WALTER E. RYAN, JR., Plaintiff,
NAREN GURSAHANEY, THOMAS COLLIGAN, TIMOTHY DONAHUE, ROBERT DUTKOWSKY, BRUCE GORDON, BRIDGETTE HELLER, KATHLEEN HYLE, DINESH PALIWAL, KEITH MEISTER, and CORVEX MANAGEMENT LP, Defendants, and THE ADT CORPORATION, a Delaware Corporation, Nominal Defendant.
Submitted: December 8, 2014
Jessica Zeldin, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Clinton A. Krislov, Esq., Michael R. Karnuth, Esq., Christopher M. Hack, Esq., KRISLOV & ASSOCIATES, LTD., Chicago, Illinois; Merrill G. Davidoff, Esq., Lawrence Deutsch, Esq., Robin Switzenbaum, Esq., BERGER & MONTAGUE, P.C., Philadelphia, Pennsylvania; Attorneys for Plaintiff Walter E. Ryan, Jr.
Stephen P. Lamb, Esq., Daniel A. Mason, Esq., PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Daniel J. Kramer, Esq., Robert N. Kravitz, Esq., PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York, Alexandra M. Walsh, Esq., PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Washington, D.C.; Attorneys for Defendants Naren Gursahaney, Thomas Colligan, Timothy Donahue, Robert Dutkowsky, Bruce Gordon, Bridgette Heller, Kathleen Hyle, Dinesh Paliwal and Nominal Defendant The ADT Corporation.
Brock E. Czeschin, Esq., A. Jacob Werrett, Esq., RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; Nancy Chung, Esq., Michael A. Asaro, Esq., Patrick M. Mott, Esq., AKIN GUMP STRAUSS HAUER & FELD LLP, New York, New York; Attorneys for Defendants Keith Meister and Corvex Management LP.
PARSONS, Vice Chancellor.
The plaintiff in this case, a stockholder of The ADT Corporation, seeks to bring a derivative action on behalf of the company against its board of directors. In 2012, a hedge fund acquired a 5% stake in ADT, and the fund's principal contended publicly that the company would benefit from incurring debt to repurchase a significant portion of its common stock. The plaintiff alleges that the director defendants breached their fiduciary duties by appointing the hedge fund's principal to the board, engaging in a stock repurchase plan similar to the one he advocated for, and then ultimately repurchasing the hedge fund's block of ADT stock at the then-prevailing, but allegedly inflated, market price. The plaintiff also accuses the hedge fund of aiding and abetting the director defendants' alleged breaches of fiduciary duty, and charges the fund and its principal with unjust enrichment.
The director defendants moved to dismiss the complaint, as did the hedge fund and its principal. They all contend that, because the plaintiff did not make a pre-suit demand on the board of directors, and demand is not excused in these circumstances, this action should be dismissed under Court of Chancery Rule 23.1. Each of the defendants also argue that, under Rule 12(b)(6), the complaint fails to state a claim against them. For the reasons stated in this Memorandum Opinion, I conclude that demand is not excused under Aronson v. Lewis and its progeny. Accordingly, I grant the defendants' motion to dismiss under Rule 23.1 and do not reach their other arguments in favor of dismissal.
Plaintiff Walter E. Ryan, Jr. brings this action derivatively on behalf of The ADT Corporation ("ADT" or the "Company"). ADT, a Delaware corporation based in Florida, is an alarm and security systems company. Its stock began trading on the NYSE in September 2012, when the Company was spun off from Tyco International, Inc. ("Tyco"). Ryan has owned shares of ADT common stock continuously since that time.
Defendant Naren Gursahaney is the CEO and a director of ADT. Defendants Thomas Colligan, Timothy Donahue, Robert Dutkowsky, Bruce Gordon, Bridgette Heller, Kathleen Hyle, and Dinesh Paliwal (together with Gursahaney, the "Board" or the "Director Defendants") also were ADT directors at all relevant times.
Defendant Keith Meister was a member of ADT's board of directors from December 2012 to November 2013. Meister also is the founder, managing director, and principal partner of Defendant Corvex Management LP ("Corvex"), a Delaware limited partnership with its principal place of business in New York. Corvex is a hedge fund, and from October 2012 to November 2013, it owned or controlled roughly 5% of ADT's issued and outstanding common stock.
1. Corvex takes a position in ADT, and the Board responds
In the process of dividing itself into three separate companies, Tyco spun off its security solutions division into an independent entity, ADT. On September 28, 2012, Tyco stockholders, including Plaintiff, received one-half share of ADT stock for each share of Tyco stock they owned. From the time of the spinoff through late October 2012, Corvex accumulated a 5% stake in ADT, at prices ranging from $36 to $39 per share.One day before disclosing its ADT investment to the Securities and Exchange Commission ("SEC") on October 25, 2012, Corvex made a public presentation at an investing conference. In that presentation, according to the Complaint, Meister asserted that ADT was undervalued and would outperform its financial expectations. Meister criticized ADT's capital structure, however. In particular, he argued that unlocking ADT's true value would require the Company to incur more debt and repurchase stock, with a goal of raising its ratio of debt to EBITDA from 1.5x to 3.Ox. He estimated that those maneuvers would double ADT's stock price from its current $30 to $40 per share range, and provide significant returns to the stockholders.
ADT's management and several directors met with Meister on November 17, 2012, and he reiterated those investment theses to them. On November 26, the full Board met telephonically. Among the subjects they discussed were the Company's capital allocation and the merits of a share repurchase program. The Board also was informed that Meister wanted to become a director of the Company. The following day, ADT publicly announced its financial results for the fourth quarter of fiscal year 2012 and provided its forecasts for 2013. The Board also announced that it had approved a stock repurchase program, pursuant to which the Company planned to buy back 17% or $2 billion of its common stock over the next three years, thereby raising its debt to EBITDA ratio to 2.Ox (the "Stock Repurchase Program").
In the meantime, Meister continued to seek appointment to ADT's board. In this regard, Plaintiff's allegations focus on a December 13, 2012 Board meeting at which Defendant Gordon, Chairman of the Board, advised the other directors that if Meister were not asked to join the Board, Corvex "likely" would make a stockholder proposal to get himself and possibly other nominees elected. The meeting minutes allegedly state that the "cost and distraction of any potential proxy contest, the likely consequences of winning or losing such a contest, and Mr. Meister's ...