Stockholder’s Suit for Directors’ Fiduciary Breach Related to Acquisitions and Stock Repurchases Dismissed With Prejudice for Failure to Plead Demand Futility and to State Viable Claims, Directors Found to be Disinterested Regardless of 10-Q Filing Stating Action Without Merit

By: Remsen Kinne and Adrienne Wimberly

In Tilden v. Cunningham et. al., C.A. No. 2017-0837-JRS (Del. Ch. Oct. 26, 2018), the Delaware Court of Chancery granted the motion of directors of Delaware corporation Blucora, Inc. (“Blucora”) named as Defendants to dismiss a derivative action and dismissed Plaintiff’s complaint with prejudice, holding that the Plaintiff, a Blucora stockholder, failed to plead demand futility and failed to state viable claims under Rule 12(b)(6). This derivative action stems from three transactions Blucora entered into between 2013 and 2015: 1) an acquisition of Monoprice, Inc. (“Monoprice”), 2) the acquisition of HD Vest (“HD Vest”), and 3) several stock repurchases.

The six-count suit included claims alleging: breach of duty of loyalty against several directors related to the HD Vest acquisition, aiding and abetting breach of fiduciary duties against GCA Advisors (“GCA”), breach of duty of loyalty against several directors related to the Monoprice acquisition, breach of duty of loyalty against several directors related to the stock repurchases, and insider trading against Director Andrew Snyder and his two companies, Cambridge Insurance Group (“CIG”) and Cambridge Insurance Group I (“CIG I”).  Plaintiffs’ requested relief including repayment of gains related to alleged insider trading, and imposition of corporate governance reform.

The decision primarily holds that Plaintiff’s claims failed because of his failure to adequately plead demand futility. The Court rejected Plaintiff’s argument that demand was futile because certain directors who were members of the Board when Plaintiff filed the First Amended Complaint (“Demand Board”) were also on the Board when Blucora stated in its Form 10-Q filing that the claims in this derivative action were without merit. Citing precedent, the Court ruled that public statements made in SEC filings regarding the merits of derivative litigation are insufficient to show that it would be futile to demand a majority of independent directors to consider claims for relief pursued in the litigation. Plaintiff asserted that one of the directors was not fit to consider a pre-suit demand because he is a Blucora stockholder and party to a stock repurchase plan. The Court held that this was speculation about a director’s motives for corporate action, which, in the absence of an actual demand, is insufficient to allege facts required to prove demand futility.

Plaintiff also alleged that one of the directors faced a situational conflict rendering her unable to impartially consider a demand because she was director in another company that was facing similar potential liability on similar claims. The Court rejected this argument, however, on the basis that the litigation involving the other company was not related to Plaintiff’s derivative action against Defendants and because Plaintiff did not plead with particularity how the director’s defenses in the other company litigation would affect her disinterested business judgment in the Blucora demand. With a least five of the eight members of the Demand Board disinterested and independent, the Court found that the Plaintiff failed to adequately plead demand futility.

In addition, the Court held that Counts III through V of Plaintiff’s claims are barred by laches.  During the three year limitations period, Plaintiff filed two other suits alleging these same claims in Washington and  California courts despite a Delaware forum selection clause in the Blucora bylaws. The court found that by forcing Defendants to defend in the wrong fora twice, the Plaintiff exposed Defendants to actual prejudice and concluded that by the time Plaintiff filed the complaint in Delaware, the claims were therefore time-barred.

Next, the Court determined that each of Plaintiff’s fiduciary duty breach and aiding and abetting allegations failed to plead viable claims upon which relief may be granted. Blucora’s Certificate of Incorporation, as allowed by Section 102(b)(7) of the Delaware General Corporation Law, requires proof of bad faith to support a breach of the duty of loyalty against any director. The Court found that Plaintiff’s allegations amount to a hindsight critique of a poor result rather than the allegation of scienter necessary to plead bad faith. Without a valid breach of loyalty claim, the aiding and abetting claim against GCA fails as a matter of law. Further, the Court concluded that the determination to effectuate the stock repurchases was to be measured by the business judgment rule.

Finally, the court turned to the insider trading claim, finding that Plaintiff failed to allege, as would be required to state a viable claim of this type against a corporate fiduciary, what material, nonpublic information Director Snyder possessed. Additionally, the Court indicated that Plaintiff’s reference to the size of a trade or its timing in relation to when the company engaged in a transaction or released financial information, is speculation that without more is insufficient to support an inference that trades by Director Snyder, CIG or CIG I were based on that information.

Tilden v. Cunningham et. al., C.A. No. 2017-0837-JRS (Del. Ch. Oct. 26, 2018)

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