Submitted: January 31, 2017
Corrected: April 24, 2017
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.
Thompson Bayliss, April M. Ferraro, ABRAMS & BAYLISS LLP,
Wilmington, Delaware, Counsel for ODN Holding Corporation.
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
M. Keyman, Samuel T. Hirzel II, HEYMAN ENERIO GATTUSO &
HIRZEL LLP, Wilmington, Delaware; Douglas Fuchs, GIBSON DUNN
& CRUTCHER, Los Angeles, California, Counsel for Lawrence
LASTER, Vice Chancellor.
2008, funds sponsored by the venture capital firm Oak Hill
Capital Partnersinvested $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.
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.
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
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.
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.
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
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.
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.
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.
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. 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).
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)).
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
A Growing Company
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
• 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.
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
• 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
• In December 2007, Oversee paid $24.6 million for
DomainSystems, Inc., a leader in domain name registration,
aftermarket sales, and appraisal and escrow services.
Oak Hill Invests $150 Million.
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.
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].
36, Ex. B, art. 5., § 6(a).
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
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).
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 . . . .
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."
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
Oak Hill Becomes The Company's Controlling
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.
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."
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
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
• 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
Oak Hill Changes The Company's Strategy.
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
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.
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
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
Further Moves In Preparation For Redemption
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.
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
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.
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.
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.
The Officers' Recommendation
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.
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
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.
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.
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.
Oak Hill's Demand And The Officers' Revised
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
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.
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.
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
Committee did not push back. They resolved to recommend that
the Board accept Oak Hill's terms.
The March Redemption
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.
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
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.
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?
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.
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.
The September Redemption.
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
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.
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.
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.
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
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.
August 4, 2014, the officers presented a revised plan. The
Committee rejected it and told the officers to cut more.
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.
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
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
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,
One More Divestiture
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.
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%.
October 19, 2015, Ng left the Board. His seat remained
vacant. The current Board comprises Pade, Scott, Domeyer,
Morgan, and Jarus.
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
March 15, 2016, Hsu filed this action through his living
trust, which holds his Company stock. The defendants ...