To be Argued by: TARIQ MUNDIYA (Time Requested: 30 Minutes) APL No. 2015-00155 New York County Clerk’s Index No. 650571/12 Court of Appeals of the State of New York IN RE KENNETH COLE PRODUCTIONS, INC. SHAREHOLDER LITIGATION --------------------------------------------------- ERIE COUNTY EMPLOYEES RETIREMENT SYSTEM, Lead Plaintiff-Appellant, - against - MICHAEL J. BLITZER, ROBERT C. GRAYSON, DENIS F. KELLY, PHILIP R. PELLER, PAUL BLUM, KENNETH D. COLE, KCP HOLDCO, INC. and KCP MERGERCO, INC., Defendants-Respondents. JOINT BRIEF FOR DEFENDANTS-RESPONDENTS SIDLEY AUSTIN LLP Attorneys for Defendants-Respondents Michael J. Blitzer, Robert C. Grayson, Denis F. Kelly and Philip R. Peller 787 Seventh Avenue New York, New York 10019 Tel.: (212) 839-5300 Fax: (212) 839-5599 KAYE SCHOLER LLP Attorneys for Defendant-Respondent Paul Blum 425 Park Avenue New York, New York 10022 Tel.: (212) 836-8000 Fax: (212) 836-8689 WILLKIE FARR & GALLAGHER LLP Attorneys for Defendants-Respondents Kenneth D. Cole, KCP Holdco, Inc. and KCP Mergerco, Inc. 787 Seventh Avenue New York, New York 10019 Tel.: (212) 728-8000 Fax: (212) 728-8111 Date Completed: September 24, 2015 DISCLOSURE STATEMENT PURSUANT TO SECTION 500.1(f) OF THE RULES OF THE COURT OF APPEALS Defendant-Respondent KCP Holdco, Inc. is the corporate parent of Kenneth Cole Productions, Inc., a privately-held company. In connection with the merger transaction in 2012, Defendant-Respondent KCP Mergerco, Inc. merged with and into Kenneth Cole Productions, Inc. and its corporate existence ceased to exist thereafter. Defendants-Respondents Kenneth D. Cole, Michael J. Blitzer, Robert C. Grayson, Denis F. Kelly, Philip R. Peller, and Paul Blum do not fall under § 500.1(f) as they are not corporations or business entities. Dated: September 24, 2015 i TABLE OF CONTENTS Page COUNTER-STATEMENT OF QUESTION PRESENTED .................................... 1 PRELIMINARY STATEMENT ............................................................................... 1 STATEMENT OF FACTS ........................................................................................ 8 PROCEDURAL HISTORY ..................................................................................... 13 ARGUMENT ........................................................................................................... 17 STANDARD OF REVIEW ..................................................................................... 17 I. GOING-PRIVATE TRANSACTIONS SUBJECT TO ADEQUATE PROTECTIONS FOR MINORITY SHAREHOLDERS SHOULD BE REVIEWED UNDER THE BUSINESS JUDGMENT RULE ..................... 18 A. Alpert Did Not Displace New York’s Traditional Application Of The Business Judgment Rule To Disinterested Transactions ........ 18 B. Like New York, Delaware Does Not Recognize An Exception To The Business Judgment Rule In This Context ............................... 24 C. The Courts Below Properly Dismissed This Case Because Appellant Failed To Allege Facts Demonstrating That The Going-Private Transaction Was Subject To Conflicts Of Interest ................................................................................................. 27 II. ALLEGATIONS RELATING TO GOING-PRIVATE TRANSACTIONS SHOULD NOT BE CATEGORICALLY EXEMPT FROM PRE-DISCOVERY DISMISSAL .................................... 33 III. ADOPTION OF ENTIRE FAIRNESS REVIEW OF GOING PRIVATE TRANSACTIONS CONDITIONED ON THE DUAL PROCEDURAL PROTECTIONS USED HERE WOULD HARM MINORITY SHAREHOLDERS ................................................................... 39 CONCLUSION ........................................................................................................ 46 ii TABLE OF AUTHORITIES Page 40 W. 67th St. Corp. v. Pullman, 100 N.Y.2d 147, 790 N.E.2d 1174, 760 N.Y.S.2d 745 (2003) ............... 18, 34 Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 473 N.E.2d 19, 483 N.Y.S.2d 667 (1984) ....................passim Aronson v. Lewis, 473 A.2d 805 (Del. 1984) .............................................................................. 30 Auerbach v. Bennett, 47 N.Y.2d 619, 393 N.E.2d 994, 419 N.Y.S.2d 920 (1979) ....... 19, 34, 35, 42 Beam v. Stewart, 845 A.2d 1040, 1046 (Del. 2004) .................................................................. 31 Brody v. Catell, No. 8835/06, 2007 WL 1865080 (N.Y. Sup. Ct. Kings Cnty. June 27, 2007) ................................................... 20 Cent. Laborer’s Pension Fund v. Blankfein, 34 Misc. 3d 456, 931 N.Y.S.2d 835 (Sup. Ct. N.Y. Cnty. 2011) aff’d sub nom., Cent. Laborers’ Pension Fund v. Blankfein, 111 A.D.3d 40, 971 N.Y.S.2d 282 (1st Dep’t 2013) ............................... 29, 30 In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604 (Del. Ch. 2005) ................................................................passim Danza v. Costco Wholesale Corp., No. 31512/10, 2011 WL 3720824 (N.Y. Sup. Ct. Kings Cnty. Aug. 24, 2011) .................................................. 10 Fenster v. Smith, 39 A.D.3d 231, 832 N.Y.S.2d 572 (1st Dep’t 2007) ..................................... 10 iii Glenbriar Co. v. Lipsman, 5 N.Y.3d 388, 838 N.E.2d 635, 804 N.Y.S.2d 719 (2005) ........................... 17 Godfrey v. Spano, 13 N.Y.3d 358, 920 N.E.2d 328, 892 N.Y.S.2d 272 (2009) ......................... 18 Gustaff v. Marathon Healthcare Corp./Monarch Staffing, No. 22611/08, 2009 WL 55009 (N.Y. Sup. Ct. Kings Cnty. Jan. 8, 2009) .. 10 Health-Loom Corp. v. Soho Plaza Corp., 209 A.D.2d 197, 618 N.Y.S.2d 287 (1st Dep’t 1994) ................................... 29 Higgins v. N.Y. Stock Exchange, Inc., 10 Misc.3d 257, 806 N.Y.S.2d 339 (Sup. Ct. N.Y. Cnty. 2005) ................... 29 Jordan Panel Sys. Corp. v. Turner Constr. Co., 45 A.D.3d 165, 814 N.Y.S.2d 561 (1st Dep’t 2007) ..................................... 10 Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) .................................................................................. 4 Kassover v. Prism Venture Partners, LLC, 53 A.D.3d 444, 826 N.Y.S.2d 493 (1st Dep’t 2008) ........................... 7, 19, 33 Kimeldorf v. First Union Real Estate Equity & Mortgage Investments, 309 A.D.2d 151, 764 N.Y.S.2d 73 (1st Dep’t 2003) ..................................... 19 Lichtenberg v. Zinn, 260 A.D.2d 741, 687 N.Y.S.2d 817 (3d Dep’t 1999) ................................... 30 Limmer v. Medallion Grp., Inc., 75 A.D.2d 299, 428 N.Y.S.2d 961 (1st Dep’t 1980) ..................................... 28 Marx v. Akers, 88 N.Y.2d 189, 666 N.E.2d 1034, 644 N.Y.S.2d 121 (1996) ....................... 18 In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013), aff’d sub nom., MFW, 88 A.3d 635 .......................................24, 25, 37, 38, 39 iv Owen v. Hamilton, 44 A.D.3d 452, 843 N.Y.S.2d 248 (1st Dep’t 2007) ..................................... 19 Se. Pa. Transp. Auth. v. Volgenau, CV 6354-VCN, 2013 WL 4009193 (Del. Ch. Aug. 5, 2013) ....................... 25 In re Southern Peru Copper Corp. S’holder Derivative Litig., 52 A.3d 761 (Del. Ch. 2011) ............................................................. 34, 35, 38 In re Sud, 211 A.D.2d 423, 621 N.Y.S.2d 37 (1st Dep’t 1995) ..................................... 31 Wilhelmina Models, Inc. v. Fleisher, 19 A.D.3d 267, 797 N.Y.S2d 83 (1st Dep’t 2005) ........................................ 10 Wolf v. Rand, 258 A.D.2d 401, 685 N.Y.S.2d 708 (1st Dep’t 1999) ................................... 28 Statutes, Rules and Regulations N.Y. Const. Art VI, § 3(a) ....................................................................................... 17 N.Y. C.P.L.R. 5501(b) ............................................................................................. 17 Other Authorities William T. Allen et al., Function over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. Law. 1287, 1307-08 (2001) ....................................................... 40, 45 Victor Brudney & Marvin A. Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale L.J. 1354, 1376 (1978) ............................................................... 43, 44 Corporate Law-Mergers and Acquisitions-Delaware Supreme Court Endorses Business Judgment Review for Going-Private Mergers with Dual Procedural Protections, 128 Harv. L. Rev. 1818, 1825 (2015) ....................................... 45 v Peter V. Letsou & Steven M. Haas, The Dilemma That Should Never Have Been: Minority Freeze Outs in Delaware, 61 Bus. Law. 25, 40 (2005) ............ 41, 44 Bernard S. Sharfman, Kahn v. M&F Worldwide Corporation: A Small but Significant Step Forward in the War Against Frivolous Shareholder Lawsuits, 40 J. Corp. L. 197, 210 (2015) ...................................................... 46 Guhan Subramanian, Fixing Freezeouts, 115 Yale L.J. 2, 17 (2005) .......... 40, 41,43 Daniel Wilson, Desirable Resistance: Kahn v. M&F Worldwide and The Fight For The Business Judgment Rule In Going-Private Mergers, 17 U. Pa. J. Bus. L. 643, 671 (2015) .............................................................................................. 