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Dirienzo v. Lichtenstein

Court of Chancery of Delaware

September 30, 2013

FREDERICK H. DIRIENZO, individually and on behalf of all others similarly situated, Plaintiff,
v.
WARREN G. LICHTENSTEIN, SANFORD ANTIGNAS, JACK HOWARD, JOSEPH L. MULLEN, MARK E. SCHWARZ, JOHN H. MCNAMERA, JR., ANTHONY BERGAMO, JOHN P. MCNIFF, RICHARD I. NEAL, ALLAN R. TESSLER, STEEL PARTNERS II, LP, a Delaware limited partnership, STEEL PARTNERS II GP, LLC, a Delaware limited liability company, n/k/a STEEL PARTNERS HOLDINGS GP INC., a Delaware corporation, STEEL PARTNERS, LLC, a Delaware limited liability company, WGL CAPITAL CORP., a Colorado corporation, SP GENERAL SERVICES, LLC, a Delaware limited liability company, Defendants, STEEL PARTNERS HOLDINGS L.P., a Delaware limited partnership, f/k/a WEBFINANCIAL L.P., a Delaware limited partnership, f/k/a WEBFINANCIAL CORPORATION, a Delaware corporation, Nominal Defendant.

Submitted: May 22, 2013.

Elizabeth Wilburn Joyce, Esq., Joanne P. Pinckney, Esq., Michael A. Weidinger, Esq., PINCKNEY, HARRIS & WEIDINGER, LLC, Wilmington, Delaware; Attorneys for Plaintiff Frederick DiRienzo.

Bruce L. Silverstein, Esq., Martin S. Lessner, Esq., Kathaleen St. J. McCormick, Esq., Lakshmi A. Muthu, Esq., YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Attorneys for Defendants Warren G. Lichtenstein, Sanford Antignas, Jack Howard, John H. McNamara, Jr., Anthony Bergamo, John P. McNiff, Richard I. Neal, Allan R. Tessler, Steel Partners II, L.P., Steel Partners Holdings GP Inc., Steel Partners, LLC, WGL Capital Corp., SP General Services, LLC, and Steel Partners Holdings L.P.

John M. Seaman, Esq., Derrick B. Farrell, Esq., ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Special Committee Defendants Joseph L. Mullen and Mark E. Schwarz.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

This dispute, like many others, has its genesis in the 2008 financial crisis. As the financial markets declined in the Fall of 2008, the defendant hedge fund and its controller found themselves unable to meet the rising number of withdrawal requests from the fund's investors. Facing the prospect of having to liquidate the fund, the controller orchestrated a series of complex and interrelated transactions that had the ultimate effect of converting the fund from a private limited partnership to a publicly traded limited partnership. A key step in that series of transactions was the use of one of the fund's portfolio companies as a conduit to facilitate the exchange of assets necessary for the conversion of the fund into a publicly traded entity. The plaintiff, by virtue of his position as a shareholder in that portfolio company at the time of the transaction, is now a limited partner in the publicly traded limited partnership. The plaintiff alleges, both directly and derivatively on behalf of the limited partnership, that the defendant hedge fund, its controller, the directors of the portfolio company, and the directors of the limited partnership's general partner, breached their fiduciary and contractual (implied and express) duties, and aided and abetted breaches of those duties, throughout the conversion process and the plaintiff seeks, among other relief, damages and restitution.

The defendants have moved to dismiss all of the plaintiff's derivative claims for failure to make demand and for failure to state a claim upon which relief can be granted. A subset of the defendants, members of the portfolio company's special committee formed to evaluate the conduit transaction, also have moved to dismiss the plaintiff's direct claims, to the extent they implicate the special committee, for failure to state a claim upon which relief can be granted.

