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The Frederick Hsu Living Trust v. ODN Holding Corp.

Court of Chancery of Delaware

April 14, 2017

THE FREDERICK HSU LIVING TRUST, Plaintiff,
v.
ODN HOLDING CORPORATION, OAK HILL CAPITAL PARTNERS III, L.P., OAK HILL CAPITAL MANAGEMENT PARTNERS III, L.P., OHCP GENPAR III, L.P., OHCP MGP PARTNERS III, L.P., OHCP MGP III, LTD., ROBERT MORSE, WILLIAM PADE, DAVID SCOTT, DEBRA DOMEYER, JEFFREY KUPIETZKY, ALLEN MORGAN, LAWRENCE NG, SCOTT JARUS, KAMRAN POURZANJANI, ELIZABETH MURRAY, TOOD H. GREENE, and SCOTT MORROW, Defendants.

          Submitted: January 31, 2017

          Date Corrected: April 24, 2017

          P. Clarkson Collins, Jr., Lewis H. Lazarus, Nicolas Krawitz, MORRIS JAMES LLP, Wilmington, Delaware; Steven Kaufhold, KAUFHOLD GASKIN LLP, San Francisco, CA, Counsel for The Frederick Hsu Living Trust.

          William M. Lafferty, Kevin M. Coen, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; David J. Berger, Catherine E. Moreno, WILSON SONSINI GOODRICH & ROSATI, PC, Palo Alto, California, Counsel for Oak Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P., OHCP GenPar III, L.P., OHCP MGP Partners III, L.P., OHCP MGP III, Ltd., Robert Morse, William Pade, and David Scott.

          A. Thompson Bayliss, April M. Ferraro, ABRAMS & BAYLISS LLP, Wilmington, Delaware, Counsel for ODN Holding Corporation.

          Colm F. Connolly, Jody C. Barillare, MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware; Stephen D. Alexander, Emily L. Calmeyer, MORGAN, LEWIS & BOCKIUS LLP, Los Angeles, California; Timothy D. Katsiff, MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania, Counsel for Debra Domeyer, Jeffrey Kupietzky, Allen Morgan, Scott Jarus, Kamran Pourzanjani, Elizabeth Murray, Todd H. Greene, and Scott Morrow

          Kurt M. Keyman, Samuel T. Hirzel II, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Douglas Fuchs, GIBSON DUNN & CRUTCHER, Los Angeles, California, Counsel for Lawrence Ng

          MEMORANDUM OPINION

          LASTER, Vice Chancellor.

         In 2008, funds sponsored by the venture capital firm Oak Hill Capital Partners[1]invested $150 million in Oversee.net, a California corporation. To facilitate the investment, the parties formed ODN Holding Corporation (the "Company") as a holding company for Oversee.net. In return for its cash, Oak Hill received shares of Series A Preferred Stock (the "Preferred Stock") from the Company. Oak Hill had the right to require the Company to redeem its Preferred Stock in 2013.

         In 2009, Oak Hill became the Company's controlling stockholder. Initially, little changed. The Company continued to expand through acquisitions and reinvested its capital for growth. Then, in 2011, the Company switched into liquidation mode. It stopped investing for growth, sold two of its four lines of business, and hoarded the resulting cash. When Oak Hill exercised its redemption right in 2013, the Company used as much of its cash as possible for redemptions. When that wasn't enough to redeem the Preferred Stock in full, the Company sold its third line of business and used the resulting cash for more redemptions. The process turned a once-promising company into a shell of its former self.

         Frederick Hsu-one of the Company's founders-brought this action against Oak Hill, the Company's board of directors (the "Board"), and certain of the Company's officers. His complaint asserts claims sounding in both law and equity. At law, the complaint contends that the redemptions violated statutory limitations and common law doctrine because the Company lacked sufficient funds legally available to make the redemptions. In equity, the complaint contends that the individual defendants and Oak Hill breached their duty of loyalty by seeking in bad faith to benefit Oak Hill by maximizing the value of Oak Hill's redemption right, rather than by striving to maximize the value of the corporation over the long-term for the benefit of the undifferentiated equity. The Complaint asserts fallback counts against Oak Hill for aiding and abetting breaches of duty by the other defendants, against the directors for waste, and against Oak Hill and the officers for unjust enrichment.

