In In re Xura, Inc. Stockholder Litigation (C.A. No. 12698-VCS), the Delaware Court of Chancery (the “Court”) denied a motion to dismiss brought by defendants Phillippe Tartavull (“Tartavull”) and Siris Capital Group (“Siris”, and collectively with Tartavull, the “Defendants”) in a case filed by Obsidian Management LLC (“Obsidian” or “Plaintiff”) for breach of fiduciary duty in connection with the sale of Xura, Inc. (“Xura”) to a Siris affiliate. The Court held that Plaintiff pled a viable breach of fiduciary duty claim against Tartavull as CEO of Xura. The Court granted a motion to dismiss as to an aiding and abetting claim brought against Siris holding that Plaintiff failed to plead a viable claim.
This case arises out of an appraisal action brought by certain stockholders of Xura. During the appraisal action Plaintiff uncovered evidence that Tartavull breached his fiduciary duties to Xura stockholders in the sale process leading up to the merger. The appraisal and the fiduciary duty actions were consolidated and the appraisal action stayed pending final adjudication of the breach of fiduciary duty and aiding and abetting claims. Defendants moved to dismiss the breach of fiduciary duty and aiding and abetting claims under Court of Chancery Rule 12(b)(6).
Xura was a publicly-traded Delaware corporation. In 2012, Tartavull sought out Siris as a potential financial sponsor for an acquisition of Xura. Tartavull and Siris representatives contemplated Tartavull would remain as CEO of the post-acquisition Xura and chair an operating committee. Nothing came of this first round of discussions, but Tartavull and Siris representatives stayed in touch. In November 2014, Tartavull and Siris representatives met to discuss a potential acquisition of Xura. Siris submitted a letter of interest in January 2015 proposing to acquire Xura for $24 per share, but Xura’s board of directors (the “Board”) declined. Months later after changes at Xura, Siris made an offer for $30 to $32.50 per share. The Board again declined, directing management to make known Xura was not for sale. Nonetheless, Siris continued acquisition discussions with Tartavull, exchanging forecasts and other non-public information. Siris next made an offer of $35 per share, and the Board responded by engaging Goldman Sachs (“Goldman”) as an adviser. Tartavull continued regular direct communication with Siris despite admonitions from Goldman and other executives that he refrain. Around this time, Tartavull became aware that he would likely be ousted as CEO unless a deal was consummated.
By February 2016, Xura’s stock price had declined and Siris prepared a lower offer. Around the same time, Tartavull and a Siris representative secretly agreed on $28 per share. Tartavull did not inform anyone at Xura or Goldman of this meeting, and it was not disclosed by proxy or any other public filing. The $28 figure was later memorialized in a letter from Siris to Tartavull. In March 2016, Siris and Xura entered into an exclusivity agreement, but Siris then sought to lower its offer price. Tartavull continued secretly negotiating, even as the Board agreed Xura would go silent. Several apparent information leaks occurred in the following months. Xura and Siris eventually executed a definitive merger agreement in May 2016, including a 45-day go-shop period.
Apparently affected by the information leaks, the go-shop period proved fruitless despite Goldman contacting 26 prospective buyers and entering into confidentiality agreements with three. Less than a month into the go-shop period Goldman reported no parties were participating. In July 2016, Xura stockholders brought claims seeking to enjoin the sale, but those claims were resolved with Xura and Siris, and the transaction ultimately closed in August. Quickly after closing, Tartavull negotiated a long-term incentive plan that could have paid him more than $25 million. However, Xura terminated Tartavull before the incentive plan could be executed.
Obsidian initially filed suit seeking appraisal, but after revelations during discovery, brought claims alleging Tartavull, as a conflicted fiduciary, directed Xura to consummate an undervalued transaction for reasons other than the best interests of the stockholders, and that Siris aided and abetted that breach.
The Court considered Defendants’ contention that Obsidian lacked standing to sue Tartavull. Defendants argued that because Obsidian had already filed a related appraisal action, it lacked standing to sue for breach of fiduciary duty. However, the Court noted that the gravamen of Obsidian’s claim was Tartavull’s alleged support of a transaction not in the stockholders’ best interests, a suitable basis for a fiduciary claim. Furthermore, the Court distinguished precedents cited by the Defendants, noting that Obsidian sought traditional fiduciary breach remedies including rescissory damages and disgorgement, rather than a quasi-appraisal remedy.
The Court then considered Defendants’ contention that the Corwin doctrine required the application of the business judgement standard and dismissal of the claim based on an informed, uncoerced vote of a majority of the Xura stockholders approving the transaction. However the defendant relying on Corwin must show that the stockholders had all material information before casting the cleansing vote. When the Xura stockholders approved the transaction, they lacked material information that would provide the basis for cleansing including the self-interested motivation of Tartavull to pursue an allegedly undervalued sale transaction for Xura and its stockholders. As such, the Court found that the allegations were well pled and denied Tartavull business judgment deference by virtue of the stockholder vote.
The Court then determined Obsidian had well pled a claim for breach of fiduciary duty against Tartavull. Tartavull was a CEO negotiating a sale and engaging in unauthorized discussions with a potential bidder, with knowledge that he would likely be removed from office if a sale did not occur. Obsidian sufficiently pled that Tartavull’s interests — i.e. a $25 million payout and continued employment at post-sale Xura — differed from those of Xura’s stockholders.
Finally, the Court concluded board approval had not cleansed Tartavull’s conduct. The Board was incapable of ratifying or approving what it did not know, and Obsidian had adequately pled that the Board was not fully informed of Tartavull’s conduct. As a result, the Court denied Defendants’ motion and ruled that claims against Tartavull could proceed.
The Court next addressed the aiding and abetting claim against Siris. The Court noted such a claim requires knowing participation in a fiduciary’s breach by a defendant who is not a fiduciary. In this case, Obsidian needed to plead facts demonstrating Siris knew of Tartavull’s conflict. This required showing not only knowledge that Tartavull sought to favor Siris, but knowledge that he did so because he thought he would lose his job and his chance at post-closing benefits if the transaction did not close. At most Siris knew Tartavull negotiated directly with Siris representatives and knew that Goldman and other Xura executives wished Tartavull was less active in negotiations. The Court found this to be insufficient to infer knowing participation, and dismissed the aiding and abetting claim against Siris. A separate spoliation allegation had arisen during discovery in the appraisal case. Both Tartavull and Siris were on notice of an obligation to preserve evidence at relevant times. On December 31, 2018 a Special Master issued a report and recommendation denying both Plaintiff and Defendants’ requests for fee shifting arising from alleged spoliation of evidence by representatives of Xura and Siris. Xura and Siris filed joint exceptions to the report. By letter opinion dated February 13, 2019, Vice Chancellor Joseph R. Slights of the Court overruled the exceptions and agreed with the Special Master’s conclusions affirming the dismissal of Defendants’ fee-shifting request for failure to demonstrate bad faith litigation conduct by the Plaintiff in pursuing spoliation discovery.