Submitted: January 27, 2014.
Eric M. Andersen, of Mark Anderson, P.A., Wilmington, Delaware, Attorney for the Plaintiffs.
Steven L. Caponi and Elizabeth Sloan, of Blank Rome LLP, Wilmington, Delaware, Attorneys for Defendants Eric S. Sagerman, Thomas D. Whittington, Clinton S. Laird, Brock J. Vinton, Raymond Ibarguen, George D. Sergio and Universata, Inc.
Stephen C. Norman and Matthew D. Stachel, of Potter Anderson & Corroon LLP, Wilmington, Delaware; OF COUNSEL: Geoffrey J. Ritts and P. Nikhil Rao, of Jones Day, Cleveland, Ohio, Attorneys for Defendant KeyBanc Capital Markets Inc.
GLASSCOCK, Vice Chancellor.
This action involves a suit by a husband and wife (the "individual Plaintiffs"), who are stockholders and creditors of Universata, Inc. ("Universata, " or the "Company"). In 2009, Universata exchanged a portion of its debt for 525, 000 shares of its common stock, transferred to the individual Plaintiffs. In addition, as part of the transaction, the individual Plaintiffs received from Defendant Thomas Whittington, a director and shareholder of Universata, a right to exchange the shares of common stock for cash, in certain circumstances. Once this put right was triggered, Whittington would become obligated to pay the individual Plaintiffs $2.10 for each share of Universata stock. Thus, the individual Plaintiffs received two types of rights from that transaction: rights as stockholders of Universata, including statutory rights as well as the common law rights arising from the obligation of the directors of Universata to act consistently with their fiduciary duties; and contractual rights against Whittington under the put contract.
In 2011, Universata's board of directors approved a merger with a subsidiary of HealthPort Technologies, LLC ("Healthport") for consideration substantially less than $2.10 per share. Rather than pursuing a challenge to the merger or seeking statutory appraisal rights as stockholders, the individual Plaintiffs instead pursued their purported contractual put rights against Whittington, in a Minnesota state court. That action was dismissed with prejudice. Unsatisfied with that outcome, the Plaintiffs brought this action, seeking to recover under theories of breach of duty with respect to the merger and quasi-appraisal, as well as to re-litigate the put-right claim. The Defendants have moved to dismiss. I examine the Plaintiffs' claims below.
A. The Parties
Prior to May 10, 2011, Universata was a Delaware corporation "provid[ing] comprehensive, on-site medical record Release of Information (ROI) services to hospitals and clinics." Plaintiff Aaron Houseman and Defendants Thomas D. Whittington, Clinton S. Laird, Brock J. Vinton, Raymond Ibarguen, and George D. Sergio sat on the Company's Board of Directors (the "Board").
Universata was founded in 2003 on the collective contribution of friends and family members of founders Mark Ferrel, Eric Barnum, and David Ferrel. Throughout 2005 and 2006, then-Chairman Thomas Whittington purchased 60, 000 shares of common stock. The Company continued to raise funds throughout 2007 and 2008 via private placements of 3, 000, 000 shares of common stock and 6, 000 "debt units." According to the Complaint, the Company only "sporadically" issued—and never audited—quarterly financial statements.
The Plaintiffs aver that in 2006, Aaron and Nancy Houseman—husband and wife—sold their business, Med-Legal, Inc., to Universata for a seven-year stream of payments totaling approximately $9 million. Universata had difficulty making those payments, however, and in November 2009, the Housemans elected to convert some of that debt into an equity interest of 525, 000 shares in the Company. This conversion was sweetened by a put right under which Whittington would, in certain circumstances, be obligated to acquire those shares; the put agreement is discussed in detail below. At that time, Mr. Houseman became a director of Universata; Mrs. Houseman did not.
B. The Sales Process
In late 2010, HealthPort and at least one other interested party approached Universata about a potential acquisition. When Universata began to receive indications of interest from potential acquirers, the Company contacted legal counsel to determine how to proceed. At counsel's suggestion,  the Company contacted KeyBanc Capital Markets, Inc. ("KeyBanc"), who in 2009 had assisted Universata in an attempt to sell certain of the Company's assets, and was therefore familiar with the Company's business.
In March 2011, the Universata Board met to consider its options; Whittington addressed the Board as follows:
As you know, we have been pursued by [HealthPort], IOD, and a potential merger partner. Our response has been to politely decline the "talking" offers and explain that we were doing well with confidence in our ability to have another banner year. . . . My personal feeling has been that we should stay independent and keep going. However, as a Board Member, it is necessary that I look at all opportunities and make Board decisions based on what is best for the shareholders under the circumstances of the company. One interested party, [HealthPort], keeps coming back despite our attitude of call us later and finally asked, "What will it take?" The Committee then took a hard look at our business, our competition, the dilution that would be caused by additional investment and gave a number to [HealthPort]. After several revisions to a Letter of Intent proposed by [HealthPort], [HealthPort] finally gave us everything that we felt we could get.