46 - 1 - COUNTER-STATEMENT OF QUESTION PRESENTED Was a complaint challenging a “going private” transaction correctly dismissed for failure to state a claim and through application of the business judgment rule where (i) the majority shareholder acquirer voluntarily removed himself from the board of directors’ consideration of his offer, (ii) the transaction was conditioned at the outset on both approval by a special committee of independent and disinterested directors and approval by a majority of the company’s minority shareholders, (iii) and the complaint contained no legally sufficient allegations that the independent directors were conflicted or otherwise controlled by the majority shareholder or that the shareholder vote was coerced and not fully-informed? Yes, both the trial court and the Appellate Division, First Department correctly applied the presumption of the business judgment rule and dismissed the complaint, and those decisions should be affirmed. PRELIMINARY STATEMENT This appeal arises out of the dismissal of a shareholder class action complaint putatively filed on behalf of the public shareholders of Kenneth Cole Productions, Inc. (“KCP” or “the Company”). The complaint challenged a proposal by the Company’s majority shareholder, Defendant-Appellee Kenneth D. Cole (“Cole”), to acquire from the public shareholders of KCP the shares of its stock that he did not already own. The offer was approved by approximately - 2 - 99.8% of those minority shareholders who voted on the transaction, and closed in September 2012. Within days of Mr. Cole announcing his intention to make an offer to KCP’s shareholders - i.e., before the Board of Directors of KCP had done anything other than receive Mr. Cole’s offer, and long before the shareholders had voted - four class action complaints were filed challenging the proposed transaction, purportedly on behalf of the minority shareholders of KCP. Although the parties had not yet agreed to any transaction, each of the complaints contained rote allegations that Mr. Cole and the special committee of independent and disinterested directors that was formed to evaluate the proposed going-private transaction (the “Independent Directors”) had breached their fiduciary duties. In the months that followed, Mr. Cole and the Independent Directors engaged in substantial negotiations concerning the offer, which ultimately resulted in Mr. Cole increasing his initial offer from $15.00 per share to $15.25 per share. The $15.25 price represented a 17% premium over the market value of the Company’s stock immediately prior to the announcement of the offer. The Independent Directors, all of whom were themselves substantial shareholders who would be agreeing to sell their stock if the transaction were approved, unanimously voted to recommend the transaction to the Company’s public shareholders. - 3 - As the controlling shareholder, Mr. Cole had the voting power to simply approve the transaction himself. But he specifically chose not do so. Instead, Mr. Cole stated from the outset that, in addition to requiring special committee approval, he would only complete the acquisition if a majority of the minority shareholders voted in favor of his offer. When the proposed acquisition was put to a vote of the shareholders, their support was nearly unanimous - approximately 99.8% of the shares voted were in support of the transaction. Nowhere in its brief does Appellant inform the Court of the overwhelming support this transaction received from the public shareholders of KCP - the same shareholders that Appellant purports to represent in this action. That is because this action has little to do with the interests of those shareholders, which are best protected by the dual mechanisms of approval by a committee of disinterested directors and the minority shareholders themselves that were put into place at the outset in this transaction. Rather, this suit exemplifies the type of lawyer-driven class action litigation that follows the announcement of virtually any merger or acquisition involving a publicly traded company; and if Appellant’s arguments are accepted, such litigation will proliferate because there will be no - 4 - judicial mechanism to dismiss such claims, no matter how meritless or flimsy the allegations.1 Class action claims of this nature traditionally have been filed in the courts of Delaware, but that state’s laws and jurisprudence have evolved to weed out meritless claims such as this one, while simultaneously promoting deal structures that actually protect the interests of shareholders. In particular, early last year, the Delaware Supreme Court held that where a controlling shareholder going- private transaction is conditioned on the dual shareholder protections that Mr. Cole employed here - approval by a fully informed independent special committee and approval by a majority of the minority shareholders - the transaction takes on the characteristics of a third party, arm’s-length merger, and should be reviewed in accordance with the presumptions of the business judgment rule. Kahn v. M&F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (“MFW”). This decision correctly incentivizes corporate controllers to adopt procedural safeguards that protect minority shareholders, rather than leaving that task to the courts through after-the- fact judicial scrutiny. 1 A review of M&A deals in 2014 shows that virtually every M&A transaction of any meaningful size is the subject of serial litigation: “Plaintiff attorneys filed lawsuits in 93 percent of M&A deals announced in 2014 and valued over $100 million, a total of 608 lawsuits,” with an average number of 4.5 lawsuits per deal. See Olga Koumrian, Shareholder Litigation Involving Mergers and Acquisitions, at 1-2 (2015), https://www.cornerstone.com/getattachment/897c61ef-bfde-46e6-a2b8- 5f94906c6ee2/shareholder-litigation-involving-acquisitions-2014-review.pdf. - 5 - The Delaware Supreme Court’s holding in MFW, while a boon for minority shareholders, poses a significant problem for the class action lawyers who bring these claims. Appellant advocates that the “entire fairness” standard should apply here, and is candid in conceding that this would require discovery in every case, guaranteeing that a complaint will survive a motion to dismiss no matter how anemic the allegations. By contrast, the business judgment standard of review-a familiar cornerstone of New York law on fiduciary duties in analogous contexts and applied by the Delaware Supreme Court in MFW-permits trial courts to dismiss claims if plaintiffs cannot plead facts demonstrating a lack of independence by the special committee of disinterested directors or that the negotiation process was otherwise unfair or controlled by the majority shareholder. This is precisely such a case. Appellant argues that, unlike Delaware, New York law should require going-private transactions to be reviewed under the heightened “entire fairness” standard and bypass any motion to dismiss, regardless of the sufficiency of the allegations and the shareholder-protective conditions employed to remove any taint of potential conflicts of interest. In support of this misguided thesis, Appellant principally relies on this Court’s decision in Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 473 N.E.2d 19, 483 N.Y.S.2d 667 (1984) (“Alpert”). However, Alpert involved a starkly different type of transaction than the one at issue here. There, a new controlling shareholder cashed out the minority - 6 - shareholders of a target corporation. The Court noted that the minority shareholders “ha[d] no choice but to surrender their shares for cash,” and the company and controlling shareholder “had not employed any neutral committees in negotiating the merger.” Id. at 574, 473 N.E.2d at 29, 483 N.Y.S.2d at 677. The Court held that under those circumstances - where minority shareholders are forced to cash out or sell their holdings - the transaction should be reviewed under the “entire fairness” standard. Alpert, 63 N.Y.2d at 569-70, 473 N.E.2d at 26, 483 N.Y.S.2d at 675. Alpert made clear that its application of the entire fairness standard was limited to two-step “freeze out” mergers, and different standards might apply to other forms of transactions, such as “going-private” mergers. Here, unlike in Alpert, KCP’s minority shareholders had a choice. Indeed, they alone controlled whether the transaction would go forward: Mr. Cole made it clear that he would consummate the transaction only if it was approved by a majority of the public shareholders. The decision by Mr. Cole to give the minority shareholders the right to accept or reject his offer is exactly the kind of shareholder-friendly result that Delaware’s MFW rule promotes, and that Appellant vigorously opposes. Also unlike in Alpert, in this transaction, a fully-empowered, neutral special committee negotiated with Mr. Cole, evaluated his offer, and made a recommendation to the minority shareholders. There was no such independent - 7 - body of directors in Alpert. Thus, while neither safeguard was present in Alpert, both are present here. Applying the business judgment standard to review of transactions with these dual protections is consistent with long-standing New York law. It is well established in New York that absent an allegation of “bad faith, a conflict of interest or [ ] self-dealing,” Kassover v. Prism Venture Partners, LLC, 53 A.D.3d 444, 826 N.Y.S.2d 493, 499 (1st Dep’t 2008), judicial review of board of director decisions is governed by the business judgment rule. Here, both the trial court and Appellate Division correctly found that Appellant failed to allege sufficient facts to support a conclusion that the fiduciaries of KCP were engaged in such misconduct. Rewarding the upfront use of minority shareholder protections with the benefits of the business judgment standard of judicial review is the most effective way to both protect minority shareholders and promote value-maximizing transactions. Where, as here, minority shareholders have the protections of an independent special committee and the clear opportunity to safeguard their own interests through an uncoerced, fully-informed vote, the transaction replicates a genuine third-party, arm’s-length merger, and the concerns for abuse warranting “entire fairness” review disappear. Under Appellant’s standard, plaintiffs would effectively be guaranteed a “fairness” trial in every going-private transaction, with no opportunity for defendants to move for dismissal of baseless complaints at an - 8 - early stage of proceedings. Such one-sided consequences would provide the worst of incentives - controlling shareholders would have no reason to adopt protections for minority shareholders and plaintiffs’ lawyers would reap the benefits of filing abusive class action lawsuits in New York, hoping that defendants would pay a nuisance settlement in a “fairness” case, rather than incur the guaranteed cost of taking an otherwise meritless case through expensive discovery. STATEMENT OF FACTS KCP is a fashion company that designs, sources, and markets a broad range of products, including footwear, handbags and apparel. (R. 563.) Mr. Cole founded the