         The Complaint fails to state a claim for an unlawful redemption. Because of the capital-generating actions that the individual defendants took, the Company had sufficient funds legally available to make them.

         The Complaint states a claim for breach of the duty of loyalty against Oak Hill and all but one of the individual defendants. The Complaint's detailed factual allegations support a reasonable inference that the individual defendants acted in bad faith to benefit Oak Hill by maximizing the value of its contractual redemption right, and the actions of Oak Hill's representatives are attributable to Oak Hill. The allegations support a reasonable inference that the entire fairness standard will apply and that the defendants will be unable to show that their course of conduct was entirely fair. The motions to dismiss the fiduciary duty claims are granted in one respect: defendant Kamran Pourzanjani is dismissed because it is not reasonably conceivable that he will not be entitled to exculpation.

         The Complaint states a claim for aiding and abetting against Oak Hill. In the event that Oak Hill is found not to have acted in a fiduciary capacity, Oak Hill could be liable for knowingly participating in the breaches of duty committed by other defendants.

         The Complaint fails to state a claim for waste. Although the Complaint supports a reasonable inference the defendants acted in bad faith when selling Company assets, the Company nonetheless received non-trivial consideration. The Complaint accordingly fails to meet the stringent standard required to state a claim for waste.

         The Complaint states a claim for unjust enrichment. Oak Hill and the officer defendants received financial benefits from the course of conduct described in the Complaint. If those benefits resulted from breaches of duty, and if the defendants who received the benefits are not liable under a different theory, then the claim for unjust enrichment could serve as a vehicle for the Company to recover some or all of the improperly received benefits.

         I. FACTUAL BACKGROUND

         The facts for purposes of the motions to dismiss are drawn from the well-pled allegations of the Verified Class Action and Derivative Complaint (the "Complaint") and the documents it incorporates by reference. At this stage, the allegations of the complaint are assumed to be true, and the plaintiff receives the benefit of all reasonable inferences.

         This decision does not consider documents which the defendants submitted but which the Complaint did not quote or reference. Before filing suit, the plaintiff demanded books and records, thereby heeding the repeated admonition of the Delaware courts.[2] The Company and the plaintiff entered into a confidentiality agreement, and the plaintiff gained access to corporate minutes and other documents. The defendants claim that the drafters of the Complaint selected certain documents and misconstrued them, while ignoring other documents that contradicted their theories. The defendants ask that the omitted documents be deemed incorporated by reference into the Complaint, citing Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016).

         In Yahoo!, after a long and contentious fight over a demand for books and records, I ordered a corporation to produce certain documents. The corporation asked that the production be conditioned on the plaintiff incorporating the documents by reference into any subsequent complaint. I granted the request, relying on the court's authority under Section 220(c) to "prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper." 8 Del. C. § 220(c); see United Techs. Corp. v. Treppel, 109 A.3d 553, 557-58 (Del. 2014) (noting the "broad discretion" afforded to the Court of Chancery under Section 220(c)).

         In this case, there has not been a prior ruling imposing an incorporation-by-reference condition, and the parties did not agree to one. Consequently, the Complaint and the documents it cites or incorporates by reference define "the universe of facts that the trial court may consider in ruling on a Rule 12(b)(6) motion to dismiss." In re Gen. Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006).

         A. A Growing Company

         Hsu and Lawrence Ng co-founded Oversee.net in 2000. Under their stewardship, Oversee became a "leading provider of technology-based marketing solutions to online publishers and advertisers worldwide." By 2007, the Company's annual revenue exceeded $200 million and its net income exceeded $19 million. At that point, the Company had four lines of business:

• Domain Monetization Services. This business drove Internet traffic derived from the Company's network of owned and managed domain names to online advertisers.
• Vertical Markets. This business provided marketers with leads from personal information collected by the Company's websites.
• Domain Aftermarket Services. This business sold domain names predominantly for third parties.
• Domain Registrar Services. This business charged fees for domain name registration and ancillary services.