Having considered the parties' briefs and heard argument on the motions, I conclude that the defendant's motion to dismiss the plaintiff's derivative claims should be granted, in its entirety, due to the plaintiff's failure to make demand. Therefore, Counts IV " VIII of the complaint are dismissed. I also conclude that the plaintiff has failed to state a direct claim upon which relief can be granted against the special committee. Accordingly, I grant the special committee's motion for dismissal of Counts I and III as to them.

I. BACKGROUND[1]

A. The Parties

Plaintiff, Frederick H. DiRienzo, was a shareholder in WebFinancial Corporation ("WebFinancial" or the "Company"), a Delaware corporation whose primary operating asset was WebBank, a Utah state-chartered industrial bank headquartered in Salt Lake City, Utah. DiRienzo was a shareholder until December 31, 2008, when WebFinancial was merged (the "Merger") into a newly formed Delaware limited partnership known as WebFinancial L.P. DiRienzo received common limited partnership units of WebFinancial L.P. as consideration in the Merger, and has held those units at all times since the merger.

1. Entity defendants

Defendant and Nominal Defendant Steel Partner Holdings L.P. ("SPH" or the "Partnership") is a Delaware limited partnership, and is the successor entity to WebFinancial L.P. and WebFinancial. SPH's holdings include WebBank and various other investments.

Defendant Steel Partners II GP, LLC, a Delaware limited liability company, now known as Steel Partners Holdings GP Inc., a Delaware corporation (the "General Partner"), serves as the General Partner of the Partnership. The General Partner also serves or has served as the general partner of Defendant Steel Partners II, LP, a Delaware limited partnership ("SP II") that is a hedge fund controlled by Defendant Warren G. Lichtenstein, which owned eighty-five percent (85%) of WebFinancial's common stock before the Merger.

Defendant Steel Partners, LLC is a Delaware limited liability company that served as the manager of the Partnership from January 1, 2009 until May 11, 2012. It is controlled by Lichtenstein and Steel Partners Ltd.

Defendant SP General Services, LLC, a Delaware limited liability company, is the successor by assignment to Steel Partners, LLC, and has served as manager of the Partnership since May 11, 2012.

Defendant WGL Capital Corp. ("WGL") is a Colorado corporation that provides investment management services. Lichtenstein is the founder, president, and majority owner of WGL.

2. Individual defendants

Defendant Lichtenstein, in addition to his previously stated roles with various entity defendants, is also the Managing Member, President, and Chairman of the Board of the General Partner.

Defendants Jack Howard, Joseph L. Mullen, Mark E. Schwarz, and John H. McNamera, Jr. comprised the WebFinancial Board of Directors before the Merger. Mullen and Schwarz were on the special committee formed by WebFinancial's Board to evaluate the Merger (the "Special Committee").

Defendants Sanford Antignas, Anthony Bergamo, John P. McNiff, Richard I. Neal, and Allan R. Tessler, along with Lichtenstein and Mullen, became directors of the General Partner as of July 15, 2009. Howard replaced Antignas as a director in October 2011.

B. Facts

In the Fall of 2008, at the peak of the financial crisis, SP II began receiving a large number of redemption requests from the fund's investors. Due to the structure of many of SP II's investments, the fund did not have enough liquidity to satisfy the increasing number of investors who wished to exit their investments in SP II. Faced with the potential prospect of having to liquidate SP II, likely at a significant loss based on the macroeconomic environment at the time, Lichtenstein began to consider options for resolving SP II's difficulties.

Lichtenstein found his solution in WebFinancial, a publicly traded SP II portfolio company in which SP II owned eighty five percent (85%) of the common stock. Broadly speaking, Lichtenstein's plan was to make SP II a wholly owned subsidiary of WebFinancial, and then convert WebFinancial from a publicly traded corporation to a publicly traded limited partnership. Upon completion of the contemplated transaction, SP II investors would be able to "redeem" their investments in SP II by selling their interests in the limited partnership on an exchange, thus relieving SP II (and the limited partnership) from having to use its own its own cash or assets to compensate an investor who no longer wanted to participate in the fund.[2]