company in 1982. At the time of the transaction at issue, Mr. Cole served as the served as the Chairman of KCP’s Board and its Chief Creative Officer. (R. 564.) In addition, Mr. Cole held approximately 46% of the Company’s outstanding shares of common stock and approximately 89% of the voting power.2 On February 24, 2012, Mr. Cole made a non-binding proposal to acquire all of the outstanding shares of KCP stock that he did not already own, either directly or indirectly, for $15 per share. (Id. 571.) From the outset, Mr. 2 The Company had two classes of common stock. Class A shares were entitled to one vote per share and were held by the public as well as by Mr. Cole, who held roughly 6% of approximately 10.7 million Class A shares outstanding. Class B shares were entitled to 10 votes per share, of which nearly 7.9 million shares were held exclusively by Mr. Cole. (R. 566.) Thus, although Mr. Cole held approximately 46% of the Company’s Class A and Class B shares, he had approximately 89% of the voting power. (R. 564.) - 9 - Cole insisted that he would only move forward with his proposal if it satisfied two conditions designed to ensure that the minority shareholders’ interests were protected. First, Mr. Cole’s offer required approval by a special committee of independent directors. Second, the offer was contingent on approval by a majority of the public shareholders, i.e., the shareholders not affiliated with Mr. Cole. (R. 67.) Moreover, Mr. Cole stated: In considering this proposal, please note that in my capacity as a stockholder of the company I am interested only in acquiring the shares of the Company that I do not currently own, and that in such capacity I have no interest in a disposition or sale of my interest in the Company, nor is it my intention, in my capacity as a stockholder, to vote in favor of any alternative sale, merger or similar transaction involving the Company. (R. 39.) Mr. Cole expressly stated that if the special committee did not recommend or the public shareholders did not approve the proposed transaction, such a determination “would not adversely affect [his] . . . relationship” with KCP. (R. 39.) In response, KCP’s Board formed a special committee of independent and disinterested directors, referred to herein as the Independent Directors or the Special Committee, to consider the proposal, negotiate on behalf of the Company’s shareholders and, if appropriate, solicit and consider any alternative transactions. (R. 66.) The four Independent Directors - Denis Kelly, Robert Grayson, Philip Peller, and Michael Blitzer - were also all significant shareholders of the company - 10 - in their own right.3 The Independent Directors were fully empowered to reach whatever conclusions they deemed appropriate, including to reject the proposal outright. (R. 66.) The process undertaken by the Independent Directors is described in extensive detail in the Company’s Preliminary Proxy Statement that was filed with the SEC on June 29, 2012 ( R. 298-532), and the Definitive Proxy (the “Proxy”), which was filed on August 24, 2012, after addressing comments by the SEC.4 ( R. 41-253.) The Proxy was then distributed to KCP’s shareholders so they could evaluate the offer and decide whether to approve or reject the transaction. 3 R. 145-46 (Kelly - 70,160 shares (which “[i]ncludes 30,000 stock options which Mr. Kelly has the right to acquire within 60 days upon exercise under the Company’s 2004 Stock Incentive Plan, as amended”); Grayson - 58,444 shares (which “[i]ncludes 30,000 stock options which Mr. Grayson has the right to acquire within 60 days upon exercise under the Company’s 2004 Stock Incentive Plan, as amended”); Peller - 34,461 shares (which “[i]ncludes 20,000 stock options which Mr. Peller has the right to acquire within 60 days upon exercise under the Company’s 2004 Stock Incentive Plan, as amended”); Blitzer - 18,444 shares (which “[i]ncludes 5,000 stock options which Mr. Blitzer has the right to acquire within 60 days upon exercise under the Company’s 2004 Stock Incentive Plan, as amended”).) 4 The lower courts properly considered the Company’s SEC filings in connection with the motion to dismiss, which Appellant does not challenge here. See Wilhelmina Models, Inc. v. Fleisher, 19 A.D.3d 267, 269, 797 N.Y.S2d 83, 85 (1st Dep’t 2005) (“Factual allegations presumed to be true on a motion pursuant to CPLR 3211 may properly be negated by affidavits and documentary evidence.”); Fenster v. Smith, 39 A.D.3d 231, 231, 832 N.Y.S.2d 572, 572 (1st Dep’t 2007) (same); see, e.g., Jordan Panel Sys. Corp. v. Turner Constr. Co., 45 A.D.3d 165, 167, 814 N.Y.S.2d 561, 563 (1st Dep’t 2007) (considering documentary evidence submitted by defendants in support of motion to dismiss); Danza v. Costco Wholesale Corp., No. 31512/10, 2011 WL 3720824, at *2 (N.Y. Sup. Ct. Kings Cnty. Aug. 24, 2011) (considering SEC filings on motion to dismiss); Gustaff v. Marathon Healthcare Corp./Monarch Staffing, No. 22611/08, 2009 WL 55009, at *3 (N.Y. Sup. Ct. Kings Cnty. Jan. 8, 2009) (same). - 11 - The Independent Directors met eleven times between the formation of the Special Committee and June 6, 2012, when the final proposed transaction was announced. (R. 66.) The Special Committee also retained its own financial and legal advisors who provided advice in considering Mr. Cole’s proposal. (R. 67, 69.) Among other things, the advisors assisted the Independent Directors in reviewing the Company’s financial forecasts, evaluating the adequacy of the price offered by Mr. Cole, and considering possible alternative transactions. (R. 69-75.) After consulting with these advisors, the Special Committee commenced negotiations regarding price and communicated to Mr. Cole that he would need to increase his price in order to gain the Special Committee’s approval. (R. 73.) At first, Mr. Cole increased his offer to $15.50 per share and stated that he had “nothing left to give.” (Id.) Nevertheless, the Special Committee continued to press for an even higher price. (Id.) On May 27, 2012, Mr. Cole raised his offer to $16 per share and informed the Special Committee that this was his “best and final offer.” (R. 74; R. 579.) Again, the Special Committee decided to seek a higher price and made a counteroffer for $16.50 per share. (R. 74; R. 579.) On June 1, 2012, however, Mr. Cole informed Blitzer that he was uncertain about going forward with his offer and, on June 4, Mr. Cole reduced his offer to $15 per share (R. 74; R. 579-80), explaining: - 12 - Mr. Cole stated that the slowdown in the Company’s operations, the problems in the European economy that, in Mr. Cole’s view, threatened to spread to the United States, the disappointing report on unemployment and job growth issued by the U.S. government on the prior Friday, and the significant decline in the U.S. stock market in the prior week had all combined to cause him and an equity investor to be undecided about proceeding with any offer. Mr. Cole said, however, that he had determined to go forward but that $15.00 per share was the highest price he could offer. (R. 74.) Nevertheless, Kelly told Mr. Cole that he should raise his price above $15 per share. (Id.; see also R. 580.) On the morning of June 5, 2012, Mr. Cole called Kelly and stated that his final offer was $15.25 per share. (R. 75; see also R. 580.) The Special Committee met on June 5, 2012 and, after due deliberation and consideration and with the input of its outside legal and financial advisors, concluded that there was no alternative available to the Company’s public shareholders that was superior to Mr. Cole’s offer of $15.25 per share. The Independent Directors, therefore, recommended to the public shareholders that they accept the offer. (R. 75; R. 580.) The play-by-play of these negotiations was exhaustively disclosed to the shareholders in the Proxy before the shareholders voted on the transaction. (R 4-253.) As Mr. Cole had required from the outset, the transaction remained subject to a non-waivable condition requiring approval by a majority of the shares not owned directly or indirectly by him. (R. 67.) - 13 - On September 24, 2012, a special meeting of the shareholders of KCP was called to consider Mr. Cole’s offer. At that meeting, more than 99.8% of the voting shares not owned by Mr. Cole or his affiliates that voted did so in favor of the proposed transaction. Subsequently, on September 25, 2012, the transaction closed; the public shareholders received the bargained-for consideration in exchange for their shares, and Mr. Cole obtained full ownership of KCP. (R. 535- 36.) The Company has been operating as a privately-held company for almost three years. PROCEDURAL HISTORY On February 24, 2012, the Company announced that it had received a proposal from Mr. Cole to purchase the outstanding public stock of the Company. Even though the KCP Board had done nothing at that point other than receive Mr. Cole’s non-binding proposal, four putative class action lawsuits against the members of the board of directors, Mr. Cole and the Company were filed within a matter of days. See Astor BK Realty Trust v. Cole, Index No. 650521/2012 (N.Y. Sup. Ct. Feb. 24, 2012); Israni v. Cole, Index No. 650526/2012 (N.Y. Sup. Ct. Feb. 24, 2012); Feinstein v. Kenneth Cole Productions, Inc., Index No. 650571/2012 (N.Y. Sup. Ct. Feb. 28, 2012); Erie Cnty. Emp. Ret. Sys. v. Cole, Index No. 650585/2012 (N.Y. Sup. Ct. Feb. 29, 2012). Subsequently, two additional class actions were filed. See KBC Asset Mgmt. NV v. Cole, Index No. 652085/2012 - 14 - (N.Y. Sup. Ct. June 14, 2012); Lawrence v. Kenneth Cole Productions, Inc., Index No. 652111/2012 (N.Y. Sup. Ct. June 18, 2012). The six actions were consolidated on July 9, 2012, with Erie County Employees Retirement System appointed as Lead Plaintiff. On July 11, 2012, Lead Plaintiff filed a Consolidated Amended Verified Class Action Complaint (the “Complaint”), purportedly on behalf of all public shareholders of KCP. The Complaint alleged a claim for breach of fiduciary duty against the Independent Directors, as well as Mr. Cole. (R. 587- 588.) The Complaint also alleged a claim for aiding