         Oversee grew internally by developing its own products and externally through acquisitions. During the eighteen-month period leading up to December 2007, Oversee made five acquisitions:

• In June 2006, Oversee paid $8.4 million for Field, Lake, and Sky LLC, an entity in the domain name acquisition space.
• In October 2006, Oversee paid $1.1 million for the assets of One Technologies L.P., a lead generator.
• In January 2007, Oversee paid $21.9 million for Lowfares.com, Inc., a company whose websites could be used to generate leads for the Vertical Markets business.
• In June 2007, Oversee paid $6.4 million for SnapNames.com, Inc. and an affiliate, both in the domain name acquisition space.
• In December 2007, Oversee paid $24.6 million for DomainSystems, Inc., a leader in domain name registration, aftermarket sales, and appraisal and escrow services.

         B. Oak Hill Invests $150 Million.

         In February 2008, Oak Hill invested $150 million in Oversee. The parties formed a new Delaware corporation-the Company-to facilitate the transaction. Oversee became its wholly owned subsidiary. In return for its cash, Oak Hill received 53, 380, 783 shares of Preferred Stock.

         The terms of the Preferred Stock gave Oak Hill the ability to exercise a mandatory redemption right beginning five years after its investment. The pertinent language stated:

At any time after February 12, 2013, upon the written request of the holders of at least a majority of the then outstanding shares of [Preferred Stock], the [Company] shall redeem, out of funds legally available therefor, all of the outstanding shares of [Preferred Stock] which have not been converted into Common Stock pursuant to Section 4 hereof (the "Redemption Date"). The Redemption Date shall be determined in good faith by the Board and such Redemption Date shall be at least thirty (30) days, but not more than sixty (60) days, after the receipt by the [Company] of such written request. The [Company] shall redeem the shares of [Preferred Stock] by paying in cash an amount equal to the Original Issue Price for such [Preferred Stock], plus an amount equal to all declared and unpaid dividends thereon (as adjusted for stock splits, stock dividends and the like, the "Redemption Price"). If the funds legally available for redemption of the [Preferred Stock] shall be insufficient to permit the payment to such holders of the full respective Redemption Price, the Corporation shall effect such redemption pro rata among the holders of the [Preferred Stock].

         Dkt. 36, Ex. B, art. 5., § 6(a).

         If the Company did not have sufficient funds to redeem the Preferred Stock, then the terms of the Preferred Stock contemplated ongoing redemptions as funds became available. The pertinent language stated:

If the funds of the [Company] legally available for redemption of shares of [Preferred Stock] on any Redemption Date are insufficient to redeem the total number of shares of [Preferred Stock] to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon their holdings of [Preferred Stock]. The shares of [Preferred Stock] not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the [Company] are legally available for the redemption of shares of [Preferred Stock] such funds will immediately be used to redeem the balance of the shares which the [Company] has become obliged to redeem on any Redemption Date, but which it has not redeemed.

Id., art. 5., § 6(d).

         In 2009, the Company and Oak Hill modified these provisions. The amendments sought to impose on the Company a contractual obligation to raise capital for additional redemptions:

If the funds of the [Company] legally available for redemption of shares of [Preferred Stock] on any Redemption Date are insufficient to redeem the total number of shares of [Preferred Stock] to be redeemed on such date: (i) those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares . . ., and (ii) the [Company] thereafter shall take all reasonable actions (as determined by the [Company's] Board of Directors in good faith and consistent with its fiduciary duties) to generate, as promptly as practicable, sufficient legally available funds to redeem all outstanding shares of [Preferred Stock], including by way of incurrence of indebtedness, issuance of equity, sale of assets, effecting a [merger or sale of assets] or otherwise . . . At any time thereafter when additional funds of the [Company] are legally available for the redemption of shares of [Preferred Stock] such funds will immediately be used to redeem the balance of the shares which the [Company] has become obliged to redeem . . . .

         Dkt. 36, Ex. C. The provision thus recognized that any actions to generate additional funds to redeem shares would be "determined by the [Company's] Board of Directors in good faith and consistent with its fiduciary duties."

         This decision refers to Oak Hill's right to cause the Company to redeem the Preferred Stock as the "Redemption Right." It refers to the provisions that governed the redemption of the Preferred Stock collectively as the "Redemption Provisions."

