Delaware Chancery Court Dismisses Claims Involving a Related Party Transaction with a Controlling Stockholder under Court of Chancery Rules 23.1 and 12(b)(6)

Aug 04 2015

In Teamsters Union 25 Health Services & Insurance Plan v. Baiera, et al, a stockholder of Orbitz Worldwide, Inc. challenged the fairness of the terms of a five-year services agreement that Orbitz entered into with a group of entities affiliated with Travelport Limited, a controlling shareholder of Orbitz when the agreement was negotiated and signed. The plaintiff asserted four derivative claims challenging the services agreement and a separate putative class claim for breach of fiduciary duty against Orbitz’s directors for allegedly violating the rules of the New York Stock Exchange (NYSE). Defendants moved to dismiss plaintiff’s claims under Court of Chancery Rule 23.1 for failure to make a demand or to adequately plead demand is excused and under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted. The Delaware Court of Chancery concluded that demand was not excused as to any of plaintiff’s derivative claims and that it was not reasonably conceivable that the plaintiff could establish that Orbitz’s directors caused Orbitz to violate the NYSE Rules. Thus, the Court granted Defendants’ motion to dismiss the derivative claims under Rule 23.1 and the NYSE-related claim under Rule 12(b)(6).

Plaintiff Teamsters Union 25 Health Services & Insurance Plan (“Plaintiff”) has been a stockholder of Orbitz Worldwide, Inc. (“Orbitz”), an online travel company, at all relevant times with respect to its claims. Nominal Defendant. The Travelport Defendants (“Travelport”), which were majority owned by Defendant Blackstone Group LP (“Blackstone”), are group of entities affiliated with Travelport Limited, which provides transaction processing services to travel companies. The other defendants included Orbitz’s board of directors when the company entered into the New Agreement (the “Agreement Board”), Orbtiz’s board of directors when Plaintiff initiated this action (the “Demand Board”), and Orbitz’s current board of directors (“Current Board”).

On February 4, 2014, Orbitz and Travelport entered into a new services agreement (“New Agreement”) which terminated and replaced a prior agreement. The Plaintiff asserted that the New Agreement was unfair and that Travelport owned approximately 48% of Orbitz, thus controlling the company when it negotiated and signed the agreement.

Plaintiff asserted four derivative claims alleging that (i) Travelport breached its fiduciary duties as Orbitz’s controlling stockholder by causing Orbitz to enter into an unfair agreement that suited Travelport’s unique needs to the detriment of the company, (ii) the Agreement Board breached their fiduciary duties by participating in the planning and execution of the unfair and improper New Agreement and by failing to extract fair terms in a related-party transaction, (iii) Travelport was unjustly enriched by the New Agreement, and (iv) Travelport and Blackstone aided and abetted the board’s breaches of fiduciary duty by knowingly soliciting, encouraging, and/or participating in the New Agreement.

In analyzing the derivative cliams, the Court noted that since a derivative action infringes upon the board’s managerial authority, the law imposes certain prerequisites on a stockholder’s right to sue derivatively. Under Court of Chancery Rule 23.1, because Plaintiff did not make a demand on the company’s board before initiating this action, it must have alleged with particularity that its failure to make such a demand should be excused. In analyzing this issue of demand futility, the Court applied the test in Rales v. Blasband, but stated that it would have reached the same conclusion under Aronson v. Lewis, the other test for demand futility under Delaware law.

Significant to the analysis, the Court also rejected the Plaintiff’s assertion that demand should be excused simply because an alleged controlling stockholder stood on both sides of the New Agreement. The Court stated that this theory is inconsistent with Delaware Supreme Court authority that focuses the test for demand futility exclusively on the ability of a corporation’s board of directors to impartially consider a demand to institute litigation on behalf of the corporation—including litigation implicating the interests of a controlling stockholder. Ultimately, the Court concluded that demand was not excused as to any of plaintiff’s derivative claims because plaintiff failed to raise a reasonable doubt that at least half of the Demand Board could have exercised impartial business judgment in responding to a demand. Accordingly, the Court granted Defendants’ motion and dismissed Plaintiff’s derivative claims under Rule 23.1.

Finally, the Plaintiff alleged that members of the Current Board breached their fiduciary duties by falsely determining certain directors were “independent” under NYSE Rules. However, citing Delaware and federal case law, the Court concluded that the Plaintiff had no standing to prosecute a violation of the NYSE Rules and that it was not reasonably conceivable that Plaintiff could establish that the Current Board caused Orbitz to violate the NYSE Rules. Therefore, the Court dismissed this claim under 12(b)(6) for failure to state a claim for relief.

Teamsters Union 25 Health Services & Insurance Plan v. Baiera, et al.