At that meeting, the Board resolved to hire KeyBanc to assist with the transaction.
Due to expense, the Company limited KeyBanc's engagement to assisting in due diligence and "identifying additional parties that could have an interest in acquiring the Company." According to Board minutes attached to the Plaintiffs' Complaint, the Board considered obtaining a fairness opinion, but "[g]iven the exigencies of time and expense, the Corporation [did] not request, and KeyBanc [did] not issue, a fairness opinion, nor [did] KeyBanc perform the necessary analysis to reach the conclusion of fairness of the transaction." Similarly, in an Information Statement provided to stockholders in connection with the transaction, the Company disclosed:
The Company's Board of Directors decided not to employ independent financial consultants or other appraisers to determine the price to be offered in connection with the Merger or to consider the fairness of such price because (i) it believed that the cost of retaining such advisors would be unduly expensive in relation to the amount of consideration involved in the Merger, and (ii) any such determination, in the final analysis, would necessarily involve a subjective judgment.
Thus, on May 10, 2011, the day the Board approved the Agreement and Plan of Merger by and among HealthPort Technologies, LLC, HealthPort Acquisition Subsidiary, Inc., and Universata, Inc. (the "Merger Agreement"), KeyBanc "did not prepare a written presentation summarizing [its] work, " nor did it present a formal fairness opinion. Instead, an investment banker at KeyBanc provided his informal opinion that the merger price was within a range of reasonableness. At that Board meeting, the Company's legal counsel "conducted a detailed overview of [a summary of the Merger Agreement's terms] for the Board, covering all pertinent aspects of the Merger Agreement, and the legal aspects of the proposed merger with [HealthPort], and addressing the questions asked by members of the Board and guests at the meeting."
Despite legal counsel's participation at the May 10 Board meeting, the Plaintiffs challenge the fact that the Board minutes do not expressly reflect that the Board was advised of its fiduciary duties. In addition, while acknowledging KeyBanc's involvement in the sales process, the Plaintiffs challenge the Board's failure to hire "a financial advisor to help it understand how much the Company was worth before selling it." In addition, the Plaintiffs contend that the Board acted uninformedly by failing to hire "an auditor to audit its financial statements" or "a tax advisor or valuation professional to value [Universata's net operating losses] to assist in negotiating the purchase price with HealthPort."
C. The Merger
On May 10, 2011, Universata entered into an agreement (the "Merger Agreement") whereby Universata would merge into HealthPort Acquisition Subsidiary, Inc., a wholly-owned subsidiary of HealthPort; in return, the stockholders of Universata would receive $1.02 per share in cash on June 1, 2011. In addition, a new Delaware corporation, "TechCo, " would be created to hold a patent formerly owned by Universata, and each share of Universata stock would receive one share in that corporation. The Company was also to form three escrow accounts from which to pay the Company's sales tax liabilities, which had, until that time, gone unpaid; the stockholders were then to receive a pro rata distribution of the remaining funds one year from the transaction date. The stockholders received $0.17 per share from the escrowed funds on June 1, 2012. The Plaintiffs aver, however, that stockholders should have received $0.27 per share, based on language in the Information Statement explaining that "if $1, 780, 000 of the Escrow Fund is released and paid to the Escrow Participants, they will receive an additional amount equal to approximately $0.27." They also aver that stockholders never received their interests in TechCo. Whittington served as "Shareholder Representative" to hold and distribute the merger consideration to the stockholders. According to the Complaint, Whittington did not set up separate trust accounts, but instead parked the consideration, including funds to be escrowed for payment of taxes, in a Rule 1.15A Attorney Trust Account. Whittington has failed to provide an explanation as to why the escrow payments ultimately released to shareholders totaled $0.17 per share rather than $0.27 per share, or why the stockholders have not yet received their TechCo stock. As explained below, those questions will be the subject of future proceedings.
Because the directors who approved the Merger Agreement collectively held a majority ownership interest in the Company, the Board did not solicit a stockholder vote to approve the transaction. Instead, the Merger Agreement was approved by written consent of the Defendant directors, who together owned approximately 55% of the voting shares in the Company. Although he had initially voted to approve a prior Letter of Intent with HealthPort, Mr. Houseman did not vote or execute a consent in favor of the merger.
D. The Company's "Litigation Assets"
In addition to challenging the adequacy of the sales process, the Plaintiffs point to three side transactions they believe gave rise to derivative claims against the Company's directors, and therefore constitute "litigation assets" of the Company.
First, the Plaintiffs challenge two decisions made at the May 10, 2011 Board meeting. The same day the Merger Agreement was approved, the Universata Board amended its 2008 Equity Incentive Plan to provide that stock options held by employees would be ...