         C. Oak Hill Becomes The Company's Controlling Stockholder.

         Oak Hill started as a minority investor. The Preferred Stock did not carry a majority of the Company's voting power, and Oak Hill only had the right to fill two seats on a seven-member Board. The Company's certificate of incorporation called for (i) two seats elected by the holders of the Preferred Stock voting as a separate class, (ii) three seats elected by the holders of the common stock voting as a separate class, and (iii) two seats elected by the holders of common stock and the Preferred Stock voting together. Oak Hill filled its two positions with Robert Morse, the Oak Hill partner who sponsored the investment, and William Pade, another Oak Hill partner.

         In 2009, Oak Hill paid $24 million to purchase enough shares of common stock from Ng to give Oak Hill control over a majority of the Company's voting power. After Oak Hill acquired mathematical control, the Board was enlarged to eight members, and a third Oak Hill representative-David Scott-became a director. Scott was an Oak Hill vice president. This decision refers to Morse, Pade, and Scott as the "Oak Hill Directors."

         The other five Board members were Jeffrey Kupietzky, Ng, Allen Morgan, Scott Jarus, and Kamran Pourzanjani. Kupietzky served as the Company's President and Chief Executive Officer. The others were non-management directors, but the Complaint strives to paint them in hues of gray. The Complaint alleges that Ng now felt indebted to Oak Hill for paying him $24 million to purchase a substantial block of his otherwise illiquid common stock. The Complaint observes that Morgan worked for fifteen years as a corporate attorney with Wilson Sonsini Goodrich & Rosati, LLP, Oak Hill's current and long-time counsel. Morgan also served alongside Pade on the board of another company, and the two men had an ongoing social relationship through their sons, who were friends. The Complaint alleges that Morgan, Jarus, and Pourzanjani served regularly on boards of Silicon Valley companies, and this made them want to remain on good terms with Oak Hill because of its outsized influence within the highly networked Silicon Valley community.

         Oak Hill's acquisition of majority control did not immediately result in any change in the Company's business strategy. For the next two years, the Company continued to focus on growth. Its pursuit of this strategy included the following acquisitions:

• In December 2009, the Company paid $4 million for New Venture Corporation, LLC, a company whose credit card website could be used to generate leads for the Vertical Markets business.
• In April 2010, the Company paid $2.7 million for T2Media, a company whose travel websites could be used to generate leads for the Vertical Markets business.
• In November 2010, the Company paid $17 million for Shopwiki Corporation, a company in the vertical markets space.

         D. Oak Hill Changes The Company's Strategy.

         The Complaint alleges that at some point during 2011, Oak Hill concluded that "exercising its contractual redemption right in February 2013 was the most effective way to achieve the return of its capital." Compl. ¶ 35. The Complaint alleges that beginning in 2011, Oak Hill caused the Company to alter its business plan by no longer focusing on growth, whether internally or by acquisition, and instead seeking to accumulate cash that could be used for redemptions.

         Consistent with a directional reset, the Company changed its management team in mid-2011. In June 2011, defendant Scott Morrow became co-President alongside Kupietzky. In August 2011, Kupietzky left the Company. Defendant Debra Domeyer, who had been serving as the Company's Chief Technology Officer, became co-President with Morrow. In December 2011, one of the Company's outside directors-Pourzanjani-left the Board. His seat remained vacant.

         Also consistent with a directional reset, the Company did not make any acquisitions during 2011. By the end of the year, the Company's cash reserves had nearly doubled, from $13.2 million at the end of 2010 to $23.7 million at the end of 2011.

         Most significantly, the Company spent the second part of 2011 preparing to sell two of its four lines of business: the Domain Aftermarket Services business and the Domain Registrar Services business. The Company completed the sale in January 2012 for total proceeds of $15.4 million. The Company had paid more than $46.5 million in 2007 to purchase two of the companies that comprised just part of the divested lines of business. Five years later, the Company sold the two lines of business in their entirety for a third of the price. The sale of the two lines of business had a dramatic effect on the Company's revenue-generating capacity. Total annual revenue dropped from $141 million in 2011 to $89 million in 2012.