1. Lichtenstein approaches WebFinancial

On October 30, 2008, WebFinancial's Board held a telephonic meeting with Lichtenstein and lawyers from the Olshan Grundman Frome Rosenzweig & Wolosky LLP law firm ("Olshan"). Olshan was participating on behalf of both WebFinancial and SP II. During the meeting, the participants discussed Lichtenstein's framework for a potential transaction between SP II and WebFinancial. At the same meeting, WebFinancial's Board authorized the formation of the Special Committee, comprised of Schwarz and Mullen, to "review and evaluate the terms of the proposed transaction and to make a recommendation to the full WebFinancial Board as to whether the proposed transaction would be in the best interests of the Company and its stockholders." [3] The Special Committee was authorized to retain, at the Company's expense, any advisors the committee deemed "necessary or advisable, " and it was decided that counsel retained by the Special Committee, and not Olshan, would represent WebFinancial in any transaction between the Company and SP II.

A few weeks later, on November 24, 2008, the Special Committee was asked to approve the record date for the Merger between the Company and SP II. Counsel for the Special Committee, Gardere Wynne Sewell LLP ("Gardere"), objected to the request based on the "unusual" nature of the transaction and the fact that the Special Committee had not yet convened its first official meeting or seen any drafts of transaction documents. It is not clear whether the Special Committee approved the record date for the Merger at that time.

The Special Committee held its inaugural meeting on December 1, 2008, and officially selected Gardere as its legal counsel and elected Mullen as its Chairman. In addition to reviewing a formal proposal for the Merger prepared by Lichtenstein, the Special Committee discussed the subjects of shareholder notification relating to the Merger and whether the Special Committee should retain an investment bank. The Special Committee defined the scope of any hired investment bank's mandate as rendering an opinion "with respect to the fairness, from a financial point of view, to the successor in interest to the Corporation of the consideration provided for in the proposed transaction." [4] The Special Committee did not discuss whether it should request the investment bank's opinion as to the fairness of the Merger with respect to the Company's minority shareholders.

The next day, Gardere received from Olshan a draft of the proposed notice to be sent to WebFinancial shareholders regarding the Merger. At or around that time, the Special Committee was informed that "Olshan intended the minimum statutorily required notice to be distributed [to the WebFinancial Minority Holders] on December 8." [5]

On December 3, 2008, the Special Committee held a joint telephonic meeting with the rest of the WebFinancial Board, Lichtenstein, and lawyers from Olshan and Gardere. After Lichtenstein reviewed certain materials that had been prepared by SP II, "[a] lengthy discussion ensued regarding the terms and conditions of the proposed transaction, the timing for completing it, and the disclosure to be provided to stockholders of the Corporation." [6] Lichtenstein wanted to use different valuation methods for WebFinancial and SP II. He stated that the Company's valuation should be based on its "book value, " and that SP II's valuation should be predicated on its "net asset value" ("NAV").[7]Lichtenstein also informed the Special Committee "that these methods were not open for negotiation." During this meeting, WebFinancial's Board voted to hold a special shareholders meeting to approve or reject the Merger (the "Special Meeting") on December 29, 2008.

Upon completion of the joint meeting, the Special Committee met separately with Gardere to discuss certain terms and conditions of the proposed transaction and the disclosures to be given to the Company's shareholders. The Special Committee also reviewed potential investment banking candidates and elected to solicit formal proposals from those candidates.

On December 9, 2008, Lichtenstein effected a temporary suspension of withdrawal rights for investors in SP II, and notified those investors that SP II was unable "to continue to meet all withdrawal requests with cash" as it had done in the past. This information was not conveyed to WebFinancial's minority shareholders even though the Special Committee had urged its disclosure.

