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In re EBIX Inc.

Court of Chancery of Delaware

July 24, 2014


Submitted: February 20, 2014

Michael Hanrahan, Esquire, Paul A. Fioravanti, Jr., Esquire, Kevin H. Davenport, Esquire, and Eric J. Juray, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Stuart M. Grant, Esquire, Michael J. Barry, Esquire, and Bernard C. Devieux, Esquire of Grant & Eisenhofer P.A., Wilmington, Delaware; Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire, and Gina M. Serra, Esquire of Rigrodsky & Long, P.A., Wilmington, Delaware; Christine S. Azar, Esquire and Peter C. Wood, Jr., Esquire of Labaton Sucharow LLP, Wilmington, Delaware; Mark Lebovitch, Esquire and Jeremy Friedman, Esquire of Bernstein Litowitz Berger & Grossmann LLP, New York, New York; Marc A. Topaz, Esquire, Lee D. Rudy, Esquire, Michael C. Wagner, Esquire, Justin O. Reliford, Esquire, and James H. Miller, Esquire of Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania; Jeffrey W. Golan, Esquire and Lisa M. Lamb, Esquire of Barrack, Rodos & Bacine, Philadelphia, Pennsylvania; Carl L. Stine, Esquire of Wolf Popper LLP, New York, New York; Kent A. Bronson, Esquire and Jessica Sleater, Esquire of Millberg LLP, New York, New York; and William B. Federman, Esquire of Federman & Sherwood, Oklahoma City, Oklahoma, Attorneys for Plaintiffs.

Samuel A. Nolen, Esquire, Catherine G. Dearlove, Esquire, and Christopher H. Lyons, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware; Charles W. Cox, Esquire and Kimberly K. Chemerinsky, Esquire of Alston & Bird LLP, Los Angeles, California; and John A. Jordak, Jr., Esquire of Alston & Bird LLP, Atlanta, Georgia, Attorneys for Defendants.


NOBLE, Vice Chancellor

This Court has, on occasion, heard claims asserted by a stockholder of a Delaware corporation challenging the board of directors' decision to agree to a recently-announced merger.[1] A stockholder plaintiff typically challenges that decision as a breach of the directors' fiduciary duties and often seeks to enjoin the merger's consummation—be it due to allegations of a flawed sale process, unreasonable provisions in the merger agreement, inadequate disclosures in the proxy materials, or some other theory. Sometimes stockholders are successful in this endeavor; sometimes they are not. Other times, business realities change, and the merger may be abandoned for reasons independent of any litigation in this Court. Stockholder plaintiffs in this last category are then left without a viable cause of action—or so it would seem. As this lawsuit demonstrates, however, terminating a merger agreement does not necessarily foreclose stockholder litigation that, absent the abandoned merger, may not otherwise have been pursued.

Defendant Ebix, Inc. ("Ebix") agreed to be acquired by an affiliate of Goldman, Sachs & Co. ("Goldman") in May 2013. In that going-private merger, the company's public stockholders were to receive $20.00 in cash per share, and several of its largest stockholders were to roll over a portion of their Ebix stock for equity in the post-merger entity. Defendant Robin Raina ("Raina"), Ebix's Chairman and Chief Executive Officer ("CEO"), was in the second group of stockholders. He agreed to accept $32 million in cash and 29% of the post-merger entity in exchange for his fully diluted, 9.3% stake in Ebix and his agreeing to waive any bonus payment due to him from the company under his 2009 Acquisition Bonus Agreement (the "ABA"). By the end of the month, Ebix stockholders had filed twelve class actions in this Court challenging the terms of the proposed merger, including the consideration that Raina would receive. But, the course of the litigation changed in June when Ebix and Goldman terminated their agreement.