         E. Further Moves In Preparation For Redemption

         In May 2012, Domeyer became the Company's CEO and joined the Board. Pourzanjani was not replaced, so the Board had seven directors: the three Oak Hill Directors, Domeyer, Morgan, Jarus, and Ng.

         Pade and Ng were the members of the Compensation Committee. In May 2012, they approved bonus agreements for Domeyer and two of the Company's senior officers: Elizabeth Murray, the Chief Financial Officer, and Todd Greene, the General Counsel. The agreements provided for special payments if the Company achieved a "liquidity event, " defined to include the redemption of at least $75 million of Preferred Stock.

         In 2012, the Company again did not make any acquisitions. By the end of the year, the Company's cash reserves had doubled a second time. At the end of 2011, the Company had $23.7 million in cash. By the end of 2012, it had $50 million. This was more than three times the Company's average end-of-year cash balance of $15.5 million during the period from 2007 to 2010, when the Company was in growth mode.

         F. The Committee

         In August 2012, with the Redemption Right looming, the Board formed a special committee (the "Committee") charged with evaluating the Company's alternatives for raising capital for redemptions and to negotiate with Oak Hill over the terms of any redemptions. The resolution creating the Committee provided that the Board would not approve any transaction relating to the Redemption Right without a prior favorable recommendation from the Committee. The resolution provided that the Committee's authority would terminate when Oak Hill exercised the Redemption Right.

         The members of the Committee were Morgan and Jarus. The Committee held its first meeting on August 28, 2012. Morgan disclosed his social relationship with Pade. He did not disclose his service with Pade on another board or his relationship with Oak Hill through his work at Wilson Sonsini.

         G. The Officers' Recommendation

         In September 2012, the Committee tasked Domeyer, Murray, and Greene-the three officers with bonuses tied to redemptions-with creating a proposal for Oak Hill. The officers determined that the Company only needed a cash reserve of $10 million, or one-fifth of the amount it had accumulated. This freed $40 million for other uses. The officers proposed that the Company use all of it redemptions, borrow an additional $35 million, and use all of that for redemptions as well. The total of $75 million would result in the Company redeeming half of the shares of the Preferred Stock, which had a contractual value of $150 million in the aggregate for purposes of redemptions. It also would trigger the officers' bonuses.

         The officers worried that banks would not lend to the Company if they perceived that additional funds would be funneled to Oak Hill, so the officers proposed that the $75 million redemption be conditioned on Oak Hill not receiving any further redemptions until 2017. In October 2012, the Committee adopted the general framework of the recommendation but shortened the delay on further redemptions from 2017 until 2016.

         Oak Hill rejected the proposal. Oak Hill countered by asking that the Company agree to redeem additional shares of Preferred Stock if the Company sold assets. Oak Hill also wanted a cumulative dividend of 12% per annum paid in kind on the unredeemed shares. The terms of the Preferred Stock did not give Oak Hill the right to a cumulative dividend, before or after the exercise of the Redemption Right. The terms of the Preferred Stock also recognized that the Company only was obligated to redeem as many shares of Preferred Stock as it could out of legally available funds and after that, the Board only had to generate funds for further redemptions consistent with its fiduciary duties. During the time it took to generate additional funds, Oak Hill was not entitled to any increase in the redemption price and had no other remedies. Oak Hill's request would cause the balance of the redemption obligation to compound at 12% per annum.

         The Committee did not accept Oak Hill's counter. In November 2012, the Committee proposed that 100% of the net cash proceeds from any divestures outside the ordinary course of business would go towards redemptions and that Oak Hill would receive a 2% cumulative payment-in-kind dividend on any shares of Preferred Stock that were not redeemed. In return for these concessions, the Committee proposed that the Company would not make any additional redemptions until 2015.

         Concurrently, Murray contacted several banks about a credit facility. Because the borrowings would be used for redemptions, only one bank would even consider a loan. That bank conditioned its proposal on Oak Hill guaranteeing repayment. Oak Hill refused. The bank then offered a two-year term loan of $15 million, conditioned on the Company not using any of the proceeds for redemptions. The inability to secure financing prevented the Company from using debt to redeem a portion of the Preferred Stock, as the officers had proposed, and thereby hit the $75 million trigger for their bonuses.