and abetting breach of fiduciary duty against the corporate entities created by Mr. Cole to effectuate the merger, KCP Holdco, Inc. and KCP Mergerco, Inc., as well as a third party that provided financing for the transaction. (R. 589.) On October 12, 2012, all defendants moved to dismiss the Complaint, and on September 3, 2013, the trial court granted those motions in their entirety.5 (R. 13-31.) In its Decision and Order, the trial court noted that Appellant alleged that Cole “acted in his own self interest in negotiating the buyout.” (R. 24-25.) However, Appellant “failed to put forth any cases demonstrating that a controlling 5 In addition to dismissing Mr. Cole and the Independent Directors, the trial court also dismissed each of the alleged aiders and abettors named in the Complaint. In addition, the Complaint named KCP as a defendant, but failed to assert any claims against it, and KCP was also dismissed from the case by the trial court. Appellant does not challenge the dismissal of any of those defendants here. - 15 - shareholder is prohibited from acting in his own economic interest, as long as his actions do not constitute unfair self dealing.” (R. 25.) The trial court concluded that there was no support for the notion that “Cole was required to subvert his own economic interest, in obtaining a low price, to the minority shareholders’ interest in obtaining a higher price.” (R. 26.) The trial court also noted that the Complaint alleged that the Independent Directors breached their fiduciary duties because they were “controlled by Cole,” in particular because two of the Independent Directors were elected to the board by Cole. (R. 21.) However, Appellant “point[s] to no authority for the assertion that a director lacks independence solely on the ground that he or she is elected by a controlling shareholder.” (R. 21.) The trial court found that the Complaint “fails to set forth facts demonstrating a lack of independence” by the Independent Directors. (R. 21.) The trial court also held that Appellant failed to allege facts sufficient to support its claim that the Independent Directors breached their fiduciary duties by failing to obtain a higher price per share. (R. 22.) The court held that absent allegations of “specific unfair conduct,” the court “will not second guess the committee’s business decisions in negotiating the terms of a transaction.” (R. 23.) Appellant subsequently appealed the trial court’s Decision and Order. On November 20, 2014, the Appellate Division, First Department entered a - 16 - decision unanimously affirming the trial court’s order in its entirety (the “Decision”). (R. 831-34.) In the Decision, the Appellate Division rejected Appellant’s contention that this Court’s decision in Alpert required the application of the entire fairness standard to the transaction at issue here. (R. 832.) Rather, the court held that the transaction was appropriately reviewed, and dismissed, under the business judgment standard. (Id.) The Decision specifically noted the existence and effective use of both procedural safeguards that the Delaware Supreme Court identified in MFW as supporting the application of the business judgment rule. (R. 833-34.) First, after noting that Mr. Cole had removed himself from the voting process, the Appellate Division held that “pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested.” (R. 832.) Second, in distinguishing Alpert, the court acknowledged that “the merger in the case at bar required the approval of the majority of the minority (i.e., non-Cole) shareholders.” (R. 832.) The Appellate Division also affirmed the trial court’s conclusion that Appellant’s allegations that the proxy statement sent to shareholders was false and misleading were insufficient. (R. 833.) - 17 - The Appellate Division expressly addressed the allegation that Mr. Cole had a conflict of interest insofar as he sought to pay as little for the publicly owned shares as possible, (R. 832), but noted that he removed himself from the Board’s consideration of his offer. (R. 833.) As a result, the proposed transaction could only be considered an interested party transaction if the Independent Directors were self-interested or Mr. Cole controlled those directors. There were no allegations that the Independent Directors had any interests in the transaction that were different from the Company’s shareholders, and the Appellate Division correctly affirmed the trial court’s finding that the allegation that Mr. Cole appointed directors to the Board was insufficient to demonstrate control. (R. 833.) Appellant filed a motion to the First Department for leave to appeal to this Court on December 19, 2014. That motion was denied on March 12, 2015. On April 15, 2015, Appellant moved this Court for leave to appeal, which this Court granted on June 10, 2015. ARGUMENT STANDARD OF REVIEW Except in limited circumstances not present here, this Court’s review on appeal in civil actions is limited to questions of law. N.Y. Const. Art VI, § 3(a); N.Y. C.P.L.R. 5501(b); Glenbriar Co. v. Lipsman, 5 N.Y.3d 388, 392, 838 N.E.2d 635, 637, 804 N.Y.S.2d 719, 721) (2005) (“The Court of Appeals is a law court - 18 - and ordinarily does not review facts except in a limited class of cases (NY Const, art VI, § 3).”). In assessing the legal sufficiency of a complaint for purposes of a motion to dismiss, the allegations are presumed to be true. Still, “conclusory allegations - claims consisting of bare legal conclusions with no factual specificity - are insufficient to survive a motion to dismiss.” Godfrey v. Spano, 13 N.Y.3d 358, 373, 920 N.E.2d 328, 334, 892 N.Y.S.2d 272, 278 (2009) (citing Caniglia v. Chicago Tribune-N.Y. News Syndicate, 204 A.D.2d 233, 233-234, 612 N.Y.S.2d 146 (1st Dept.1994)); see Marx v. Akers, 88 N.Y.2d 189, 204, 666 N.E.2d 1034, 1043, 644 N.Y.S.2d 121, 130 (1996) (affirming grant of motion to dismiss because “conclusory allegations do not state a cause of action . . . [and] are insufficient as a matter of law to state a cause of action”). I. GOING-PRIVATE TRANSACTIONS SUBJECT TO ADEQUATE PROTECTIONS FOR MINORITY SHAREHOLDERS SHOULD BE REVIEWED UNDER THE BUSINESS JUDGMENT RULE A. Alpert Did Not Displace New York’s Traditional Application Of The Business Judgment Rule To Disinterested Transactions The trial court and Appellate Division correctly held that Appellant’s claim for breach of fiduciary duty fails because the Independent Directors’ conduct should be reviewed under the business judgment rule. This rule, which “has been long recognized in New York,” 40 W. 67th St. Corp. v. Pullman, 100 N.Y.2d 147, 153, 790 N.E.2d 1174, 1179, 760 N.Y.S.2d 745, 750 (2003), “bars judicial inquiry - 19 - into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes,” Auerbach v. Bennett, 47 N.Y.2d 619, 629, 393 N.E.2d 994, 1000, 419 N.Y.S.2d 920, 926 (1979). The business judgment rule applies to directors’ decisions “if they possess a disinterested independence and do not have dual relation[s] which prevent[] an unprejudicial exercise of judgment.” Id. at 631, 393 N.E.2d at 1001, 419 N.Y.S.2d at 927. Therefore, a claim for breach of fiduciary duty cannot survive a motion to dismiss absent non-conclusory allegations of “bad faith, a conflict of interest or the self-dealing necessary to overcome the business judgment rule.” Kassover, 53 A.D.3d at 450, 862 N.Y.S.2d at 499. The fact that the transaction contemplated by the Merger Agreement was with KCP’s controlling shareholder does not prevent application of the business judgment rule where, as here, the transaction was conditioned at the outset on appropriate safeguards to replicate an arm’s-length transaction and protect the minority shareholders. For example, in Kimeldorf v. First Union Real Estate Equity & Mortgage Investments, the business judgment rule was held to apply even though the defendant merger partner was “principally owned” by its largest shareholder and managed by the former chairman of its board. 309 A.D.2d 151, 153, 157-60, 764 N.Y.S.2d 73, 75 (1st Dep’t 2003); see also Owen v. Hamilton, 44 A.D.3d 452, 456, 843 N.Y.S.2d 248, 302 (1st Dep’t 2007) (business - 20 - judgment rule applied to disinterested directors’ informed decision made in good faith to approve transaction involving majority shareholder); Brody v. Catell, No. 8835/06, 2007 WL 1865080, at *5 (N.Y. Sup. Ct. Kings Cnty. June 27, 2007) (business judgment rule applies to merger approved by disinterested directors and conditioned on shareholder vote). Appellant does not cite a single New York decision (and Appellees are aware of none) that rejects the application of the business judgment rule where a going-private merger with a controlling shareholder was conditioned at the outset, as it was here, on approval by both an independent and disinterested special committee and a majority of the minority shareholders. Instead, Appellant rests its argument on the contention that Alpert is controlling here. Alpert involved a “two-step” merger in which minority shareholders of a private company were to be cashed out by a majority shareholder. Alpert, 63 N.Y.2d at 563, 473 N.E.2d at 22, 483 N.Y.S.2d at 670. The “two-step” merger worked as follows. First, the company’s controlling shareholders sold their controlling interest to the acquirer in a private sale. Second, having obtained a controlling interest in the company, the acquirer voted to approve a merger and cash buyout of the minority shareholders. Id. at 563-64, 473 N.E.2d at 22-23, 483 N.Y.S.2d at 670-71. The minority shareholders did not vote, or have any say whatsoever, with respect to either “step” in the transaction. To the contrary, the - 21 - controlling shareholder simply forced an acquisition of the minority’s shares at the price that the controller deemed appropriate. Id. at 573, 473 N.E.2d at 28, 483 N.Y.S.2d at 676. Unlike Mr. Cole’s acquisition of KCP’s public shares, the two-step merger at issue in Alpert was a coercive “freeze out” because “[t]he merger plan did not require approval by any of the minority shareholders.” Id. at 564, 473 N.E.2d at 23, 483 N.Y.S.2d at 671. Moreover, there was no independent