By: Michael J. Ross and Ryan Reilly
In Daniel Feldman et al. v. AS Roma SPV GP, LLC, et al., C.A. No. 2020-0314-PAF (Del. Ch. July 22, 2021), the Delaware Court of Chancery (the “Court”) dismissed a suit brought by minority members (“Plaintiffs”) of AS Roma SPV GP, LLC (the “Company”) for breach of fiduciary duties by the managing member for breach of the Company’s limited liability company agreement (“LLC Agreement”) for failure to disclose material information, and breach of fiduciary duties by the investor committee in connection with pandemic-driven financing and recapitalization efforts. In granting the Defendants’ motion to dismiss for failure to state a claim, the Court emphasized the Defendants’ limited disclosure duties and the Plaintiffs’ failure to adequately plead harm.
In 2011, a group of investors obtained a controlling interest in an Italian football (soccer) club known as AS Roma, which the investors held through the Company. Beginning in 2019, the Company sought to sell its interest in AS Roma, but the COVID-19 pandemic cast uncertainty on the sale transaction in early 2020. In response to that uncertainty, the Company made efforts to raise additional capital to meet its financial needs.
The Company was managed by a managing member with certain actions requiring approval of a five member investor committee. Initially, the Investor Committee (the “Committee”) proposed the issuance of priority “Class C membership units” (providing for priority over the Company’s existing Class A and B units and a 1.5x liquidation preference) and the recapitalization of existing member loans, and the Committee amended the Company’s limited liability agreement (the “LLC Agreement”) in anticipation of consummation of these proposals. Although the Committee ultimately abandoned the proposals, the Committee retained the anticipatory amendment (the “Amendment”). Subsequently, as the Company still required financing, the Committee called for “2020 Member Loans” (providing for 9% interest and a premium of 50% of the outstanding principal amount), which transaction closed in June 2020 with most of the Company’s members participating. Finally, the Company managed to sell its interest in AS Roma in August 2020, allowing the Company to repay various expenses and loans, including the 2020 Member Loans.
The Plaintiffs filed a complaint against the managing member, certain of its affiliates, and members of the Committee (“Defendants”) focused on the Committee’s initial proposals, but the Plaintiffs filed an amended complaint in May 2020 following the abandonment of the financing proposals. The first count of the amended complaint alleged the Company “breached the LLC Agreement by approving the Amendment and failing to disclose all material information to the Class A unitholders in connection with the 2020 Member Loans.” The second and third counts alleged breach of fiduciary duties by the managing member and members of the Committee. The fourth count alleged aiding-and-abetting by affiliates of the managing member. And the fifth count alleged that certain lender defendants were unjustly enriched by rights granted to them under the Amendment.
Noting that the Plaintiffs’ claims were “confined to two discrete issues”—(1) the disclosures concerning the Company’s financial status and sale process provided in conjunction with the proposal for the 2020 Member Loans, and (2) the Amendment to the LLC Agreement—the Court divided its analysis into four sections to address the two principal issues and the Plaintiffs’ two additional claims of aiding-and-abetting and unjust enrichment.
First, the Court held that the Plaintiffs’ amended complaint failed to state a disclosure claim. The LLC Agreement provided that the managing member has the same fiduciary duty to the Company and the non-managing members as does a director of a Delaware corporation and its shareholders. The Court explained that “directors are under a duty to disclose fully and fairly all material facts within their control bearing on the request” for stockholder action, but the Plaintiffs’ disclosure allegations failed to state a claim for breach of that duty. The Plaintiffs alleged “the financial statements provided by the Defendants are incomplete and misleading,” but the Court deemed that allegation to be conclusory. Moreover, the Plaintiffs also alleged the Defendants should have disclosed the likelihood of a sale before a specific date linked to a liquidation preference, but the Court rejected that allegation as well, reasoning in part that “Delaware law does not require a blow-by-blow description of fluid sale negotiations.”
Second, the Court held that the Plaintiffs’ amended complaint failed to state a claim for breach of fiduciary duty and breach of the LLC Agreement in regard to the abandoned initial proposals and the Amendment. The Plaintiffs essentially alleged the Amendment “diluted and impaired” Class A units by creating Class C units. The Court acknowledged that the Defendants did not rescind the Amendment following the abandonment of the initial proposals, but the Plaintiffs nevertheless failed to adequately allege harm. Among other things, the Court observed that Class C units were never issued, the recapitalization did not occur, and the recapitalization could no longer proceed because of the expired timeframes set forth in the Amendment. Additionally, the Court held that the Plaintiffs’ claim alleging harm was unripe because Class C units could not be issued without further action, and the claim was moot because the initial proposals were abandoned and also because the Company ultimately sold its interest in AS Roma.
Finally, in the third and fourth sections of the analysis, the Court quickly dismissed the Plaintiffs’ two additional claims of aiding-and-abetting and unjust enrichment. The aiding-and-abetting claim failed because the requisite underlying claim for breach of fiduciary duty failed. And the unjust enrichment claim failed because, in light of the abandoned initial proposals and the never-issued Class C units, there was neither enrichment to the Defendants nor detriment to the Plaintiffs.