         H. Oak Hill's Demand And The Officers' Revised Recommendation

         On February 1, 2013, Pade told the Committee that Oak Hill intended to exercise the Redemption Right in full on the earliest possible date, i.e. February 13. Acknowledging that the Company did not have the funds to redeem the Preferred Stock in full, Pade proposed that the Company immediately make a redemption payment of $50 million, which he later reduced to $45 million. In return, Oak Hill would forbear on receiving further redemption payments until December 31, 2013. Under Pade's proposal, Oak Hill would have the right to cancel the forbearance agreement unilaterally and demand additional redemptions on thirty-days' notice.

         On February 12, 2013, the Committee met to consider Pade's demand. One obvious problem was that using $45 million for redemptions would leave the Company with only $5 million in cash, which was half of the reserve of $10 million in cash that the officers had stated was necessary to support the Company's operations. During the period from 2007 to 2010, the Company ended each year with an average of $15.5 million in cash.

         Conveniently, the officers changed their minds about how much cash the Company needed. Murray advised the Committee that she now believed $2 million in cash was sufficient. That figure permitted the Company to make the $45 million redemption payment that Oak Hill wanted.

         The Committee did not seek any other changes in Oak Hill's proposal, such as more meaningful forbearance. Under Oak Hill's proposal, the thirty-day termination right rendered the forbearance offer largely illusory. Moreover, the offer at most contemplated forbearance of ten months. This was effectively the sleeves from Oak Hill's vest, because (i) Oak Hill had no ability to compel the Company to make redemptions except out of legally available funds, (ii) the Board had the right to determine how to raise additional funds in a manner that complied with its fiduciary duties, and (iii) one can readily doubt whether, after a $45 million redemption, the Company would have the capacity to make any additional redemptions during the remaining nine months of the year.

         But the Committee did not push back. They resolved to recommend that the Board accept Oak Hill's terms.

         I. The March Redemption

         On February 13, 2013, Oak Hill exercised the Redemption Right in full and on the earliest possible date. In accordance with Generally Accepted Accounting Principles ("GAAP"), the Company reclassified Oak Hill's Preferred Stock as a current liability on its balance sheet in the amount of $150 million. The Committee's authority terminated with the exercise of the Redemption Right.

         On February 27, 2013, the Board met to consider Oak Hill's demand for redemption. The Board concluded that the Company had sufficient surplus to redeem $45 million of Preferred Stock, as required by Section 160 of the Delaware General Corporation Law (the "DGCL"). 8 Del. C. § 160. In making this determination, the Board did not treat the Preferred Stock as a current liability of $150 million, as it appeared on the Company's balance sheet. Had the Board done so, the Company would have had a deficit of $60 million and could not have redeemed any Preferred Stock.

         Domeyer, Morgan, Jarus, and Ng voted to approve the redemption. The Oak Hill Directors abstained. On March 18, 2013, the Company paid Oak Hill $45 million to redeem shares of Preferred Stock (the "March Redemption"). Although Kupietzky was no longer employed by the Company, his employment agreement called for him to receive a bonus if shares of Preferred Stock were redeemed. He received $632, 813, or approximately 1.4% of the redemption amount. Murray, Greene, and Domeyer did not receive a bonus, because their agreements required a redemption of at least $75 million to trigger their payments.

         Hsu learned of the March Redemption on May 23, 2013, when Greene e-mailed him the Company's audited financial statements for 2012. Hsu was shocked. He e-mailed Greene:

Well this is a surprise. Our "growth company" emptying its coffers to Oak Hill through redemption? How is this supposed to instill shareholder confidence? On April 5th I asked you if there were any material corporate transactions and to get this to me within a reasonable 5-7 days. How is it this is the first time I'm hearing of this?

         Greene replied: "I believe you have been aware of the redemption right since Oak [Hill] made their investment back in 2008. . . . In February they provided a redemption notice pursuant to the charter and the company complied with its obligation to redeem the shares that it could." Greene's reply obscured the lengthy background leading up to the formal exercise of the Redemption Right.

         In September 2013, Morse left Oak Hill and resigned from the Board. This left Pade and Scott as the Oak Hill representatives. Morse's seat was left vacant.

