In Thermopylae Capital Partners, L.P. v. Simbol, Inc. C.A. No. 10619-VGC (Jan. 29, 2016), Vice Chancellor Glasscock granted defendants’ motion to dismiss, with prejudice. After attempting to unravel the allegations in plaintiffs’ pleadings as to a dilution claim, the Court of Chancery held that the complaint’s omission of pertinent facts tested the limits of “reasonable conceivability” by requiring the Court to speculate as the fundamental facts necessary for plaintiffs to prevail—facts available to plaintiffs under Delaware General Corporation Law § 220.
Plaintiffs—stockholders and former management of defendant Simbol, Inc. (“Simbol”)—claimed that Simbol’s board of directors, executives, and certain defendants-stockholders diluted plaintiffs’ shares in the corporation as part of an elaborate “scheme” to usurp corporate control for the benefit of defendants-stockholders Mohr Davidow Ventures (“MDV”) and Itochu Corporation (“Itochu”). By so doing, defendants purportedly breached their fiduciary duties to minority stockholders, causing them direct harm.
Before reaching the sufficiency of the pleadings, the court addressed the distinction between direct and derivative claims in stockholder actions, noting that while claims based on diminution in stock value—such as the share dilution alleged by plaintiffs—are generally derivative in nature, the Delaware Supreme Court recognized a limited exception to this rule in Gentile v. Rossette, 906 A.2d 91 (Del. 2006). In Gentile, the Court held that a minority shareholder may maintain a direct claim where (a) a majority or controlling stockholder issues itself “excessive” shares for insufficient consideration and (b) the exchange decreases the equity share of minority stockholders in proportion to the increase in equity share of the majority or controlling stockholder. In such cases, the Court reasoned, there is a direct transfer of both economic value and voting power from minority stockholders to the majority or controlling stockholder, and therefore there is direct stockholder harm distinct from any suffered by the corporation. As a result the stockholder may bring a claim directly in a case in which a defendant-fiduciary had the ability to use the levers of corporate control to provide a benefit to himself and did so.
According to the Court, plaintiffs acknowledged at oral argument that only two transactions orchestrated by defendants caused plaintiffs direct harm. First, plaintiffs alleged that Itochu and MDV unilaterally re-priced certain preferred stock in a manner that allowed such parties to issue themselves stock at a significantly discounted price—resulting in dilution to existing stockholders. Second, plaintiffs alleged that defendants further diluted stockholder interests by improperly transferring shares from the former CEO to the new CEO.
After noting that, if properly pled, the first transaction could constitute a direct harm to plaintiffs, the Court rejected both claims as insufficiently pled. While plaintiffs asserted that MDV was a majority shareholder, they did not delineate the number of outstanding shares or identify the relative voting rights associated with MDV’s shares. As a result the Court could not conclude from the pleadings that MDV was a controlling stockholder. Similarly, although plaintiffs asserted that the transactions were tainted by an interested board of directors, the pleadings failed to identify the number of persons on the board at the time, and as a result it was impossible for the Court to conclude that these persons constituted a majority of the board.
Rather, plaintiffs relied on certain contractual rights (a put option and a veto right) provided to MDV to insinuate actual control by the stockholder. Specifically, plaintiffs alleged that, in exchange for further investment necessitated by MDV’s actions, Simbol entered into a series of agreements whereby MDV gained certain beneficial rights. The Court rejected these facts as irrelevant, holding that the fact that MDV was able to exert influence through bargained for power does not render it a “controlling” stockholder for purposes of a breach of fiduciary duty analysis.
The Court dismissed the complaint with prejudice. The Court also denied plaintiffs’ request at oral argument to re-plead the complaint with sufficient facts to support their claims because the plaintiffs filed an answer to the Motion to Dismiss rather than correct the deficiencies in their complaint. However, the Court noted that any stockholder could still find relief through a properly brought derivative action.