special committee that could negotiate on behalf of the minority shareholders. In other words, unlike here, the shareholders in Alpert had no choice. The element of coercion was central to this Court’s holding in Alpert that the controlling shareholder in such transactions must demonstrate the fairness of the process and the price. See, e.g., id. at 563, 473 N.E.2d at 22, 483 N.Y.S.2d at 670 (explaining that a “two-step” merger involves “the ‘freeze-out’ of the minority shareholders of the target corporation by the forced cancellation of their shares”) (emphasis added); id. at 572, 473 N.E.2d at 28, 483 N.Y.S.2d at 676 (“the minority has no choice but to surrender their shares for cash”) (emphasis added); id. at 566, 473 N.E.2d at 24, 483 N.Y.S.2d at 672 (“On this appeal, the principal task facing this court is to prescribe a standard for evaluating the validity of a corporate transaction that forcibly eliminates minority shareholders”) (emphasis added). - 22 - No such coercion or compulsion was present here because, from the outset, Mr. Cole conditioned his offer on approval by a majority of the non-Cole- affiliated shareholders. KCP shareholders could not be forced to do anything; they alone controlled the fate of the transaction. And the subsequent approval by 99.8% of those public shareholders who cast votes leaves no doubt whatsoever about their conclusions about Mr. Cole’s offer. This Court expressly noted that its decision in Alpert did not address the standard that would apply to “‘going-private’ mergers where the majority shareholders seek to remove the public investors.” Id. at 567 n.3, 473 N.E.2d at 24 n.3, 483 N.Y.S.2d at 672 n.3. The Court explained that because “different protections for the minority and varying notions of fairness may be appropriate for” other types of mergers, such as going-private mergers or parent/subsidiary mergers, the Court did “not now decide if the circumstances which will satisfy the fiduciary duties owed in this two-step merger will be the same for the other categories.” Id. Appellant contorts Alpert in arguing that the transaction there was the result of “true arm’s-length negotiating.” (See App. Br. 25.) While the controlling shareholder acquired its shares at arm’s-length, and was free to engage in a transaction or not, the minority shareholders simply had no choice. They were forced to sell, at the price and terms imposed upon them by the controlling - 23 - shareholder. And no one represented their interests in the transaction. Indeed, this Court in Alpert specifically noted that “defendants had not employed any neutral committees in negotiating the merger,” Alpert, 63 N.Y.2d at 574, 473 N.E.2d at 29, 483 N.Y.S.2d at 677 - in sharp contrast with the transaction at issue here, where the special committee negotiated on behalf of the minority shareholder and more than 99% of those who voted chose to approve the transaction. These differences underscore why Alpert, and the standard applied to that coercive transaction, is inapplicable here. Rather, the decisions by the lower courts in this case are entirely consistent with the policy underpinnings articulated in Alpert. Specifically, the dual protections for minority shareholders that were employed here - an effective, fully-empowered Special Committee of Independent Directors and an ab initio requirement of approval by a majority of the minority shareholders - together replicate an arm’s-length transaction because the potential influence of the controlling shareholder is neutralized. As this Court recognized in Alpert, “the appointment of an independent negotiating committee made up of neutral directors or of an independent board to evaluate the merger proposal and to oversee the process of its approval” can “simulate arm’s length negotiations.” Id. at 570. Thus, Appellant’s claims that the courts below somehow deviated from Alpert are without merit. The trial court and the First Department simply applied - 24 - longstanding precedents supporting the presumption of the business judgment rule and found that Appellant had not alleged facts sufficient to rebut that presumption. B. Like New York, Delaware Does Not Recognize An Exception To The Business Judgment Rule In This Context Delaware law is now explicit that a controlling shareholder “take private” transaction predicated from the outset on the approval of an independent special committee of directors and a non-waivable, fully-informed vote by a majority of the minority shareholders is subject to review under the business judgment rule. MFW, 88 A.3d at 642. In MFW, a controlling shareholder announced his intention to consummate a going-private transaction with a subsidiary corporation. Like Mr. Cole, that controlling shareholder “irrevocably and publicly disable[d] itself from using its control to dictate the outcome of the negotiations and the shareholder vote,” by appointing a special committee of disinterested directors. Id. at 644. Moreover, the controlling shareholder, like Mr. Cole here, conditioned its transaction at the outset on approval by (i) the special committee and (ii) a majority of the minority shareholders. Id. at 640. The controlling shareholder further announced that, also like Mr. Cole, it would not agree to sell its shares to any third party bidders. Id. at 640-41. The Delaware Supreme Court reasoned that, by including these procedural safeguards, the “controlled merger then acquires the shareholder- - 25 - protective characteristics of a third-party, arm’s-length merger[ ].” Id. at 644. Accordingly, the transaction was governed by the business judgment rule, and it was unnecessary to require a heightened showing of “entire fairness,” as required where there is a high likelihood that minority shareholders could not be assured of having their interests protected against overreaching by a controlling shareholder. See also Se. Pa. Transp. Auth. v. Volgenau, CV 6354-VCN, 2013 WL 4009193, at *1 (Del. Ch. Aug. 5, 2013) (finding that where both procedural protections of approval by special committee and majority of minority were employed, “the Court reviews the merger under the business judgment rule”). Thus, it is now settled law in Delaware that a challenge to a going- private transaction with these two protections for minority shareholders would be subject to review under the business judgment rule. 6 Appellant cursorily claims that its “complaint would survive MFW scrutiny on the pleadings.” (App. Br. 35.) As both courts below found, however, the Complaint’s allegations fall far short of pleading the basis for any causes of action against Defendants arising out of the transaction. Specifically, the trial court found that Appellant had failed to allege “facts that, if true, would give the Court a legitimate basis for judicial inquiry,” 6 Appellant argues that this Court in Alpert “relied heavily” on Delaware law as established in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), and cites Weinberger to support its contention that the entire fairness standard should apply here. (App. Br. 24.) However, the transaction at issue in Weinberger did not involve the dual procedural protections of approval by a special committee and a vote of the majority of the minority shareholders. - 26 - noting that Appellant merely “disagree[s] with the manner in which the special committee pursued negotiations with Cole and [is] dissatisfied with the result.” (R. 23.) Similarly, the Appellate Division held that “pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested.” (R. 834.)7 At bottom, Appellant would have this Court adopt a rule that is at odds with Delaware law. Having New York adopt a fundamentally different rule than Delaware on an important issue of corporate law would create needless inconsistency across jurisdictions and encourage forum shopping. Directors and controlling stockholders of Delaware corporations who engage in shareholder- protective conduct in going private transactions (as Mr. Cole did here) have rightly been accorded the protection of the business judgment rule - an approach that will incentivize shareholder-friendly directorial behavior and reduce the filing of lawyer-driven class action litigation that needlessly clogs judicial dockets. There is no reason in law or policy why New York should adopt a rule that is any 7 The result would be identical under Delaware law, applying MFW, since, as the courts below found, Plaintiff utterly failed to allege the elements of a claim for breach of fiduciary duty. See Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014) (transcript ruling) (applying MFW to dismiss complaint challenging a cash-out merger by management group comprising 46% ownership of target, where dual procedural protections of independent special committee and majority of the minority voting provision in place). - 27 - different, or that the clogged New York judicial dockets should be given any less protection from abusive class action litigation in M&A transactions. C. The Courts Below Properly Dismissed This Case Because Appellant Failed To Allege Facts Demonstrating That The Going- Private Transaction Was Subject To Conflicts Of Interest In support of its argument that the heightened “entire fairness” standard should be applied here, Appellant labels the going-private transaction “inherent[ly] conflicted.” (App. Br. 1.) The supposed “conflict” Appellant refers to, however, is entirely illusory and based on allegations that both the trial court and Appellate Division found to be inadequate under settled New York law. Appellant argues that simply by proposing the transaction, Mr. Cole “put himself in [a] conflicted position[.]” (App. Br. 3) It is of course beyond dispute that Mr. Cole had an interest in paying as little as possible for the public stock, just as the public shareholders - and the Independent Directors, as shareholders themselves - had an interest in obtaining a high price from Mr. Cole. As the Appellate Division found, however, “[a]lthough Mr. Cole had a conflict of interest, he did not participate when the company’s board of directors voted on the merger.” (R. 