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Carr v. New Enterprise Associates, Inc.

Court of Chancery of Delaware

March 26, 2018

KENNETH CARR, individually and on behalf of all others similarly situated, and derivatively on behalf of nominal defendant ADVANCED CARDIAC THERAPEUTICS, INC., Plaintiff,
v.
NEW ENTERPRISE ASSOCIATES, INC., PETER JUSTIN KLEIN, ROY T. TANAKA, DUKE S. ROHLEN, ARIS CONSTANTINIDES, WILLIAM OLSON, MICHAEL J. PEDERSON, NEW ENTERPRISE ASSOCIATES 14, L.P., NEA PARTNERS 14, LIMITED PARTNERSHIP, NEA 14 GP, LIMITED PARTNERSHIP, NEA VENTURES 2014, LIMITED PARTNERSHIP, AND DUKE ROHLEN AND KENDALL SIMPSON ROHLEN, AS TRUSTEES OR SUCCESSOR TRUSTEE, OF THE ROHLEN REVOCABLE TRUST DATED U/A/D 6/12/98, Defendants, and ADVANCED CARDIAC THERAPEUTICS, INC. Nominal Defendant.

          Submitted: December 8, 2017

          T. Brad Davey and Matthew A. Golden of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Barry S. Pollack and Joshua L. Solomon of POLLACK SOLOMON DUFFY LLP, Boston, Massachusetts; Counsel for Plaintiff.

          Herbert W. Mondros and Krista R. Samis of MARGOLIS EDELSTEIN, Wilmington, Delaware; Counsel for Defendants Peter Justin Klein, Roy Tanka, Duke Rohlen, Aris Constantinides, William Olson, Michael Pederson, Duke Rohlen and Kendall Simpson Rohlen, as Trustees or Successor Trustee of the Rohlen Revocable Trust Dated U/A/D 6/12/98, and Nominal Defendant Advanced Cardiac Therapeutics, Inc.

          Michael F. Bonkowski and Nicholas J. Brannick of COLE SCHOTZ P.C., Wilmington, Delaware; Roger A. Lane, Courtney Worcester, and Jasmine D. Coo of FOLEY & LARDNER LLP, Boston, Massachusetts; Angelica Boutwell of FOLEY & LARDNER LLP, Miami, Florida; Counsel for Defendants New Enterprise Associates, Inc., New Enterprise Associates 14, L.P., NEA Partners 14, Limited Partnership, NEA 14 GP, Limited Partnership, NEA Ventures 2014 Limited Partnership.

          MEMORANDUM OPINION

          BOUCHARD, C., Judge.

         This action involves a dispute between Kenneth Carr, a co-founder of Advanced Cardiac Therapeutics, Inc. ("ACT" or the "Company"), and its controlling stockholder, New Enterprise Associates, Inc. ("NEA"). ACT is a pre-commercial medical device company. NEA holds itself out as one of the largest venture capital firms in the world and has investments in a large portfolio of companies.

         In April 2014, NEA became ACT's controlling stockholder as a result of the sale of Series A-2 preferred stock that was offered to a select group of investors. Carr was not among them. The Series A-2 offering implied a value for ACT of approximately $15 million. In October 2014, ACT sold a warrant to Abbott Laboratories ("Abbott") for $25 million, giving it the option to purchase all of ACT's equity for a 30-month period for up to $185 million. In the interim between the Series A-2 offering and the warrant sale to Abbott, another medical device company made a proposal to acquire ACT for up to $300 million, but that overture was not pursued. In 2016, ACT repurchased the warrant from Abbott for $25 million in cash and a note as part of a "settlement agreement."

         Critical to this case, the 2014 warrant transaction with Abbott was conditioned on Abbott acquiring another company, Topera, in which NEA was the largest institutional investor. NEA also was the largest institutional investor in VytronUS, a company for which Abbott provided funding simultaneously with the warrant transaction. The gravamen of Carr's complaint is twofold: (1) that the Series A-2 offering that allowed NEA to become ACT's controlling stockholder was approved by a conflicted board and severely undervalued ACT; and (2) that NEA orchestrated the potential sale of ACT to Abbott on the cheap as part of a strategy to optimize the value of its portfolio by inducing Abbott to acquire Topera and invest in VytronUS.

         Carr's complaint asserts various claims on behalf of a putative class of stockholders (and, alternatively, derivatively) for breach of fiduciary duty and/or aiding and abetting against ACT's directors at the time of the challenged transactions and NEA. Defendants have moved to dismiss. For the reasons explained below, the motion is denied in large part, although certain claims and parties will be dismissed because of various pleading deficiencies.

         I. BACKGROUND

         Unless noted otherwise, the facts in this decision are drawn from the Verified Class Action and Derivative Complaint (the "Complaint") and documents incorporated therein, [1] which include documents produced to plaintiff in response to a books and record demand made under 8 Del. C. § 220.[2] Any additional facts are either not subject to reasonable dispute or subject to judicial notice.