The next official Special Committee meetings occurred, telephonically, on December 10 and 11, 2008. During these meetings, Gardere updated the Special Committee on its discussions with Olshan "regarding the disclosure to be provided to the Corporation's stockholders before and after the Special Meeting, " and there were also discussions about how the Company would be managed after it was merged into a limited partnership. On December 11, the Special Committee officially engaged Houlihan Lokey Howard & Zukin ("Houlihan") as its investment banker to deliver an opinion "with respect to the fairness, from a financial point of view, to the successor in interest to the Corporation of the consideration provided for in the proposed transaction."

On December 17 and 18, 2008, respectively, Gardere received, for the first time, a draft of the proposed WebFinancial Limited Partnership Agreement ("LPA" or the "Partnership Agreement") and a draft of the proposed agreement governing the exchange of shares and assets (the "Exchange Agreement") between the limited partnership and Steel Partners II Master Fund, L.P. ("Master Fund"), an entity that controlled SP II.

On December 18 and 19, 2008, the Special Committee held at least two telephonic meetings with Gardere. Topics discussed during these meetings included terms of the proposed Partnership Agreement, contractual appraisal rights for WebFinancial's minority shareholders after the Exchange Agreement was executed, and the ability of the general partner of the new limited partnership entity to unwind the transaction contemplated by the Exchange Agreement. Between December 18 and December 26, 2008, Gardere and Olshan discussed the terms of the transaction's underlying agreements. These included the Merger Agreement, the LP A, the Exchange Agreement, and an agreement between the Partnership's general partner and the Partnership's manager (the "Management Agreement"). During these discussions, Gardere raised several issues and requested numerous changes, most of which were rejected by Olshan.

On December 21, 2008, the Special Committee first became aware of the existence of a "Deferred Fee Liability" while reviewing a draft of the Exchange Agreement. The Deferred Fee Liability was an obligation of Steel Partners II (Offshore) Ltd. ("Offshore"), one of several investment vehicles through which SP II operated, owed to WGL for investment management services WGL had provided to Offshore from 2002 to 2008. The Deferred Fee Liability was a product of a "Deferred Fee Agreement" between Offshore and WGL, which prescribed how the liability would be calculated. Under the Exchange Agreement, Offshore was to transfer the Deferred Fee Liability to the newly created limited partnership if the exchange transaction was not unwound. Between December 21 and December 26, 2008, Gardere informed Olshan on numerous occasions that it "needed to understand the Deferred Fee Obligations." Neither Gardere nor the Special Committee ever was provided with a copy of the Deferred Fee Agreement, told the size of the Deferred Fee Liability, [8] or informed that the Deferred Fee Arrangement was modified on December 29, 2008.

On December 26, 2008, the Special Committee held a telephonic meeting with Gardere and Houlihan. During the meeting, the Special Committee and its advisors reviewed both WebFinancial's and SP II's public and non" public financial information. At the meeting, Houlihan provided an oral opinion, followed up by a written fairness opinion dated December 26, 2008, that the transaction was fair from a financial point of view to the Partnership, as successor in interest to WebFinancial. Houlihan's fairness opinion assumed the transaction would be executed as it was presented to Houlihan and there is no evidence that the opinion, in any way, accounted for the Deferred Fee Liability. After further discussions with Gardere, the Special Committee determined that the transaction was "fair to and in the best interests of the stockholders" of WebFinancial, and unanimously recommended that the full WebFinancial Board approve the proposed transaction.

Immediately following the Special Committee meeting, the entire WebFinancial Board held a telephonic meeting in which representatives from SP II, Olshan, and Gardere also participated. After being told that "there was nothing else of which [it] needed to be made aware of with respect to the Steel Proposal, " the Special Committee advised the full Board of its recommendation. The full Board then proceeded to approve the Merger Agreement and the Merger, deeming them to be in "the best interests" of the Company.