832-33.) Not only did Mr. Cole remove himself from the Board’s consideration of the transaction, he specifically structured the transaction to simulate an arm’s-length merger by insisting up front on two conditions to maximize protection to the minority shareholders’ interests: (i) approval by a - 28 - committee of independent and disinterested directors and (ii) a vote of the majority of the publicly held stock. Under New York law, entire fairness review is limited to situations where the board of directors engages in self-dealing or otherwise has a conflict of interest. See Limmer v. Medallion Grp., Inc., 75 A.D.2d 299, 303, 428 N.Y.S.2d 961, 963 (1st Dep’t 1980) (“In . . . instances of self-dealing, defendants have the burden of demonstrating the fairness of the transactions”); Wolf v. Rand, 258 A.D.2d 401, 404, 685 N.Y.S.2d 708, 711 (1st Dep’t 1999) (“[When] corporate officials . . . engage in fraud or self-dealing or corporate fiduciaries . . . make decisions affected by inherent conflict of interest, the burden shifts to defendants to prove the fairness of the challenged acts.”) (internal citations omitted). As the Appellate Division noted, there is no allegation in this case that the Independent Directors had any conflict of interest with the public shareholders. (R. 832.) Simply put, the Independent Directors did not stand to personally gain from the transaction to the detriment of the minority shareholders. To the contrary, as shareholders who would be selling millions of dollars worth of stock themselves if a transaction were to be approved, the Independent Directors’ interests were directly aligned with those of the public shareholders. (See R. 102 (“At the Effective Time, shares of Class A Common Stock held by the members of the Board of Directors and our executive officers (in each case, other than Mr. Cole) - 29 - will be converted into the right to receive the merger consideration in the same manner as all outstanding shares of Class A Common Stock held by Public Stockholders . . . .”).) Accordingly, Appellant was required to allege facts sufficient to state a claim that Mr. Cole controlled the Independent Directors. To do so, Appellant “must allege particularized facts sufficient to raise the suspicion that the directors were somehow beholden” to Mr. Cole. Higgins v. N.Y. Stock Exchange, Inc., 10 Misc.3d 257, 280, 806 N.Y.S.2d 339, 359 (Sup. Ct. N.Y. Cnty. 2005); see Health-Loom Corp. v. Soho Plaza Corp., 209 A.D.2d 197, 198, 618 N.Y.S.2d 287, 288 (1st Dep’t 1994) (affirming dismissal where “[p]laintiffs offer[ed] only conclusory allegations that the two defendant directors control the remaining directors” and did not “present specific and detailed allegations that the defendant directors ha[d] coercive powers over the other directors, or that the defendant directors constitute[d] a majority”) (citations omitted). A director’s independence can be challenged only when a plaintiff pleads facts that “establish that the directors are beholden to the controlling person or so under their influence that their discretion would be sterilized.” Cent. Laborer’s Pension Fund v. Blankfein, 34 Misc. 3d 456, 470, 931 N.Y.S.2d 835, 847 (Sup. Ct. N.Y. Cnty. 2011), aff’d sub nom., Cent. Laborers’ Pension Fund v. Blankfein, 111 A.D.3d 40, 971 N.Y.S.2d 282 (1st Dep’t 2013). - 30 - Here, Appellant argues that two of the Independent Directors (Grayson and Kelly) were elected to the Board by Mr. Cole, and the other two members (Blitzer and Peller), although elected exclusively by the Class A shareholders (i.e., non-Cole affiliated), were nominated for election by Mr. Cole’s “Board cronies.” (R. 566, 575; see also App. Br. 10). This allegation is inadequate as a matter of law: [I]t is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director. It is the care, attention and sense of individual responsibility to the performance of one’s duties, not the method of election, that generally touches on independence. Aronson v. Lewis, 473 A.2d 805, 815-16 (Del. 1984). With respect to Grayson and Kelly, Plaintiff’s sole contention is that they were not independent because Mr. Cole’s voted shares assured their elections to the board. (App. Br. 42; see also R. 561-62; R. 565-66; R. 575-76.) But the mere fact that Mr. Cole exercised his own rights as a shareholder to vote his shares in favor of their elections to the board is insufficient as a matter of law to allege that Grayson and Kelly lacked independence. See Cent. Laborers’ Pension Fund, 34 Misc. 3d at 470, 931 N.Y.S.2d at 847; see, e.g., Lichtenberg v. Zinn, 260 A.D.2d 741, 743, 687 N.Y.S.2d 817, 820 (3d Dep’t 1999) (allegation that members of special committee were “hand-picked” insufficient to establish lack of - 31 - independence); see also, e.g., Beam v. Stewart, 845 A.2d 1040, 1046, 1051 (Del. 2004) (allegations that directors served at the “sufferance” of controlling shareholder, who held 94% of the voting power, were “insufficient, without more, to rebut the presumption of independence” or “provide a sufficient basis from which reasonably to infer that [the directors] may have been beholden to [the controlling shareholder]”). Even if the fact that Mr. Cole voted for Grayson and Kelly in their elections to the board were legally relevant (and it is not), the notion that Grayson and Kelly were “legally incapable of acting as agents for the minority shareholders” (R. 562) rings particularly hollow given that the vast majority of public Class A shareholders - more than 80% - voted for Grayson and Kelly in the most recent director election prior to the Merger. (R. 255.) Appellant is no more successful in its weak attempt to cast the Special Committee’s negotiations with Mr. Cole as “anemic.” (App. Br. 15.) In fact, on three separate occasions, the Independent Directors persuaded Mr. Cole to increase his offer price. (R. 579; R. 580; see also R. 73-75.) As the Complaint acknowledges, Kelly and Mr. Cole discussed “‘the probable negative effect on the Company’s stock price and on its shareholders, including Mr. Cole, if a transaction were not to occur.’” (R. 579 (quoting R. 331).) Appellant’s allegation that the Independent Directors failed to use leverage to increase the offer is illogical and undermined by the Complaint itself. See In re Sud, 211 A.D.2d 423, 424, 621 - 32 - N.Y.S.2d 37, 38 (1st Dep’t 1995) (“factual claims [that are] either inherently incredible or flatly contradicted by documentary evidence” are not entitled to the presumption of truth on a motion to dismiss). Appellant elsewhere litters its Statement of Facts with conclusory allegations of control of the Independent Directors. For example, Appellant claims that the KCP board “consistently reward[ed] Cole with outsized executive compensation.” (App. Br. 10.) However, Appellant did not allege any facts supporting the conclusory assertion that the compensation paid to KCP executives was a result of Mr. Cole’s control of the Board. Indeed, Appellant has not alleged a claim against Mr. Cole or KCP concerning this allegedly improper compensation, nor has Appellant asserted that the compensation awarded would give rise to a claim for breach of fiduciary duty. Similarly, Appellant cites in its brief to “lucrative licensing agreements to Cole’s brother, Neil Cole, and approved payments to Cole’s aviation company to allow him to travel in his own private jet.” (App. Br. 10.) Even assuming those vague and unsupported allegations are true, they do not demonstrate that the Independent Directors were somehow beholden to Mr. Cole in this transaction. In fact, those allegations relate to conduct that occurred well before 2012, and are not alleged to have any connection to Mr. Cole’s offer to purchase the shares of the public shareholders. It appears that in drafting its - 33 - Complaint, Appellant did nothing more than scour public filings of KCP in search of any factual tidbit that could be spun as supposed evidence of Mr. Cole’s control of the Independent Directors. But none of these allegations have anything to do with this transaction or in any way support a claim that the Independent Directors were incapable of evaluating Mr. Cole’s offer, negotiating, and making a recommendation to the shareholders. As demonstrated above, the lower courts correctly rejected the central assumption underlying Appellant’s argument: that a going-private transaction is “inherently conflicted” even where premised at the outset on the dual protections of approval by a disinterested special committee and a fully informed majority of the minority shareholders, and absent allegations of control of the Independent Directors by the controlling shareholder. This Court should affirm. II. ALLEGATIONS RELATING TO GOING-PRIVATE TRANSACTIONS SHOULD NOT BE CATEGORICALLY EXEMPT FROM PRE-DISCOVERY DISMISSAL Appellant candidly asks this Court to relieve it of the obligation to plead more than conclusory allegations of “bad faith, a conflict of interest or the self-dealing necessary to overcome the business judgment rule,” Kassover v. Prism Venture Partners, LLC, 53 A.D.3d 444, 450, 862 N.Y.S.2d 493, 499 (1st Dep’t 2008), and instead assume that the fairness of any going-private transaction is automatically suspect, regardless of the process and protections for minority - 34 - shareholders. In other words, Appellant seeks to have this Court adopt a categorical and inflexible rule that every plaintiff alleging a breach of fiduciary duty in the context of a “going private” transaction is automatically entitled to proceed at least to summary judgment, and that no motion to dismiss a complaint making such allegations may ever be granted prior to discovery, no matter how deficient the complaint. Such an approach would upend the business judgment rule’s “ba[r on] judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes,” Auerbach v. Bennett, 47 N.Y.2d 619, 629, 393 N.E.2d 994, 1000, 419 N.Y.S.2d 920, 926 (1979), which has been “long recognized in New York,” 40 W. 67th St. Corp. v. Pullman, 100 N.Y.2d 147, 153, 790 N.E.2d 1174, 1179, 760 N.Y.S.2d 745, 750 (2003). In defense of its position, Appellant offers only the possibility