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Appel v. Berkman

Court of Chancery of Delaware

July 13, 2017

STEPHEN J. APPEL, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
v.
DAVID J. BERKMAN, STEPHEN J. CLOOBECK, RICHARD M. DALEY, FRANKIE SUE DEL PAPA, JEFFREY W. JONES, DAVID PALMER, HOPE S. TAITZ, ZACHARY D. WARREN, ROBERT WOLF, and CENTERVIEW PARTNERS LLC, Defendants.

          ORDER GRANTING MOTIONS TO DISMISS

          TAMIKA MONTGOMERY-REEVES, VICE CHANCELLOR.

         WHEREAS, Plaintiff Stephen J. Appel was a stockholder of Diamond Resorts International ("Diamond" or the "Company") at all relevant times;

         WHEREAS, Defendants David J. Berkman, Stephen J. Cloobeck, Richard M. Daley, Frankie Sue Del Papa, Jeffrey W. Jones, David Palmer, Hope S. Taitz, Zachary D. Warren, and Robert Wolf were directors of Diamond at all relevant times (collectively, save Cloobeck, the "Director Defendants");

         WHEREAS, Defendant Centerview Partners LLC ("Centerview") was the financial advisor to Diamond's strategic review committee that reviewed the transaction (the "Strategic Review Committee") and the Diamond board;

         WHEREAS, non-party Apollo Global Management LLC ("Apollo") acquired Diamond in a two-step merger under 8 Del C. § 251(h) at $30.25 per share, which closed on September 2, 2016;

         WHEREAS, Plaintiff challenges the process by which the Diamond board and Defendant Cloobeck, the largest stockholder, negotiated the transaction, the failure of the board to disclose all material information to the Diamond stockholders regarding the tender offer, and the alleged knowing concealment by Centerview of its true relationship with Apollo;

         WHEREAS, the Director Defendants, Centerview, and Cloobeck have separately moved to dismiss, and I have reviewed the parties' briefs and the applicable law;

         NOW, THEREFORE, THE COURT HEREBY FINDS AND ORDERS:

         1. The motions to dismiss are GRANTED.

         2. In considering a motion to dismiss under Rule 12(b)(6), "(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are 'well-pleaded' if they give the opposing party notice of the claim; [and] (iii) the Court must draw all reasonable inferences in favor of the non-moving party." In re Gen. Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006). While I must draw all reasonable inferences in Plaintiff's favor, I need not "accept as true conclusory allegations 'without specific supporting factual allegations.'" Id. (quoting In re Santa Fe Pc. Corp. S'holder Litig., 669 A.2d 59, 65-66 (Del. 1995)). "[D]ismissal is inappropriate unless the 'plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.'" Id. (quoting Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).

         3. In Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court held that "when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies." 125 A.3d 304, 309 (Del. 2015). In In re Volcano Corp. Stockholder Litigation, this Court held that the same policy reasons dictate that "the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation's outstanding shares in a two-step merger under Section 251(h) has the same cleansing effect under Corwin." 143 A.3d 727, 747 (Del. Ch. 2016). Where the business judgment rule under Corwin applies, claims are dismissed unless there is a showing of waste. Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *15 (Del. Ch. May 31, 2017); Singh v. Attenborough, 137 A.3d 151, 151-52 (Del. 2016).

         4. "In that light, there are two limitations on the application of Corwin: the vote must be fully informed, and be uncoerced." Sciabacucchi, 2017 WL 2352152, at *15. If the vote is uninformed, the Court cannot assume "that stockholders determined the transaction was beneficial, in light of the actual facts; thus, an uninformed vote has no ratification effect." Id. Similarly, if a vote is coerced, the Court cannot rely on the fact that the "stockholders have made a determination that the transaction at issue is beneficial, only that, under whatever coercive factors exist, they are better accepting the transaction than the alternative." Id.

         5. Here, the first-step tender offer expired on September 1, 2016, with approximately 81.26% of the Company's outstanding shares tendered. Compl. ¶ 118. On September 2, 2016, the merger was consummated under Section 251(h). Id. Plaintiff has not argued that waste occurred or pled that the tender offer was coerced. Thus, in order to avoid dismissal, Plaintiff must show that the vote was not fully informed.

         6. "Although a plaintiff generally bears the burden of proving a material deficiency when asserting a duty of disclosure claim, a defendant bears the burden of demonstrating that the stockholders were fully informed when relying on stockholder approval to cleanse a challenged transaction." In re Volcano Corp. S'holder Litig., 143 A.3d 727, 748 (Del. Ch. 2016). The Court, however, in In re Solera Holdings Inc. Stockholder Litigation held that "a plaintiff challenging the decision to approve a transaction must first identify a deficiency in the operative disclosure document, at which point the burden would fall to defendants to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect of the vote." 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017). Information is material if there is "a substantial likelihood that the undisclosed information would significantly alter the total mix of information already provided." Berger v. Pubco Corp., 2008 WL 2224107, at *3 (Del. Ch. May 30, 2008) (quoting Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000)), rev'd on other grounds,976 A.2d 132 (Del. 2009). "[O]mitted facts are not ...


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