On December 29, 2008, the Merger was approved by WebFinancial's stockholders. Because the WebFinancial stockholder vote was not made contingent on a "majority of the minority" approving the transaction, and because SP II owned 85% of WebFinancial's common stock, the vote to approve the transaction was a fait accompli. The transaction closed on December 31, 2008, and became effective as of January 1, 2009, subject to post-closing adjustments and confirmation of the General Partner's election not to unwind the transaction before June 30, 2009. While the WebFinancial minority shareholders owned 15% of WebFinancial before the Merger, they owned only 0.5% of the limited partnership created by the Merger and Exchange.

2. The Partial Unwind

On December 31, 2008, Lichtenstein sent another letter to SP II investors touting the merits of the WebFinancial transaction as a solution to the liquidity crunch that SP II was facing. On January 9, 2009, Lichtenstein convened a web/teleconference with investors to review the transaction in greater detail. Lichtenstein's discussion of the WebFinancial transaction, however, was not well received by the SP II investors.

In response to the lack of investor support for the transaction, on or about March 12, 2009, Lichtenstein distributed a term sheet to investors, but not to the former WebFinancial minority shareholders, that modified the plan he had described in his December 31, 2008 letter and his January 9, 2009 presentation. Under the revised plan, investors would have two choices: Option A or Option B. Investors who chose Option A would be electing to continue to invest with Lichtenstein and would be entitled to receive common units in the new limited partnership ("SPH Common Units") and certain cash distributions. Investors who chose Option B would be electing to terminate their relationship with SP II, and would be entitled to receive distributions in kind of SP II portfolio securities as well as a cash distribution.

As of April 15, 2009, investors representing 36% and 21% of the economic interests of SP II and its various feeder funds had selected Option A and Option B, respectively. These percentages included the interests corresponding to the Deferred Fee Liability, although it is unclear how those interests were voted.

On May 19, 2009, the General Partner distributed an information memorandum to investors describing Lichtenstein's modified plan in greater detail. This information was not disclosed to the former WebFinancial minority shareholders until November 2009. According to the information memorandum, Option A Investors, as well as the General Partner and its affiliates, would receive certain pro rata cash distributions as well as SPH Common Units valued at $17.28 per unit. In addition, investors were informed that Option B was specifically for those "WHO ELECT NOT TO RECEIVE THE COMMON UNITS [OF SPH] UNDER THE REVISED RESTRUCTURING PLAN." [9]

The General Partner set June 5, 2009, as the final deadline for investors to select either Option A or Option B. If an investor failed to make a selection, they were deemed to have chosen Option B. On June 11, 2009, the General Partner reported that investors representing 38% of the economic interests of SP II had selected Option A, and 62% had either explicitly elected Option B or were deemed to have elected Option B by not responding. As with the prior General Partner's report, these figures included the Deferred Fee Liability.

On June 12, 2009, Lichtenstein sent a letter to investors indicating his decision to implement the modified transaction, effective July 15, 2009. This was followed by a letter on June 24, 2009, in which Lichtenstein: (1) gave Option B shareholders more time to switch to Option A; and (2) revealed that Investors who selected Option B would be receiving SPH Common Units in addition to cash and distributions in kind of SP II portfolio securities. The number of SPH Common Units Option B Investors would receive would be based on "their pro rata share of the Common Units held by SP II . . . at December 31, 2008 before the Exchange Agreement was effective." [10]

On June 29, 2009, Lichtenstein, as Managing Member of the General Partner, executed a written consent authorizing the amendment of the LPA, the Exchange Agreement, and the Management Agreement, giving the General Partner the authority to effectuate both a partial unwind (the "Partial Unwind") and a complete unwind of the Exchange transaction.

The modified transaction Lichtenstein proposed to SP II investors was implemented on July 15, 2009. On that date, the General Partner also decided to affect a "partial unwind of the Exchange." Under the Partial Unwind, to satisfy the 56%[11]economic interest in SP II that ultimately elected Option B, a total of $750, 399, 063 in cash and assets was transferred out of the Partnership. By November 24, 2009, the modified transaction and Partial Unwind had been fully implemented, leaving SPH with an NAV of approximately $450 million. Lichtenstein, WGL, and Lichtenstein's family trusts received over 3.8 million SPH Common Units from the implementation of the modified transaction and Partial Unwind.