that the dual protections of an independent special committee and a majority-of-the- minority vote may, under certain circumstances, be insufficient to protect the interests of minority shareholders. For example, relying on the decision in In re Southern Peru Copper Corp. S’holder Derivative Litig., 52 A.3d 761 (Del. Ch. 2011), Appellant posits that the good-faith performance of a special committee may “appea[r] pristine on the surface, but [be] wholly corrupt underneath,” (App. - 35 - Br. 36).8 Even taking Appellant’s hyperbole as true, however, all this amounts to is the common-sense statement that it is possible for a plaintiff to plead facts that overcome the presumption of the business judgment rule. But the business judgment rule is not and never has been an automatic entitlement to a dismissal in every case: where a plaintiff can plead facts as egregious as those alleged in Southern Peru, he might well be able to demonstrate “bad faith or fraud” and defeat a motion to dismiss. Auerbach, 47 N.Y.2d at 631, 393 N.E.2d at 1000, 419 N.Y.S.2d at 926. The business judgment rule is borne out of “the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments.” Id. at 630, 393 N.E.2d at 1000, 419 N.Y.S.2d at 926. Yet Appellant seeks to have courts wade into the details of every going-private transaction without imposing an obligation on plaintiffs to plead the sort of bad faith that indicates that this expenditure of judicial resources is worthwhile. Appellant’s claim that a majority-of-the-minority vote also is somehow suspect is even less credible. Again, Appellant relies only on mere possibilities, asserting that such votes “can be subtly coerced by controllers” 8 Southern Peru at best illustrates an outlier case of bad faith. It certainly provides no instructive guidance on the appropriate standard of review because the defendants there failed to raise that question. See In re S. Peru, 52 A.3d at 787. - 36 - through threats of retaliation. (App. Br. 27; see also id. at 36.) But Appellant makes no attempt to show that such coercion is either so likely that it warrants imposition of a legal presumption of such coercion, or that any such coercion occurred in this case. The only citation for such coercive effect that Appellant can muster is a twenty-five year old reference to the Delaware law decision in Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490, 502 (Del. Ch. 1990). Appellant’s reliance on Citron (as well as the Delaware decision in Southern Peru) exemplifies its cherry picking from Delaware law when it wishes, while elsewhere attempting to distance itself from the Delaware Supreme Court’s decision in MFW, which is on all fours with the facts here. But Citron does little more than Appellant’s brief here: hypothesize about a cartoonish world in which the ominous presence of a controlling shareholder cows any investor that stands before it. Delaware courts have rightly refused to extend that view, relying instead on actual evidence from practice about the validating effect of majority-of-the-minority votes: Market developments in the score of years since have made it far easier, not harder, for stockholders to protect themselves. With the development of the internet, there is more public information than ever about various commentators’, analysts’, institutional investors’, journalists’ and others’ views about the wisdom of transactions. Likewise, the internet facilitates campaigns to defeat management recommendations . . . . Perhaps most important, it is difficult to look at the past generation of experience and conclude that stockholders are - 37 - reluctant to express positions contrary to those espoused by company management . . . . Stockholders have mounted more proxy fights, and, as important, wielded the threat of a proxy fight or a “withhold vote” campaign to secure changes in both corporate policies and the composition of corporate boards. Stockholders have voted against mergers they did not find favorable, or forced increases in price. Nor has timidity characterized stockholder behavior in companies with large blockholders or even majority stockholders; such companies still face stockholder activism in various forms, and are frequently the subject of lawsuits if stockholders suspect wrongdoing. In re MFW S’holders Litig., 67 A.3d 496, 530-32 (Del. Ch. 2013), aff’d sub nom., MFW, 88 A.3d 635. Nor is there any specific allegation here that the majority-of-the- minority vote was somehow coerced or otherwise tainted. The courts below rightly rejected the naked allegations of Appellant’s complaint that the Proxy - which extensively detailed the negotiations between the Independent Directors and Mr. Cole - was somehow misleading, concluding that Appellant “do[es] not allege any specific facts in support of this allegation.” (R. 23.) Similarly, Appellant’s attempt to cast doubt on the reliability of a majority-of-the-minority voting provision by noting that “the Southern Peru transaction was approved by a majority of the company’s minority shares,” (App. Br. 27) is disingenuous. The vote in that case was neither an ab initio requirement nor was it a majority-of-the-minority vote. On the contrary, it was only agreed to - 38 - in the very final stages of negotiations when “the Special Committee gave up on its proposed majority of the minority vote provision and agreed to [controlling shareholder] Grupo Mexico’s suggestion that the Merger require only the approval of two-thirds of the outstanding common stock.” In re S. Peru, 52 A.3d at 778. Moreover, the vote was not an independent check on the special committee because one of the largest minority shareholders tied its votes to the special committee’s recommendation, meaning that if the special committee approved the transaction, that shareholder “had to vote for the Merger, and its vote combined with Grupo Mexico’s vote would ensure passage.” Id. at 784. Appellant’s argument further fails to recognize the amplifying effects of protecting minority shareholders through both an independent special committee and an ab initio requirement of a majority-of-the-minority vote. As the Delaware Court of Chancery noted in MFW, using these protections in tandem makes them both more effective: Because a special committee in this structure knows from the get-go that its work will be subject to disapproval by the minority stockholders, the special committee has a strong incentive to get a deal that will gain their approval. And, critically, so does another key party: the controlling stockholder itself, which will want to close the deal, having sunk substantial costs into the process. But the second is equally important. If, despite these incentives, the special committee approves a transaction that the minority investors do not like, the minority investors get to vote it down, on a full information base and without coercion. - 39 - In re MFW S’holders Litig., 67 A.3d at 530, aff’d sub nom., MFW, 88 A.3d 635. In short, Appellant’s piecemeal attack on the dual protections for the minority shareholders used in both this case and in MFW fails to acknowledge that the whole is greater than the sum of its parts. III. ADOPTION OF ENTIRE FAIRNESS REVIEW OF GOING PRIVATE TRANSACTIONS CONDITIONED ON THE DUAL PROCEDURAL PROTECTIONS USED HERE WOULD HARM MINORITY SHAREHOLDERS Appellant’s rule would impose an unavoidable litigation tax on every single going-private transaction. No matter how diligently undertaken or how scrupulously the rights of minority shareholders were protected, there is simply no amount of procedural protection that Appellant deems significant enough to warrant dismissal of frivolous claims before discovery. The consequence is obvious: controllers and companies will have no incentive to provide those protections to minority shareholders in the first place. “From a controller’s standpoint, accepting this condition from the inception of the negotiating process add[s] an element of transactional risk without much liability-insulating compensation in exchange.” In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618 (Del. Ch. 2005). On the contrary, subjecting a transaction first to the scrutiny of a special committee and the shareholders, and then to entire fairness review in court creates what one leading commentator has described as “the worst - 40 - of all possible worlds: a fully empowered [Special Committee] and a feisty negotiation with the controller, to be followed nevertheless with entire fairness review by the court, even if minority shareholders have approved the deal.” Guhan Subramanian, Fixing Freezeouts, 115 Yale L.J. 2, 17 (2005). Thus, absent the possibility of avoiding the “litigation tax,” a controlling shareholder has no reason to subject the transaction to the vote of minority shareholders.9 Adhering to application of the business judgment rule gives controllers an ability to avoid costly litigation by agreeing to - and even pursuing - upfront mechanisms to protect minority shareholders. “According business judgment review treatment . . . would create an incentive for acquired company boards and management to vest the decision-making power over the transaction’s procession in the disinterested members of the corporate electorate.” William T. Allen et al., Function over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. Law. 1287, 1307-08 (2001); see also MFW, 67 A.3d at 535 (“Under an approach where the business judgment rule standard is available if a controller uses a majority-of-the-minority condition upfront, minority 9 This is not mere speculation. Professor Subramanian’s review of available data found that “the vast majority of controllers . . . (eighty out of eighty-five, or 94%) went through [a special committee] process. With the burden thus shifted through a well-functioning SC, controllers have no further incentive to provide a [minority vote] condition. Consistent with this prediction, I find that only one-third (eighteen out of fifty-five) of the merger freezeouts in my sample included [such a] condition.” Subramanian, supra, at 16-17. - 41 - investors will have an incentive for this