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Capella Holdings, Inc. v. Anderson

Court of Chancery of Delaware

July 8, 2015

Capella Holdings, Inc.

Submitted: March 12, 2015

A. Thompson Bayliss, Esquire Sarah E. Hickie, Esquire Abrams & Bayliss LLP

Johnna M. Darby, Esquire Hiller & Arban, LLC

Dear Counsel:

A company (and its operating subsidiary) and several of its fiduciaries have moved to dismiss counterclaims and third-party claims brought against them by a company founder who also is a former director and officer. The claims relate to a 2014 recapitalization that led the founder to file a public complaint in Tennessee state court, and then to be terminated based on the disclosure of supposedly confidential information. The founder has failed to plead that the recapitalization was unfair, but there are factual issues that prevent dismissal of his contract claims. The Court thus grants the motion to dismiss in part and denies the motion in part.

Counterclaim Defendants are Capella Holdings, Inc. ("Capella Holdings") and Capella Healthcare, Inc. ("Capella Healthcare, " and collectively, "Capella"), as well as Capella directors Daniel S. Slipkovich ("Slipkovich"), Joseph P. Nolan ("Nolan"), David A. Donnini ("Donnini"), Joshua M. Earl ("Earl"), and Robert Z. Hensley ("Hensley, " and collectively, the "Director Defendants"). They have moved to dismiss breach of fiduciary duty and contract claims made by Counterclaim Plaintiff James Thomas Anderson ("Anderson"), a founder and former director and officer of Capella.[1]

Capella is a Delaware corporation that operates "acute care hospitals and ancillary facilities."[2] Upon Capella's formation, affiliates of GTCR Golder Rauner II L.L.C. ("GTCR")[3] invested approximately $206 million for approximately 50 million common and 206, 000 preferred shares of Capella. Capella's charter capped issuance of common stock at 75 million shares "to protect the minority shareholders from dilution."[4] Furthermore, under the terms of the Senior Management Agreement dated May 4, 2005, Capella was required to "reserve 2, 211, 688 additional shares of Common Stock . . . for issuance . . . to other executives and employees" of Capella and its subsidiaries.[5] Capella and Anderson were signatories to the Senior Management Agreement.

In 2013, GTCR began a sales process that resulted in a bid from Apollo Global Management, LLC ("Apollo") of $200 million for preferred securities convertible into at least 51% of Capella's common stock. According to Anderson, the bid thus valued the common at between $200 million and $400 million, or "at least $3.17 per share."[6] Counterclaim Defendants offer an October 30, 2013, bid letter from Apollo, which, however, makes clear that part of the investment was to be used to deleverage Capella.[7] Nevertheless, GTCR subsequently terminated the process. GTCR then began changing management, including hiring new chief executive officer Mike Wiechart ("Wiechart"). Anderson was given, but did not execute, "'voluntary termination' papers" on December 20, 2013.[8]

The counterclaims relate to an April 17, 2014, recapitalization (the "Recapitalization"). Wiechart proposed the Recapitalization in February 2014, citing a need to avoid a potential debt rating downgrade and to "'incentivize'" employees.[9] Legal counsel was present and answered Anderson's questions at that February board meeting. As of then, Capella was able to issue approximately 12 million more shares of common stock, and Chief Financial Officer Denise Warren represented that "no downgrade was threatened or imminent."[10] She also "stated that no debt issuance was currently under consideration."[11]

The board members were provided with details of the Recapitalization less than 48 hours before their ultimate vote. In the Recapitalization, Capella would be authorized to issue over 1.2 billion shares of common stock. GTCR's preferred shares[12] would be converted into common shares based on a $0.175 per common share valuation, reportedly determined by "the amount of money that various investors had paid for their shares"-not fair market value.[13] Generally speaking, GTCR's ownership percentage would increase from 79.1% of Capella's common stock to 88%; Anderson's share would decrease from 6% to 0.308%; and the minority shareholders' share would decrease from 20% to less than 2%. GTCR also requested exclusive Delaware jurisdiction.

At an April 17, 2014, meeting, after receiving legal advice, Capella's board of directors approved the Recapitalization. Minutes from February presented at the April meeting noted "an imminent threat of a bond-ratings downgrade" and a lack of questions to legal counsel.[14] Anderson voted against the Recapitalization, while five directors-who were either GTCR "affiliates" or had "a direct pecuniary interest through GTCR in maximizing the value of GTCR's investment"-voted in favor.[15] In Anderson's words, Donnini and Earl are "direct affiliates of GTCR";[16]Nolan is "a former direct affiliate in GRCR" who serves to benefit from "GTCR-affiliated investments";[17] Hensley is "a board member for multiple GTCR-affiliated companies";[18] and Slipkovich is a beneficiary of "employment agreements linked to the outcome of GTCR's investment in [Capella]."[19] GTCR had nominated Donnini, Earl, Nolan, and Hensley to the board.

Anderson filed an action in Tennessee state court on April 23, 2014, alleging breaches of contract and fiduciary duty and seeking rescission of the Recapitalization (the "Tennessee Complaint").[20] Included in the Tennessee Complaint was information about the Apollo bid, the Recapitalization, and alleged concerns about a debt-rating downgrade. Capella responded by purporting to terminate Anderson "for cause" under the Senior Management Agreement on May 19, 2014, and filing this Delaware action.[21] Anderson's "breach of his duty of loyalty and breach of his confidentiality obligations" were cited as justifying the termination.[22] Capella has refused to pay Anderson severance.[23] In September 2014, Anderson "voluntarily dismissed his Tennessee case, without prejudice" and filed "mirror[ing]" claims through his Delaware counterclaims.[24]

In this action, Anderson brings five counts, the first four focused on rescission of the Recapitalization[25] and the last focused on securing benefits under his employment agreement through an order for declaratory judgment and specific performance. In his first three counts, Anderson asserts duty of loyalty, duty of care, and duty of good faith claims against the Director Defendants and Capella Holdings for the directors' role in approving the Recapitalization.[26] Anderson alleges that the Recapitalization was conducted to benefit GTCR and management, without sufficient time and information, and for stated reasons that were false. He contends that entire fairness review is appropriate. Count IV accuses Capella of breaching the Senior Management Agreement "by authorizing the issuance of" more than the shares reserved for executives and employees (and more than the 75 million cap in its charter).[27] Anderson's final count faults Capella for failing to uphold severance pay and other obligations required for termination without cause.[28] From these violations, Anderson claims to have suffered damages in an amount "unascertainable" at this stage.[29]

Counterclaim Defendants urge the Court to dismiss the counterclaims on the grounds of laches (or the impracticality of rescission), failure to comply with requirements for derivative claims, and failure to state a claim. On the merits of the fiduciary duty claims, Counterclaim Defendants argue that Anderson has not rebutted the presumption that the Director Defendants acted loyally, that the Section 102(b)(7) provision in Capella's charter[30] shields them from liability, and that Capella cannot breach a duty to itself. They contend that the contract claims fail because "the clear and unambiguous language"[31] of the Senior Management Agreement supports their reading that the reserved share amount was a "floor, "[32]and Anderson has not identified an actual harm suffered. Counterclaim Defendants add details of the Apollo bid in their reply to debunk Anderson's theory of damages. They also argue that "[t]he public existence of Anderson's Tennessee Complaint"[33] is enough to establish that Capella terminated him for good cause, which both ...

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