3. Management of SPH

After the closing of the Merger on December 29, 2008, the WebFinancial Board and the Special Committee ceased to exist. On that date, however, Gardere wrote an email to the CEO of WebFinancial and Olshan stating that WebFinancial, LP and the Special Committee agreed that "irrespective of the termination of the Special Committee's existence, this firm should continue to consult with and take direction from Mark Schwarz and Joe Mullen with regard to the pending legal representation we are providing." On January 1, 2009, Lichtenstein wrote Mullen and Schwarz a letter stating that Mullen and Schwarz would become independent directors of SPH's General Partner and that the General Partner would "not take any action that requires prior Board approval under the Partnership Agreement without the prior written approval" of both Schwarz and Mullen. This presumably is because, as of January 1, 2009, the General Partner did not have a sitting board of directors. Lichtenstein's letter agreement and Gardere's email were negotiated at some time in December 2008, but were not disclosed to WebFinancial shareholders prior to the Merger.

Between January 1, 2009 and July 15, 2009, Lichtenstein sought approval from Schwarz and Mullen on at least four occasions: (1) on May 19, 2009 before distributing the disclosure statement to SP II investors describing the modified transaction; (2) on June 16, 2009 when Steel Partners wanted to extend the deadline under the Exchange Agreement to implement an unwind; (3) on June 29, 2009 when the Exchange Agreement was amended and restated to allow for a partial unwind; and (4) on July 14, 2009 to effect the Partial Unwind the next day. In response to each request, Gardere would send an email to Lichtenstein stating "Schwarz and Mullen have not refused to grant their consent to any action that we are aware is proposed to be taken." [12]

Also during this time period, Gardere was permitted to review and comment on the draft transaction documents associated with the Partial Unwind. Gardere's suggestions, however, were "respectfully noted but dismissed" by Olshan and Steel Partners. This includes Gardere's comments on subjects that it asserted "would have been negotiated had they been known by the Special Committee at the time of the Merger." [13]

On July 15, 2009, SPH, through the General Partner, notified Antignas, Bergamo, Lichtenstein, McNiff, Mullen, Neal, and Tessler that they were the incoming directors of the General Partnership. The notice did not specify when their term as directors would begin. The first action taken by the General Partner directors, and thus the first action taken by the General Partner Board, was a written consent authorizing the October 2009 amendment to the Amended and Restated Exchange Agreement.

4. The growth of the Deferred Fee Liability

In conjunction with the Partial Unwind, on November 23, 2009, Lichtenstein caused SPH to enter into an Assignment and Assumption Agreement ("Assumption Agreement") with Offshore. Under the terms of the Assumption Agreement, SPH agreed to assume Offshore's Deferred Fee Liability and to retain WGL as an investment advisor. In exchange, Offshore was to provide SPH with $4, 486, 496 in cash and 2, 725, 533 SPH Common Units[14] (valued at $17.28 per unit), or total consideration of $51, 583, 706. According to the SPH 2009 general ledger, the cash component of the consideration was a receivable only. It is unclear whether SPH ever has received the cash it is owed from Offshore.

The General Partner Board first received a copy of the Deferred Fee Agreement in its inaugural meeting on February 11, 2010. At that same meeting, the General Partner Board authorized Lichtenstein affiliate Steel Partner Limited to pursue "any corporate opportunity with respect to the acquisition of Common Units, " including repurchasing SPH Common Units from two investors who had chosen Option B and wanted to sell the SPH Common Units they received back to SPH. The Board granted this approval after it "determined that it is in the best interest of the Company to retain funds to invest in the operations of the Company." [15]