Left without a transaction to challenge, the Plaintiffs[2] filed the Amended Complaint, shifting their focus to the conduct surrounding the ABA. In the Amended Complaint, the Plaintiffs assert several class and derivative claims against Ebix and its board of directors (the "Board, " and together with Ebix, the "Defendants"): (i) a declaratory judgment claim regarding certain terms of the ABA;[3] (ii) a direct breach of fiduciary duty claim regarding the adoption and effects of, and disclosures about, the ABA;[4] (iii) a direct breach of fiduciary duty claim challenging the company's 2010 Stock Incentive Plan as invalid because it was adopted pursuant to a materially uninformed stockholder vote;[5] and (iv) a derivative breach of fiduciary duty claim regarding the adoption and effects of, and disclosures about, the ABA.[6] The Plaintiffs have also asserted direct and derivative claims against Raina for breach of fiduciary duty and unjust enrichment for improperly retaining the rights he received under the ABA.[7]

The Defendants moved to dismiss all of the Plaintiffs' claims pursuant to Court of Chancery Rules 23.1 and 12(b)(6). In brief, the Defendants assert that the claims related to the ABA are either barred by laches or not ripe, that the claims asserted are all derivative and demand is not excused, and that the Amended Complaint otherwise fails to state a claim upon which relief may be granted.

For the reasons set forth below, the Court concludes that the Defendants' motion must be granted in part and denied in part.


Ebix, a Delaware corporation based in Atlanta, Georgia, provides e-commerce, software and related services to the insurance industry. Its stock trades on the NASDAQ.[8] Including options, Raina and his eponymous foundation beneficially owned approximately 9.3% of Ebix's stock as of June 2013, making him the company's largest stockholder.[9]

The Board is comprised of six directors, each of whom is named as a Defendant in this action: Raina, Pavan Bhalla ("Bhalla"), Neil D. Eckert ("Eckert"), Rolf Herter ("Herter"), [10] Hans U. Benz ("Benz"), and Hans U. Keller ("Keller"). Each has served as a director since at least 2005.[11] Benz and Keller have constituted the Board's Compensation Committee since 2009.[12] At times, the Court refers to Bhalla, Eckert, Herter, Benz, and Keller as the "Outside Directors."

Raina has been Ebix's CEO since 1999 and Chairman of the Board since 2002.[13]

The Plaintiffs have been Ebix stockholders at all material times.[14]


A. Ebix's 1996 Stock Incentive Plan

Undoubtedly like most large companies, Ebix has historically had an incentive-based compensation plan for its officers, directors, and employees. Ebix's 1996 Stock Incentive Plan, with the amendments thereto, (the "1996 Plan") governs the awarding of compensation such as options, stock appreciation rights, restricted shares, deferred shares, performance shares, and performance units.[15]One of the compensation units it authorizes is an Appreciation Right, through which a recipient would be entitled to up to 100% of the increase in the price of Ebix stock from the defined base price on the date the right is granted to the exercise price on the date the right is exercised.[16]

The 1996 Plan sets forth certain mandatory and permissive terms for Appreciation Rights. For example, while Appreciation Rights may be conditioned on a change-in-control transaction, they must be evidenced by an agreement stating that the grant is subject to all of the terms of the 1996 Plan.[17] In addition, a grant of an Appreciation Right "shall specify . . . a Base Price per Common Share, which shall be equal to or greater than the Market Value per Share on the Date of Grant."[18] The Date of Grant, in turn, is "the date specified by the Board on which a grant of . . . Appreciation Rights . . . shall become effective, which shall not be earlier than the date on which the Board takes action with respect thereto."[19]

The 1996 Plan also contains aggregate award limits. Only 1, 137, 500 shares are available under it, and a recipient may receive up to 125, 000 shares annually.[20]The Board may not increase the aggregate number of available shares, but it may adjust certain terms of the awards, such as the base price of Appreciation Rights, to prevent dilution after a stock split, stock dividend, or similar change to the company's capital structure.[21]

Ebix filed the 1996 Plan with the Securities and Exchange Commission ("SEC") as an exhibit to its 2004 Form 10-K Annual Report (the "2004 Form 10-K").[22]

B. The Acquisition Bonus Agreement between Ebix and Raina

Based on a recommendation from the Compensation Committee, the Outside Directors unanimously authorized Ebix to enter into the ABA with Raina on July 15, 2009.[23] The ABA provided to Raina a right to a bonus payment upon a defined acquisition event. In a Form 8-K Current Report filed with the SEC on July 21 (the "July 2009 Form 8-K"), the Board disclosed the ABA and summarized the way in which Raina would be compensated under it:

Mr. Raina shall receive in cash an amount equal to 20% of the total outstanding shares of Ebix common stock, on a fully diluted basis, prior to the occurrence of such an event less the number of shares of common stock Mr. Raina beneficially owned at that time, multiplied by the difference between the per share fair value of the net proceeds received by the Company less $23.84.[24]

In effect, because Raina already held just under 10% of Ebix's fully diluted stock in July 2009, the ABA granted to him stock appreciation rights on approximately 10% more of the company's fully diluted stock.[25] The ABA further provided to Raina a gross-up payment, in order to cover any federal excise tax on change-in-control payments, on both the bonus amount and the gross-up itself.[26]

The ABA, according to the Plaintiffs, is subject to the 1996 Plan because it "granted Acquisition Rights within the meaning of the 1996 Plan" to Raina.[27] The Plaintiffs contend that the ABA violates the 1996 Plan in at least three primary ways: (i) "the Base Price exceeded [the] market value of [Ebix stock on] the Date of the Grant"; (ii) the awarding of approximately 1.1 million Appreciation Rights exceeded the 125, 000 annual limit per recipient; and (iii) the ABA did not state that it was subject to the 1996 Plan.[28]

The base price for Raina's rights (the "Base Price") under the ABA is perhaps the key issue in dispute in this litigation. Initially, the ABA defined the Base Price as $23.84.[29] That represented, as the Board would later disclose, the closing price of Ebix stock on March 25, 2009. The Plaintiffs contend that, for the ABA to comply with the 1996 Plan, the Base Price should have been at least the market price of Ebix stock on the date the ABA was executed—which was, they say, $37.32 on July 15, 2009.[30] As alleged, the Outside Directors "knew" that the $23.84 Base Price was not the market value of Ebix's stock on July 15 when they approved the ABA.[31]

Although a number of terms used to calculate Raina's rights under the ABA may fluctuate, the definition of the Base Price allegedly does not. Specifically, the Plaintiffs assert that the ABA "does not contain any anti-dilution provision for a change in the Base Price in the event of a stock split."[32] While they do recognize that Ebix and Raina may amend the ABA by written agreement, the Plaintiffs insist that the ABA—especially the Base Price—has not been amended.[33] The Defendants, when pressed on this issue, were unable to identify a written amendment to the ABA that may have negated the Plaintiffs' claim as a matter of law.[34]

The July 2009 Form 8-K stated that the ABA was intended to create the right incentives for Raina "to profitably grow the Company" and to "maximize the value received by all stockholders of Ebix" in a change-in-control transaction.[35]The Board also suggested that the ABA was, in part, a response to its evaluation of "the potential threat of the Company itself being an acquisition target" because of its "comparatively low P/E [price/earnings] multiple."[36]

Although Ebix promptly disclosed the ABA in the July 2009 Form 8-K, the company did not mention the agreement in several of its subsequent SEC filings in 2009. For example, in the proxy statement for its October 2009 annual meeting (the "2009 Proxy Statement"), the Compensation Committee's report on executive compensation did not mention the ABA, despite discussing Raina's other bonus compensation that the Outside Directors had approved in March 2009.[37]

C. Ebix's 3-for-1 Stock Split Via a Two-Share Stock Dividend

In late 2009, Ebix sought to effect a 3-for-1 stock split by way of a two-share stock dividend. The company issued a proxy statement for a special stockholders' meeting (the "2009 Special Meeting Proxy Statement") to approve a charter amendment that would increase the number of authorized shares from 20 million to 60 million. The Board "did not mention the Acquisition Bonus Agreement or indicate that the stock dividend would reduce the Base Price under that Agreement" in the 2009 Special Meeting Proxy Statement.[38] Ebix stockholders approved the charter amendment, and Ebix issued the dividend.[39] D. The Discussion of the ABA in the 2009 Form 10-K