         A. The Parties and Relevant Non-Parties

         Plaintiff Kenneth Carr is an inventor in the area of microwave radiometry technology and ablation catheter devices. In or about 2007, he co-founded nominal defendant Advanced Cardiac Therapeutics, Inc. At all relevant times, Carr held approximately 960, 000 shares of ACT common stock. When the Company was founded, Carr held an approximately 30% interest in ACT. Subsequent rounds of financing have diluted that interest.

         The Company is a Delaware, pre-commercial, medical device company that designs and manufactures a catheter-based system for the treatment of patients with atrial fibrillation, commonly known as AFIB, which is characterized by an irregular, often rapid heart rate. ACT collaborates with and licenses technology from Meridian Medical Systems, another company that Carr founded.

         Defendant NEA is a Delaware corporation that holds itself out as the world's largest venture capital fund with more than $17 billion in committed capital across fifteen funds. Defendants New Enterprise Associates 14, L.P., NEA Partners 14, Limited Partnership, NEA 14 GP, Limited Partnership, and NEA Ventures 2014, Limited Partnership are limited partnerships controlled by NEA. I refer to these entities hereafter, collectively, as "NEA" and, at times, to one or more of them as an "NEA entity" or "NEA entities."

         NEA holds interests in numerous "portfolio companies" in addition to ACT. Relevant to this action, in or about April 2013, NEA and an affiliate of Abbott co-invested in Topera, a cardiac arrhythmia mapping company that specializes in mapping electrical signals of the heart. Another NEA portfolio company relevant to this action is known as VytronUS, which describes itself as having been "formed in 2006 to harness the imaging and therapeutic capabilities of ultrasound energy to treat cardiac arrhythmias, starting with atrial fibrillation."[3] ACT's outside counsel regularly represents and advises NEA.

         NEA became ACT's controlling stockholder in April 2014 as a result of its purchase of Series A-2 preferred stock, defined below as the "Series A-2 Financing." Carr contends that, even before the Series A-2 Financing, NEA and defendants Duke S. Rohlen and Kendell Simpson Rohlen, as Trustees or Successor Trustee, of the Rohlen Revocable Trust Dated U/A/D 6/12/98 (the "Trust"), together constituted the controlling stockholder of ACT.[4]

         The Complaint names as defendants the following six individuals who constituted the six members of ACT's board of directors (the "Board") at the time of the challenged transactions (i.e., the Series A-2 Financing and, as defined below, the Warrant Transaction): Peter Justin Klein, Roy T. Tanaka, Duke S. Rohlen, Aris Constantinides, William Olson, and Michael J. Pederson (collectively, the "Director Defendants"). Three of these individuals (Klein, Tanaka, and Rohlen) remained on the Board when this action was filed, while the other three (Constantinides, Olson, and Pederson) had left the Board by that date. At the time the Complaint was filed, the Board consisted of Klein, Tanaka, Rohlen, and non-party Ryan Drant.

         The Complaint describes a variety of affiliations between and among the Director Defendants and NEA apart from their service as directors of the Company, including the following:

Peter Justin Klein is a partner on NEA's healthcare team who has served at various times on the boards of numerous NEA portfolio companies, including Topera and VytronUS.
Roy T. Tanaka has served at relevant times on the board of VytronUS.
Duke S. Rohlen was appointed to serve as the Company's President and CEO on March 11, 2014, at which time he was serving as ACT's Chairman of the Board. At that time, Rohlen also served as the CEO of Ajax Vascular, another NEA portfolio company. In addition, Rohlen previously served as CEO of CV Ingenuity and the President of FoxHollow Technologies, two other NEA portfolio companies. NEA has held Rohlen out as a "serial entrepreneur within the NEA family."[5]
• Aris Constantinides was a venture capital fund partner at an entity known at the time as NBGI, the private equity arm of the National Bank of Greece. Constantinides is connected to NEA and Klein through various venture capital investments in the medical device industry. NEA permitted NBGI to participate in the Series A-2 Financing.
William Olson was the Company's CEO before Rohlen. Olson was removed as CEO pursuant to a March 2014 Separation Agreement. Olson and ACT also are parties to a Consulting Agreement.[6] Olson served previously as a Vice President at FoxHollow Technologies.
Michael J. Pederson served, at relevant times, as the President and CEO of VytronUS.