         J. The September Redemption.

         In February 2014, Domeyer advised the Board that a strategic acquirer had expressed interest in purchasing the Domain Monetization business. After selling two lines of business in January 2012, the Company had two lines left. The Domain Monetization business was the Company's primary source of revenue.

         Recognizing that any cash generated by the sale could be used for redemptions, and perceiving that this could create a conflict for the Oak Hill Directors, the Board reconstituted the Committee to oversee the negotiations. Its members again were Morgan and Jarus. The Committee delegated the actual negotiations to Domeyer, Murray, and Greene, the three members of management with bonuses tied to achieving $75 million in redemptions.

         In April 2014, management reached an agreement to sell the Domain Monetization business for $40 million. The Committee recommended the deal to the Board, and the Board approved it on April 14.

         The sale of the Domain Monetization business closed in May 2014. The Board moved quickly to deploy the resulting cash for redemptions. On June 4, the Board acted by written consent to reconstitute the Committee a third time, once again consisting of Morgan and Jarus, and charged the Committee with overseeing the redemption process.

         The Board also decided to free up additional cash for redemptions through a restructuring. It would involve terminating certain executives, reducing the overall work force, and terminating the Company's lease on its Los Angeles headquarters. The Board charged the Committee with implementing the restructuring.

         The Committee delegated the details of both tasks to Domeyer, Murray, and Greene. In July 2014, the officers presented a plan for the restructuring. The Committee rejected it because it did not cut costs enough. The Committee told the officers to cut more.

         On August 4, 2014, the officers presented a revised plan. The Committee rejected it and told the officers to cut more.

         On August 25, 2014, the full Board received an update on the Committee's work. The officers recommended a business plan that involved greater cost reductions and the sale of one of the three segments of the Company's lone remaining line of business, Vertical Markets. The full Board approved the new business plan with Pade, Scott, Domeyer, Morgan, and Jarus voting in favor. Ng abstained.

         On August 29, 2014, the Committee determined that in light of the new business plan, the Company could make a redemption payment of $40 million to Oak Hill. The Committee resolved to ask Oak Hill to extend the forbearance agreement until March 31, 2015. One can readily question whether this term provided any benefit to the Company, because after a $40 million redemption, it was doubtful that the Company would have the capacity to redeem any additional shares during the next seven months.

         The full Board met on September 2, 2014. The Board determined that the Company had sufficient surplus to make a redemption payment of $40 million. As before, the Board did not treat Oak Hill's remaining Preferred Stock as a current liability of $105 million, as it appeared on the Company's balance sheet. The Board approved the redemption payment on the terms recommended by the Committee, and the Company made the redemption (the "September Redemption").

         The Company previously had redeemed $45 million in Preferred Stock through the March Redemption. The September Redemption brought the total to $85 million. That amount exceeded the $75 million redemption trigger for the officers' bonuses. Domeyer, Murray, and Greene each received a bonus of $587, 184.

         K. One More Divestiture

         The sale of the Domain Monetization business left the Company with only its Vertical Markets line of business. It had three segments: Retail, Travel, and Consumer Finance. Retail generated nearly half of the Company's remaining revenue. The "crown jewel" of Retail was Shopwiki. In 2010, the Company acquired Shopwiki for $17 million. In December 2014, the Company sold Shopwiki for $600, 000.

         The sale of Shopwiki capped a remarkable period during which the Company sold three of its four lines of business in their entirety and divested the principal economic driver of the fourth line of business. The sales had a dramatic effect on the Company's cash-generating capacity. In 2011, before the divestitures, the Company generated annual revenue of $141 million. In 2015, after the divestitures, the Company generated annual revenue of $11 million, a decline of 92%.

         On October 19, 2015, Ng left the Board. His seat remained vacant. The current Board comprises Pade, Scott, Domeyer, Morgan, and Jarus.

         L. This Litigation

         On December 11, 2015, Hsu received the Company's 2014 audited financial statements and learned of the September Redemption and the sale of Shopwiki. In January 2016, he sought books and record pursuant to Section 220 of the DGCL. 8 Del C. § 220. The Company agreed to produce certain documents, including minutes of Board and Committee meetings.

         On March 15, 2016, Hsu filed this action through his living trust, which holds his Company stock. The defendants ...


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