, 1999, to just under $23 per share on September 1, 2000.On September 1, 2000, ICI entered into a merger agreement with WorldCom. The directors of both ICI and Digex approved the proposed transaction, and the necessary ICI shareholder vote is expected to occur in late November or December. No proxy statement or other information about the proposed transaction has yet been mailed to shareholders. Upon consummation of the proposed merger, WorldCom will own ICI and ICI will continue to control Digex. Digex's minority shareholders will retain their equity interest in Digex, which will continue as a separate corporation. They will not, however, receive anything from the merger.
TCW alleges that WorldCom's real purpose for purchasing ICI is to acquire Digex. By purchasing ICI, WorldCom gains control of Digex, giving WorldCom instant access to the lucrative managed web hosting market. TCW also points to WorldCom's own press release announcing its merger with ICI, which stated "WorldCom gains Control of Digex Through Merger With Intermedia." TCW's complaint alleges that ICI had announced publicly that it was considering a sale of Digex and had hired an investment bank, Bear, Steams Company, to explore various opportunities. It is further alleged that ICI received a number of favorable inquiries, including an inquiry from WorldCom, about acquiring Digex. Ultimately, TCW contends that the Digex directors, a majority of whom are also ICI officers and directors diverted Digex's opportunity to be sold, at a significant premium to market, to ICI. The ICI-WorldCom transaction, according to TCW, resulted from an exploitation of ICI's majority shareholder position, to the detriment of Digex's minority shareholders. Finally, TCW attacks a decision by Digex's board of directors, contrary to the recommendation of its independent Special Committee, to waive the provisions of 8 Del. C. § 203. Section 203 bars business combinations with an interested stockholder for a three year period following a merger, unless certain conditions are met. Here, TCW alleges that ICI used its control over Digex's board to cause it to remove the protections afforded by § 203 to Digex's minority shareholder.
Defendants correctly point out that TCW's motion to expedite is not supported either by affidavit or by a verified complaint. At this point, TCW has simply included a prayer for injunctive relief in its unverified complaint. Before an injunction may issue, TCW must file a verified complaint or a supporting affidavit. See Court of Chancery Rule 65 (a).
Not surprisingly, the defendants disagree with all of TCW's assertions. They insist that Digex did not, and will not, have a corporate opportunity to offer itself for sale without ICI's approval and that ICI cannot be compelled to agree to a Digex sale. Defendants thus argue, and not without force, that Digex's minority public stockholders have no legal right to a "control premium" for their stock, as they do not have any "control." Finally, defendants insist that TCW's § 203 claim is premature, as no business combination involving WorldCom and Digex has been announced. If and when such a combination is proposed, argue defendants, there will be time enough for Digex's minority shareholders to assert a claim under § 203.
II.
On a motion for expedited proceedings, this Court must assess, preliminarily, whether the plaintiff has stated a colorable liability claim, together with the possibility of a threatened irreparable injury, so as to justify the expense and inconvenience of an expedited preliminary injunction proceeding This determination is necessarily made in the context of an extremely limited record, consisting almost entirely of unadorned allegations in hastily drafted pleadings that rely on little more than print and electronic media reports. Such is the case here, as TCW's unverified complaint relies, in large part, on press releases and newspaper articles.
Nonetheless, because I am required to assess primarily the viability of TCW's claim, as well as the risk of irreparable harm, I have no real choice other than to accept the complaint's assertions at face value. Here, TCW alleges that an opportunity belonging to Digex has been improperly diverted to ICI, with interested Digex directors manipulating corporate procedures to advantage ICI at the expense of Digex. If TCW can offer evidence to support such a claim, I cannot say at this juncture that it would have no reasonable chance of resulting in a liability determination. So, too, with TCW's § 203 claim. If TCW can demonstrate that Digex's board rejected the independent Special Committee's recommendations not to waive § 203 as part of a larger scheme to divert the advantages of WorldCom's offer to ICI rather than to Digex, it might be sufficient to support a claimed breach of the directors' fiduciary duty of loyalty. In all events, I am not obliged to opine on the probability of success on these claims, but merely to ascertain whether, based on the allegations, a colorable claim or claims exist. I find the claimed breaches of fiduciary duty sufficiently viable, at this juncture, to warrant scheduling a preliminary injunction hearing.
The second consideration — a sufficient possibility of a threatened irreparable injury — is also met here. Compensatory damages are sometimes a sufficient and complete remedy in cases where a fiduciary has manipulated corporate machinery to benefit itself by expropriating a corporate opportunity. When a minority shareholder can prove, for example, that a fiduciary has profited by accepting certain payments in connection with a transaction, those payments may form the basis for a damage award incidental to the breach of duty. See Thorpe v. Cerbco, Inc., Del. Supr., 676 A.2d 436, 444-45 (1996). In the circumstances here, however, it would be extremely difficult to calculate the damages necessary to compensate Digex's shareholders for the alleged breaches of duty by Digex's directors. It is also unclear whether, and how, the fiduciaries could be forced to disgorge any benefits or profits wrongfully expropriated. Because of the uncertainty surrounding any potential damages remedy, I conclude that the threat of irreparable injury is substantial enough to warrant expediting these cases.
The following schedule is established and will govern further proceedings in these cases, unless otherwise ordered:
1) Document requests shall be served on or before October 3, 2000;
2) Parties shall respond to document requests served upon them no later than October 17, 2000.
3) Parties shall schedule depositions between October 20 and November 3, 2000.
4) Plaintiff shall file an opening brief in support of its motion for preliminary injunction on November 10, 2000.
5) Defendants shall file their answering brief on November 20, 2000.
6) Plaintiff shall file its reply brief on November 27, 2000.
7) A hearing on the motion for preliminary injunction shall be heard on November 29, 2000 at 1:00 p.m. in Wilmington, Delaware.
IT IS SO ORDERED.
Very truly yours, _________________________ William B. Chandler III
oc: Register in Chancery (NCCo.)