The Defendants submit that the ABA was fully disclosed to stockholders in the company's 2009 Form 10-K Annual Report (the "2009 Form 10-K"), which Ebix filed with the SEC on March 16, 2010.[40] In the 2009 Form 10-K, the Board identified the "Spread" under the ABA as being "calculated by subtracting $23.84 (post three-for-one split, $7.95) from the Net proceeds per share."[41] The Board also explained that $7.95 "represents the approximate price per share of the Company's common stock on March 25, 2009 when the independent members of the Board agreed on the desirability of this type of agreement."[42] The July 15, 2009, date on which the ABA was executed was not discussed in the 2009 Form 10-K, but the date was noted in the exhibit list, which incorporated the ABA by reference.[43]

E. The Board Seeks Stockholder Approval of the 2010 Stock Incentive Plan

In the proxy statement for the company's 2010 annual meeting (the "2010 Proxy Statement"), the Board recommended that Ebix stockholders approve the proposed 2010 Stock Incentive Plan (the "2010 Plan"). The 2010 Plan would authorize up to five million additional shares in incentive-based compensation for Ebix officers, directors, and employees. The Board described the 2010 Plan as "critical" and "essential" to Ebix's future, in part, because approximately 80% of the shares authorized by the company's prior incentive-based compensation plans—such as the 1996 Plan—had already been granted.[44] The 2010 Plan, much like the 1996 Plan, provided anti-dilution protection by permitting certain adjustments to the exercise price for stock options in the event of a stock dividend or a stock split.[45]

The Board again explained how Raina would be compensated under the ABA in the 2010 Proxy Statement. The Base Price was identified as $7.95.[46] This disclosure is the first of several in Ebix proxy statements that the Plaintiffs challenge as a material misstatement because the Base Price was allegedly never reduced, by operation of the ABA's terms or by a written amendment, from $23.84. Additionally, the Board described the Base Price as the price of Ebix stock on March 25, 2009, the date "when the independent members of the Board agreed on the desirability of this type of agreement."[47] Other than on the exhibits list, the 2010 Proxy Statement does not appear to disclose that the Outside Directors approved the ABA on July 15, 2009; it simply notes that the approval occurred "in 2009."[48]

Ebix stockholders presumably approved the 2010 Plan. Following Ebix's annual meetings in 2010, 2011, and 2012, the Outside Directors were granted 9, 000 options each pursuant to the 2010 Plan. The total value of these awards was approximately $300, 000.[49] Raina also received 12, 500 restricted shares, worth approximately $879, 298, pursuant to the 2010 Plan in 2012.[50]

F. The Discussion of the ABA in Ebix's 2011 and 2012 Proxy Statements

In the proxy statement for the company's 2011 annual meeting (the "2011 Proxy Statement"), the Board noted that the $7.95 Base Price was a post-stock dividend price. The included Compensation Committee report stated that the Outside Directors approved the ABA in 2010 rather than in 2009.[51] But, the following year, in the proxy statement for Ebix's 2012 annual meeting (the "2012 Proxy Statement"), the Compensation Committee report noted that the approval was in 2009.[52]

As it did in the July 2009 Form 8-K, the Board continued to describe the ABA as having, in part, anti-takeover effects. For example, in the 2010, 2011, and 2012 Proxy Statements, the Board noted:

Considering the continued healthy growth of the Company and the prevailing comparatively low price to earnings multiple of Ebix's common stock, the Board has evaluated the potential threat of the Company itself being an acquisition target. The Agreement [i.e., the ABA] serves in part to allow for stockholder value to be maximized by dissuading a potentially hostile attempt at an unacceptable price.[53]

The Board also described the ABA as intended to reward Raina for his contributions "to the future success and growth of Ebix."[54]

In the 2012 Proxy Statement, apparently for the first time, the Board provided a hypothetical calculation of Raina's payment rights under the ABA. The calculation assumed, as had been disclosed in the 2010, 2011, and 2012 Proxy Statements, that the Base Price was $7.95:

Using the number of shares of common stock held by Mr. Raina on the record date for the Company's 2012 Annual Meeting, and, merely for sake of example, a $24.00 price of the Company's stock as the Net Proceeds, Mr. Raina would receive a $92, 214, 368 payment upon a liquidation event.[55]

Given Raina's stock ownership at the time, this bonus and gross-up figure represented approximately 10% of Ebix's value.[56]

G. The (Abandoned) Merger with Goldman

The Plaintiffs contend that Ebix's stock price has generally decreased in recent years. Specifically, it decreased from nearly $29 in February 2011 (which pegged Ebix's market capitalization at over $1 billion) to below $14 two years later.[57] During the interim, various persons—first in an anonymous online article and then in several federal securities class actions—accused Ebix of improper accounting practices and inadequate financial disclosures.[58] Raina and the rest of the Board have denied these allegations.[59]

Near the end of this timeframe, according to the Plaintiffs, Raina sought to take advantage of the "enormous upside" created by the temporary reduction in Ebix's stock price.[60] To do so, he partnered with Goldman to take Ebix private.[61]

On May 1, 2013, Ebix and Goldman announced a merger agreement pursuant to which Ebix's public stockholders would receive $20.00 in cash per share. The consideration was approximately 7% above the pre-announcement closing price of Ebix stock, and the transaction implied an enterprise value, including assumed debt, of $820 million.[62]

Concurrently, Raina and Goldman entered into the Investment Letter Agreement (the "Investment Agreement") that would govern the consideration he (and his foundation) would receive in the merger.[63] Based on the disclosed $7.95 Base Price and the $20.00 per share merger price, Raina had the right under the ABA to demand a payment of approximately $84 million from Ebix.[64] But, under the terms of the Investment Agreement, Raina agreed to accept $32 million in cash and approximately 29% of the post-merger entity in exchange for his fully diluted 9.3% interest in Ebix and for waiving his rights under the ABA.[65] The Plaintiffs note that, were the Base Price not $7.95 but rather $23.84, then Raina would not have been entitled to any payment under the ABA in this transaction.[66]

The proposed merger and the accompanying flurry of lawsuits filed by Ebix stockholders in this Court were short-lived. Ebix and Goldman announced on June 19 that they had agreed to terminate the merger agreement.[67] The Investment Agreement, which was contingent on the merger, was also terminated.[68] The company's decision was partially based on a letter it had received from the United States Attorney for the Northern District of Georgia regarding a preliminary investigation related to the allegations in the securities class action lawsuits.[69] In a press release, Raina and another Ebix director maintained that the underlying allegations were without merit.[70]

Despite—or, perhaps, because of—the termination of the merger, the Plaintiffs pressed forward with their claims related to the ABA against the Defendants. They filed their Amended Complaint on August 27, 2013.


The Plaintiffs plead six causes of action against the Defendants. In addition to a declaratory judgment claim regarding the ABA Base Price (Count I) and breach of fiduciary and unjust enrichment claims asserted against Raina individually (Counts III and VI), the Plaintiffs challenge certain decisions by the Board or the Outside Directors as a breach of fiduciary duty. They denominate certain claims as direct (Counts II and IV) and others as derivative (Count V). The Plaintiffs' classifications are not dispositive of the Court's analysis of the nature of those claims, but a brief overview of them is appropriate before addressing the Defendants' motion to dismiss under Court of Chancery Rules 23.1 and 12(b)(6).

The Plaintiffs challenge the following actions by the Board or the Outside Directors directly (Counts II and IV):

• Approving and maintaining the ABA as an unreasonable anti-takeover device;[71]
• Approving the ABA in violation of the 1996 Plan;[72]
• Omitting material information about the ABA in the 2009 Proxy Statement and the 2009 Special Meeting Proxy Statement;[73] and
• Stating inaccurately that the ABA Base Price was $7.95 in the 2010, 2011, and 2012 Proxy Statements.[74]
In addition, the Plaintiffs challenge the following conduct by the Board or the Outside Directors derivatively (Count V):
• Approving the ABA in violation of the 1996 Plan;
• Causing Ebix to file materially misleading or false ...

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