In Cumming v. Edens, et al., C.A. No. 13007-VCS (Del. Ch. Feb. 20, 2018), the Court of Chancery denied a motion to dismiss a derivative suit for breach of fiduciary duties brought by a stockholder of New Senior Investment Group, Inc. (“New Senior”) against New Senior’s board of directors (the “Board”) and related parties in connection with New Senior’s $640 million acquisition of Holiday Acquisition Holdings LLC (“Holiday”). The Court made clear that compliance with Section 144 does not necessarily provide a safe harbor against claims for breach of fiduciary duty and invoke business judgment review of an interested transaction. Because the complaint alleged with specificity “that the Board acted out of self-interest or with allegiance to interest other than the stockholders,” the court applied the entire fairness standard of review and concluded that the transaction was not fair to New Senior stockholders.
The transactions at issue revolve around the senior living industry. New Senior is a publicly-traded real estate investment trust with a diversified portfolio of senior housing facilities. And Holiday was the nation’s second-largest private owner of independent living communities for seniors.
The many, allegedly incestuous ties in the case are impossible to ignore. At the center of these allegations are defendants Fortress Investment Group LLC (“Fortress”), a multi-billion dollar global investment manager, and various affiliated entities. According to the complaint, Fortress was effectively both the buyer and the seller in this deal: (i) Fortress affiliates managed the buyer New Senior and six out of the seven directors of New Senior had ties to Fortress or related parties; and (ii) Fortress affiliates also controlled and owned a majority stake in the M&A target Holiday. In addition to the acquisition, there were also related financing and other transactions that allegedly involved self-interested elements.
In the complaint, the plaintiff asserted breach of fiduciary duty claims against New Senior’s directors and CEO as well as claims of aiding and abetting breaches of fiduciary duty against Fortress and related parties. The defendants moved to dismiss under Rules 23.1 and 12(b)(6).
In its 75-page opinion, the court held the complaint pled particularized facts to raise a reasonable doubt as to whether a majority of the Board was disinterested or independent, such that a demand for the Board to pursue this case would have been futile. Following the Aronson precedent, the court engaged in a detailed review of the potential disinterested or independent nature of each of the directors and determined that six of the seven had the potential of not satisfying the standard. As a result the court denied the motion to dismiss under Rule 23.1.
In analyzing plaintiff’s claim for purposes of the 12(b)(6) motion to dismiss, the court found compliance with Section 144(a)(1) (regarding interested party transactions) does not necessarily invoke business judgment review of an interested transaction. A plaintiff can still overcome the business judgment presumption at the pleading stage by alleging the board acted out of self-interest or with allegiance to interest other than the stockholders. For the same reasons the Board was interested and not independent under the Aronson analysis, the court held the plaintiff had adequately pled facts to warrant application of the entire fairness standard, which normally defeats a 12(b)(6) motion to dismiss.
Under the heightened scrutiny of entire fairness, the court held the pled facts adequately alleged the Holiday acquisition was not entirely fair, under both “fair dealing” and “fair price” analyses. Accepting the allegations as true, the court noted eight indications of unfair dealing and six indications of unfair fair price, including that New Senior Board members Wesley Edens and Susan Givens: stood on both sides of the deal—Edens was the co-founder and largest stockholder of Fortress and Susan Givens was managing director of Fortress’ private equity group and owned interests in Holiday through Fortress’ private equity fund; and they initiated, structured and negotiated each element of the challenged transactions, even though they stood to improperly benefit from the acquisition.
Finally, the court addressed the claim against Fortress and its affiliates for aiding and abetting a breach of fiduciary claim. Because such a claim must contain the element of scienter, an aiding and abetting claim is among “the most difficult to prove.” However, the complaint described at length how various Fortress subsidiaries aided and abetted to benefit from the Holiday acquisition. Under basic principles of agency, the court determined that the knowledge of Edens and Givens was imputed to the Fortress entities they served as agents. Thus, the court held it is reasonably conceivable that all five of the alleged aiders and abettors knowingly participated in the directors’ alleged fiduciary duty breaches and denied defendants’ motion to dismiss in its entirety.