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Red Oak Fund, L.P. v. Digirad Corporation

Court of Chancery of Delaware

August 5, 2013

Red Oak Fund, L.P.
Digirad Corporation, et al.

Submitted: July 11, 2013

Elizabeth M. McGeever, Esquire Prickett, Jones & Elliott, P.A.

John M. Seaman, Esquire Abrams & Bayliss LLP

Dear Counsel:

Plaintiff Red Oak Fund, L.P. ("Red Oak") lost a close stockholder vote for control of Defendant Digirad Corporation's ("Digirad") board. Blaming its unsuccessful effort on election irregularities attributable to Digirad's incumbent board[1] and management, it brought this action under 8 Del. C. § 225 purportedly to validate its rights to a fair election and to obtain a prompt, new election without having to wait for next year's shareholders' meeting.

Section 225 actions are summary proceedings.[2] Bogging down in pre-hearing procedural motions may risk denying a plaintiff the primary benefit of an expedited proceeding.[3] On the other hand, if there is no reasonably conceivable basis upon which a plaintiff can succeed, it makes little sense to burden the defendants with the cost of a trial and with the distraction from arguably more important corporate functions and objectives.

It is in this context that the Court is called upon to resolve Defendants' motion, brought under Court of Chancery Rule 12(b)(6), to dismiss Red Oak's Verified Amended Complaint (the "Complaint") for failure to state a claim upon which relief can be granted. Perhaps out of more caution than is warranted, the Court, for the following reasons, will deny the motion.

In evaluating a complaint confronted with a motion to dismiss, the Court must draw all reasonable inferences in favor of the plaintiff and deny the motion if there is a "reasonably conceivable" set of circumstances under which the plaintiff could prevail.[4] A shareholder frustrated with the outcome of a board election may invoke 8 Del. C. § 225 "to determine the validity of the votes cast."[5]

Red Oak's challenges to the voting fall into three general, if imprecisely defined, categories:

1. To induce shareholders to be on the winning side, Defendants repeatedly reported non-public preliminary totals of the voting which Defendants knew to be inaccurate because of their having allowed the counting of treasury shares that should not have been voted.[6] These numbers supported management's assertion that the election would be "not even close."[7]

2. Defendants withheld material, negative financial information until immediately after the voting had concluded.

3. Digirad's board did not disclose its intentions to adopt a Tax Benefit Preservation Plan (i.e., a poison pill).[8]

These claims, Red Oak hopes, will coalesce into a valid challenge to the fairness of Digirad's disclosures to its stockholders. Unless coercive or materially misleading, the communications (or absence thereof) will not likely sustain Red Oak's position.[9] The disclosures upon which Red Oak has focused may not individually suffice, but, when considered collectively, they may raise a sufficient basis for another vote. This is, ultimately, a matter of context, and context is best assessed at trial.

In part, Digirad constructed its defense—and it did so with some persuasive power—on facts not set forth in the Complaint.[10] The Court, however, must, at this stage, look to the Complaint and documents that were incorporated into it. Although Red Oak's Complaint may not seem overwhelming on its face, the Court cannot fairly conclude that it is not "reasonably conceivable" that Red Oak could prevail at trial. That, especially in the context of an expedited proceeding, counsels against dismissal.

Accordingly, Defendants' Motion to Dismiss is denied.[11]


Very truly yours,

John W. Noble Vice Chancellor.

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