         B. NEA's Early Involvement in ACT

         In January 2014, an NEA entity purchased Series A-l preferred stock from the Company and entered into an Amended and Restated Voting Agreement (the "Voting Agreement").[7] The Complaint alleges that, following the Series A-l transaction, "NEA began causing changes in the Company's management to further increase its power over the Company."[8]

         In March 2014, Olson was removed as CEO and replaced by Rohlen, although Olson stayed on as a director and consultant. At this time, NEA and the Trust together held a majority of the Company's preferred stock, which had the right to appoint two of the seven director positions on the Board.[9] On or about March 17, 2014, an NEA entity and the Trust amended the Voting Agreement to provide that one of the preferred designees to the Board would be Pederson, and the other director seat would remain vacant.[10]

         C. The Series A-2 Financing

         On April 2, 2014, the Board-composed of the six Director Defendants-signed a written consent (the "April 2014 Consent") providing for the issuance of 265, 780, 730 shares of Series A-2 preferred stock for $0.0301 per share (the "Series A-2 Financing"). This issuance placed a valuation on the Company of approximately $15 million. NEA obtained nearly 90% of the Series A-2 preferred stock, which, combined with its other equity holdings, resulted in NEA acquiring more than 65% of ACT's stock on an as-converted basis and becoming its controlling stockholder. The Series A-2 preferred stock was not offered to more than 30 stockholders who previously invested in Act, including Carr.

         The April 2014 Consent expressly acknowledges that four of the six directors who approved the Series A-2 Financing participated in the transaction personally or through entities in which they had material financial interests:

It is hereby disclosed or made known to the Board that (i) Aris Constantinides is a director of the Company and is associated with, and/or has a material financial interest in NBGI Technology Fund II, L.P., or its affiliates (CCNBGF), (ii) Justin Klein is a director of the Company and is associated with, and/or has a material financial interest in New Enterprise Associates 14, L.P. ("NEA"), (iii) Duke Rohlen is a director and officer of the Company, and (iv) Michael Pederson is a director of the Company, such that the Financing is an Interested Party Transaction since NBGI, NEA, Duke Rohlen and Michael Pederson will be participating in the Financing.[11]

         On April 3, 2014, the day after the Board approved the Series A-2 Financing, an NEA entity executed a new Amended and Restated Voting Agreement with certain other ACT stockholders (the "Restated Voting Agreement"), which provides for the seven positions on the Board to be selected as follows:[12]

The Rohlen Designee: Rohlen was entitled to appoint a director as long as he or his affiliate continued to hold at least 25% of his originally acquired Series A-l preferred shares. He appointed himself.
The NEA Designee: An NEA entity was entitled to appoint a director as long as it or its affiliate continued to hold at least 25% of its originally acquired Series A-l preferred shares. It appointed Klein.
The Series 1 Designee: The holders of the Series 1 preferred stock were entitled to appoint a director. NBGI held a majority of these shares and appointed Constantinides.
The CEO Designee: The CEO Designee was the then-serving CEO, which was Olson.
The Preferred Designees: The holders of the preferred stock were entitled to appoint two directors. NEA held a majority of the preferred stock and it appointed Pederson and left one vacancy.
The Mutual Designee: This director was to be appointed unanimously by the other directors serving at that time. The other directors appointed Tanaka.

         The Restated Voting Agreement also provided drag-along rights that permitted the holders of a majority of ACT's preferred stock on an as-converted basis-at that time, NEA-to cause other stockholders to vote in favor of a sale of the Company.

         After the Series A-2 Financing, the Board granted Rohlen and Pederson options, 23, 256, 940 and 13, 954, 164, respectively, with a retroactive vesting schedule that started on October 2, 2013. Rohlen exercised his options on or about July 8, 2014, and Pederson exercised his options on or about June 4, 2014, which, according to the Complaint, was "contrary" to their vesting schedules.[13]

         D. Abbott and Medtronic Make Proposals to Acquire the Company

         On June 30, 2014, Abbott submitted a letter of intent for an option to purchase ACT. In the letter of intent, Abbott proposed a $25 million purchase price for a warrant (the "Warrant") with a $75 million exercise price and up to $85 million in potential milestone payments, for total consideration up to $185 million.[14] The proposal was conditioned on the completion of Abbott's purchase of Topera.

         The June 30 proposal included an exclusivity period of up to 60 days for Abbott and ACT to negotiate a transaction, but also recognized that ACT had an agreement with Medtronic, an Abbott competitor, which required ACT to give Medtronic notice of certain proposals. Specifically, the June 30 proposal included a provision contemplating that ACT would negotiate exclusively with Abbott "except as may otherwise be required to comply with the terms ... of that certain Master Development Agreement, dated July 2013 (as amended to extend its term to July 26, 2015), between ACT and Medtronic, Inc."[15]

         On July 12, 2014, Abbott submitted an updated letter of intent proposing the same high-level economic terms, i.e., a $25 million purchase price for a warrant with a $75 million exercise price and up to $85 million in potential milestone payments, for total consideration up to $185 million.[16] The July 12 proposal also was conditioned on the completion of Abbott's proposed purchase of Topera and contained the same exclusivity language as the June 30 proposal.[17]

         Later on July 12, 2014, the Board met telephonically and discussed Abbott's July 12 letter of intent and the timing of Medtronic's right to receive notice under the Company's agreement with Medtronic. Five of the six ACT directors participated in the meeting; Tanaka was not present.[18] The Board approved the July 12 letter of intent at the July 12 meeting before giving notice to Medtronic.