potent fairness protection to become the market standard and to be able more consistently to protect themselves in the most cost-effective way, at the ballot box.”). Frontloading protections for minority shareholders is far more likely than judicial review to actually protect them. First, there are strong reasons to believe that meaningful judicial review of these transactions is unlikely to occur, regardless of the standard of review. “[A] per se rule of entire fairness encourages defendants to settle freeze-out challenges, even when the claims are non- meritorious.” Peter V. Letsou & Steven M. Haas, The Dilemma That Should Never Have Been: Minority Freeze Outs in Delaware, 61 Bus. Law. 25, 40 (2005). The problem is that plaintiffs’ lawyers have no incentive to significantly challenge the price agreed to by the special committee. Instead, they have an incentive to sue earlier in the process, “as soon as there is a public announcement of the controller’s intention to propose a merger,” so that the lawyers “can claim ‘shared credit’ with the special committee” for any price increases obtained and then quietly settle. In re Cox Commc’ns, 879 A.2d at 620, 622-23. In short, rather than promote a meaningful challenge to the fairness of the proceedings, requiring entire fairness review for all transactions creates an incentive for all sides merely to effectuate “a wealth transfer from the controller to plaintiffs’ counsel.” Subramanian, supra, at 45. It is thus perhaps unsurprising - 42 - that the Delaware courts could not find a single case in which plaintiffs’ lawyers “ever refused to settle once they have received the signal that the defendants have put on the table their best and final offer - i.e., an offer that is acceptable to the special committee” and “there are no good examples of situations when a plaintiff’s attack on a going private proposal has, by actual litigation, added actual value.” In re Cox Commc’ns, 879 A.2d at 630-31. Even when properly applied, there would still be strong reasons to prefer the ex ante shareholder protections employed in this case to ex post judicial review. Judicial scrutiny of business dealings is always limited by the generalist nature of our courts, the peculiarities of the adversary process, the rules of evidence that limit what may be considered, and the necessarily brief time and attention that can be devoted to any particular case in the midst of crowded dockets. After all, the business judgment rule was not borne out of a desire to create incentives, but from “the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments, [for which] . . . there can be no available objective standard by which the correctness of every corporate decision may be measured.” Auerbach, 47 N.Y.2d at 630, 393 N.E.2d at 1001, 419 N.Y.S.2d at 926. By contrast, the mechanisms employed in this case actually create value for shareholders. An empowered special committee has the freedom to - 43 - “explore various options, assess tradeoffs across issues, and make offers and counteroffers, thus identifying a fair range for the deal.” Subramanian, supra, at 50. As here, the special committee process can draw on the wisdom of outside experts without being hamstrung by judicial rules for the consideration of such opinions, and “the combination of a special committee, with general business acumen and a fair amount of company specific knowledge, with wily advisors who know how to pull the levers in merger transactions in order to extract economic advantage, is a potent one of large benefit to minority stockholders.” In re Cox Commc’ns, Inc., 879 A.2d at 618. So too is a majority-of-the-minority veto power a more effective tool than judicial review. The sort of vote that took place in this case “can facilitate an implicit market check in a merger freezeout, and, in fact, is the only way to subject a merger freezeout to a market check.” Subramanian, supra, at 54. It is telling that the only academic support that Appellant can muster for its position is an almost 40-year-old law review article that advocates the extreme conclusion that going-private transactions should be “flatly prohibited in all cases” because “their only serious aim is to enrich the insiders” and that no legitimate business purpose ever “exists in going-private transactions.” Victor Brudney & Marvin A. Chirelstein, A Restatement of Corporate Freezeouts, 87 - 44 - Yale L.J. 1354, 1376 (1978).10 No modern court or scholar has taken such an economically irrational view; on the contrary it is now well-recognized that “a going-private transaction may be the optimal wealth-enhancing transaction for minority shareholders.” Letsou & Haas, supra, at 82. The commentary relied upon by Appellant has no utility in a world where going-private transactions have become commonplace. The paucity of citation in Appellant’s brief is a product of the simple fact that virtually no one who has studied this area supports its proposed approach. Courts, the bar, and academics now agree practically across the board that when controllers take actions to protect minority shareholders early in a going-private transaction - as Mr. Cole did here - the diligent work of the special committee and the vote of the minority shareholders should be protected from plaintiffs’ lawyers by the business judgment rule. [I]f a controller proposed a merger, subject from inception to negotiation and approval of the merger by an independent special committee and a Minority Approval Condition, the business judgment rule should presumptively apply. . . . This alteration would promote the universal use of a transactional structure that is very favorable to minority stockholders - one 10 Appellant’s repeated description of “Alpert’s heavy reliance on Brudney and Chirelstein,” (App. Br. 23), is misleading. Alpert cited the article in two footnotes early in the opinion for general descriptions of the types of going-private transactions and the nature of the risks they entail - wholly uncontroversial points. Alpert, 63 N.Y.2d at 566-67 n.2 & 3, 472 N.E.2d at 24 n.2 & n.3, 483 N.Y.S.2d at 673 n.2. & n.3. Alpert did not rely on any of the authors’ extreme conclusions for any point of law, and there is no reason to think that it provides meaningful guidance, then or now. - 45 - that deploys an active, disinterested negotiating agent to bargain for the minority coupled with an opportunity for the minority to freely decide whether to accept or reject their agent’s work product. In re Cox Commc’ns, 879 A.2d at 643-44; see also Subramanian, supra, at 70 (“[M]inority shareholders should receive, to the extent possible, the same procedural protections that are built into the arm’s-length merger process. In the freezeout context, this principle means approval by an SC of disinterested directors, to be followed by approval from a majority of the minority shareholders. If these procedural protections are met, courts should defer to the outcome and apply only business judgment review.”); Allen, et al., supra, at 1321 (“[B]y giving greater liability-insulating effect to fully informed stockholders votes and approvals by effective special committees, our proposed standards will provide an incentive for corporate boards to use these protective mechanisms, and will minimize judicial second-guessing of transactions whose integrity is adequately ensured by intra-corporate procedures.”); Corporate Law-Mergers and Acquisitions-Delaware Supreme Court Endorses Business Judgment Review for Going-Private Mergers with Dual Procedural Protections, 128 Harv. L. Rev. 1818, 1825 (2015) (“M&F Worldwide took a significant step toward remedying the - 46 - incoherence of Delaware’s freezeout doctrine and policy by tying protections and standards of review to prevailing norms of arm’s-length transactions.”).11 Maintenance of a vibrant and effective business judgment rule gives companies and directors an incentive to protect minority shareholders at the front, value-creating end of a transaction. Minority shareholders may remain confident that, if the special committee truly deals with them in bad faith, the business judgment rule allows them to plead such failures and obtain their day in court. Because Appellant failed to plead a basis for rebuttal of the presumption of the business judgment rule in this case, the courts below properly dismissed the Complaint. CONCLUSION For the foregoing reasons, Defendants-Respondents respectfully request that the Court enter an Order affirming the Decision of the Appellate Division, which affirmed the trial court’s dismissal of Appellant’s Complaint. 11 See also Daniel Wilson, Desirable Resistance: Kahn v. M&F Worldwide and The Fight For The Business Judgment Rule In Going-Private Mergers, 17 U. Pa. J. Bus. L. 643, 671 (2015) (“[B]y upholding MFW I, the Delaware Supreme Court incentivized controlling shareholders to structure their going-private mergers in a manner maximally protective of minority shareholders.”); Bernard S. Sharfman, Kahn v. M&F Worldwide Corporation: A Small but Significant Step Forward in the War Against Frivolous Shareholder Lawsuits, 40 J. Corp. L. 197, 210 (2015) (“[T]he rationale for the dual protection merger structure is to discourage frivolous lawsuits and the paying off of plaintiffs’ attorneys to end these suits.”). Dated: September 24, 20 l5 New York, New York By: FARR & GALLAGHER LLP Tariq undiya Sameer Advani Benjamin P. McCallen 787 Seventh Avenue New York, New York 10019 Phone: (212) 728-8000 Attorneys for Defendants-Respondents Kenneth D. Cole, KCP Holdco, Inc. , and KCP Mergerco, Inc. SIDL~USTIN LLP A By: ~ {J CJ/.un Andrew W. Stem Nicholas P. Crowell David L. Breau David W. Denton, Jr. 787 Seventh A venue New York, New York 10019 Tel.: (212) 839-5300 Fax: (212) 839-5599 Attorneys for Defendants-Respondents Michael J. Blitzer, Robert C. Grayson, Denis F. Kelly, and Philip R. Peller - 47- KAYE SCHOLER LLP n By: \I ww--ta . ~ Yin~nt A. Sarna 1 Catherine B. Schumacher Daphne Morduchowitz 425 Park A venue New York, New York 10022-3598 Tel. : (212) 836-8000 Fax: (212) 836-8689 Attorneys for Def endant-Respondent Paul Blum - 48-