On June 25, 2010, the General Partner Board approved the Second Amended Deferred Fee Agreement. Although the Board gave its approval in June 2010, it made the agreement effective as of July 15, 2009. The Second Amended Deferred Fee Agreement gave WGL the right to elect, without the previously required General Partner Board approval, the manner in which the deferred amount would be paid. Thus, WGL could elect to be paid in cash, units, or some combination of the two. Furthermore, under the amended agreement, if WGL elected to be paid entirely in SPH Common Units, WGL would be entitled to a 15% "discount" [16] so long as it agreed not to sell those units for at least six months. Finally, the Second Amended Deferred Fee Agreement allowed WGL to "index" the Deferred Fee Liability to SPH's NAV and to cash distributions made to SPH's limited partners such that if SPH's NAV increased or SPH made cash distributions to limited partners, the size of the Deferred Fee Liability also would increase.

On April 11, 2012, the General Partner Board approved the Third Amended and Restated Deferred Fee Agreement. This amendment entitled WGL to an immediate payment of a fee it was entitled to as a result of Offshore's distribution of funds that Offshore had maintained after the Exchange to satisfy certain contingent liabilities. More significantly, on that same date, WGL and SPH terminated the Investor Services Agreement[17] underlying the Deferred Fee Agreement, causing the Deferred Fee Liability to become immediately payable. By May 11, 2012, WGL received 6, 939, 647 Class B Common Units, [18] worth approximately $80 million, as full payment for the Deferred Fee Liability, which was $70.5 million on March 31, 2012.

C. Procedural History

On December 7, 2011, DiRienzo commenced this action. All Defendants other than the Special Committee filed an answer on February 7, 2012, and the Special Committee answered the following day on February 8. After several months of discovery, DiRienzo moved for leave to amend his complaint, which this Court granted on January 9, 2013. On January 18, 2013, DiRienzo filed an amended complaint (the "Complaint") containing five new derivative counts. That same day, all Defendants other than the Special Committee moved to dismiss the newly added derivative counts in their entirety. On January 22, 2013, the Special Committee moved to dismiss all counts relating to it. After full briefing on those motions, I heard argument on May 22, 2013. This Memorandum Opinion constitutes my ruling on those motions to dismiss.

D. Parties' Contentions

Plaintiff, DiRienzo, has asserted eight counts against Defendants, seven of which are relevant to the pending motions to dismiss. Counts I and III are direct claims, the relevant parts of which assert that the Special Committee breached its fiduciary duties both before and after the Merger. DiRienzo claims that the Special Committee breached its fiduciary duties in conjunction with the Merger by not taking steps to properly protect WebFinancial's minority shareholders and approving an unfair transaction. In addition, DiRienzo avers that after the Merger, the Special Committee functioned as the board of the General Partner and breached their fiduciary duties by approving the modified transaction, the Partial Unwind, and the dissemination of disclosures to SP II investors but not to the WebFinancial minority shareholders.

Counts IV and V are derivative claims brought against the General Partner, its Managing Member, and the General Partner Board for breaches of fiduciary or contractual duties. In Count IV, DiRienzo contends those Defendants breached their duties by having SPH assume and pay the Deferred Fee Liability and by allowing Lichtenstein to purchase corporate opportunity units. In Count V, DiRienzo alleges that those Defendants breached their duties by issuing SPH Common Units to Option B Investors pursuant to the Partial Unwind.

In Count VI, a derivative claim, DiRienzo avers that the General Partner breached its express and implied contractual duties under the LPA by acting without a board of directors from the Merger date until October 2009 and by disposing of substantially all of SPH's assets in the Partial Unwind. DiRienzo also contends in Count VI that the General Partner directors breached their contractual duties by: (1) failing to stop the Partial Unwind, the terms of which were determined based solely on SP II's internal management valuation; (2) causing SPH to assume and pay the Deferred Fee Liability; and (3) causing SPH to issue SPH Common Units to Option B Investors as a component of the Partial Unwind.

Count VII is a derivative claim against the General Partner for breach of the implied covenant of good faith and fair dealing. DiRienzo claims the General Partner breached the implied covenant by: (1) distributing $750 million of SPH assets to Option B Investors; (2) accepting an overvaluation of NAV contributed to the Partnership in the Partial Unwind; (3) assuming and paying the Deferred Fee Liability; and (4) issuing SPH Common Units to Option B Investors.

DiRienzo's final claim, Count VIII, is a derivative claim against Lichtenstein, the General Partner Board, the Manager, and WGL.[19] In Count VIII, DiRienzo alleges that those Defendants aided and abetted the General Partner in breaching its fiduciary and contractual duties, as alleged in Counts IV through VII.

Defendants counter that Claims IV through VIII should be dismissed because DiRienzo has failed to make a pre-suit demand on the General Partner Board, and demand for any of DiRienzo's claims is not excused under either the Aronson or Rales tests. Defendants further argue that if demand is excused for any of DiRienzo's derivative claims, those claims still should be dismissed because DiRienzo has not alleged that any Defendant engaged in conduct outside of the exculpatory provisions of the LPA. With regard to the claim for a breach of the implied covenant of good faith and fair dealing, Defendants aver that DiRienzo's claim is foreclosed by express contractual language and that, even if it is not, DiRienzo has not pled the requisite elements of an implied covenant claim. Defendants also argue that DiRienzo has failed to assert a valid aiding and abetting claim because: (1) the Complaint does not assert a viable underlying claim for breach of a fiduciary duty; (2) the Count VII Defendants are, themselves, fiduciaries and cannot be considered to have aided and abetted in a breach of fiduciary duty; and (3) the Count VIII Defendants are agents of the fiduciaries who allegedly breached their fiduciary duties, and cannot be held liable for aiding and abetting an alleged breach of fiduciary duty by their principal. Finally, Defendants contend that to the extent a valid aiding and abetting claim exists, it cannot be asserted against WGL because WGL was not named in Count VIII and because this Court lacks personal jurisdiction over WGL.

The Special Committee joins in each of Defendants' arguments, and also contends that DiRienzo has not pled viable direct claims against them. Regarding conduct that occurred before the Merger, the Special Committee asserts that DiRienzo has not alleged that it took any actions that would not be exculpated under WebFinancial's Section 102(b)(7) charter provision. With respect to conduct after the Merger, the Special Committee argues that the Complaint specifically alleges that the General Partner had no board for several months starting on January 1, 2009, and accordingly, the Special Committee cannot be held liable for actions the General Partner took when there was no board. Finally, the Special Committee contends that even if it is found to have constituted the General Partner Board immediately after the Merger, DiRienzo has not alleged the Special Committee took any actions that would not be exculpated by the LPA.

II. ANALYSIS

I first address the Special Committee's motion to be dismissed from the direct claims asserted in Counts I and III of the Complaint.

A. Standard

Pursuant to Court of Chancery Rule 12(b)(6), this Court may grant a motion to dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if proven, would entitle the plaintiff to relief. As recently reaffirmed by the Delaware Supreme Court, "the governing pleading standard in Delaware to survive a motion to dismiss is reasonable 'conceivability.'" [20] That is, when considering such a motion, a court must

accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as "well-pleaded" if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.[21]

This reasonable "conceivability" standard asks whether there is a "possibility" of recovery.[22] If the well-pled factual allegations of the complaint would entitle the plaintiff to relief under a reasonably conceivable set of circumstances, the court must deny the motion to dismiss.[23] The court, however, need not "accept conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences in favor of the non-moving party." [24] Moreover, failure to plead an element of a claim precludes entitlement to relief and, therefore, is grounds to dismiss that claim.[25]

Generally, a court will consider only the pleadings on a motion to dismiss under Rule 12(b)(6). "A judge may consider documents outside of the pleadings only when: (1) the document is integral to a plaintiff's claim and incorporated in the complaint, or (2) the document is ...


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