         On or about July 25, 2014, after ACT gave Medtronic the required notice and during Abbott's 60-day exclusivity period, Medtronic submitted its own letter of intent for an option to buy the Company. The Medtronic letter of intent proposed a $30 million payment for an option with a $100 million exercise price, and milestone payments that could bring the total payments up to $300 million.[19] Medtronic's proposal was not conditioned on Medtronic's purchase of any other entity.

         E. NEA Executes Three Simultaneous Transactions with Abbott

         On October 14, 2014, the Board met and discussed a series of transactions in which Abbott would purchase the Warrant (the "Warrant Transaction"), acquire Topera, and invest in VytronUS. The Warrant Transaction was conditioned expressly on the sale of Topera to Abbott.[20] At the time, NEA was the largest and only institutional investor in Topera alongside Abbott.

         During the October 14 Board meeting, Pederson formally disclosed that he was the President and CEO of VytronUS and was discussing potential employment with Abbott.[21] Klein disclosed that he, as a NEA partner, had a material interest in the Topera and VytronUS portions of the deal. The Board then voted to approve the Warrant Transaction but did not submit it to a full stockholder vote.

         The Warrant, dated October 27, 2014, [22] locked up ACT for a potential purchase by Abbott until March 2017. It also included terms that would have allowed for a distribution by ACT of up to $12.5 million of the $25 million payment by Abbott, although no distribution is alleged to have occurred.[23]

         NEA issued a public announcement concerning the Warrant Transaction and the transactions involving Topera and VytronUS, which stated:

With NEA as the largest institutional investor in each of these companies-and the only investor to be involved in all three-we are proud to share some insight into this seemingly unprecedented suite of transactions that, for the first time in the medical device sector's history, feature a large corporate acquirer partnering with multiple portfolio companies in a single VC's portfolio to establish a path to building a market leader in a major diagnostic and therapeutic category.[24]

         The announcement also lauded "NEA's internal legal and accounting teams and the outside firms who advised each company involved in these transactions."[25] The Complaint alleges that, "[a]s a result of NEA's three-headed deal with Abbott, NEA and its affiliates enjoyed a $250 million payment from Abbott for Topera, " and that VytronUS "received $31.5 million in funding from Abbott's investment arm, Abbott Ventures."[26]

         The mechanics of how an exercise of the Warrant would allow Abbott to gain 100% control of ACT's equity are not clear from the pleadings, but the terms of the Warrant agreement provide that a group of "Key Stockholders, "[27] collectively holding not less than 89% of outstanding Company common stock on an as-converted basis, would sign a stockholders agreement with Abbott.[28] ACT also agreed that "[t]he Company shall have taken all actions necessary to cause each Equity Participation Right of the Company that is outstanding immediately prior to the Warrant Exercise Closing and has not been exercised to be cancelled, terminated and no longer outstanding."[29] Thus, the terms of the Warrant indicate, consistent with the Complaint, that Abbott's exercise of the Warrant would result in Abbott acquiring complete control of ACT.

         F. ACT Repurchases the Warrant

         In 2016, Abbott acquired St. Jude Medical, which also had an ablation catheter business. The Federal Trade Commission "took issue with Abbott's plan to purchase St. Jude Medical, finding that, in light of Abbott's right to purchase ACT's business, the acquisition of St. Jude Medical would substantially lessen competition."[30]

         In October 2016, ACT and Abbott entered into a "settlement agreement" in which ACT agreed to repurchase the Warrant, paying Abbott $6 million in cash and $19 million via a secured promissory note-the same total amount as the original purchase price of the Warrant.[31] On or about December 27, 2016, Abbott reached an agreement with the FTC that allowed its proposed acquisition of St. Jude Medical to proceed, with Abbott agreeing not to purchase any product line from ACT without giving prior notice to the FTC.

         II. PROCEDURAL HISTORY

         On May 18, 2017, Carr filed the Complaint, asserting six claims, all of which are premised on the same theory: that the Series A-2 Financing impermissibly diluted ACT stockholders and allowed NEA to gain control of the Company for less than fair value, and that NEA used its control to sell the Warrant to Abbott at an unreasonably low price in order to facilitate the Topera and VytronUS transactions for NEA's benefit.[32] Carr views the Series A-2 Financing and the Warrant Transaction as part of a "unitary plan" that he challenges together in six claims, pled directly and, in the alternative, derivatively.

         Counts I and IV assert directly and derivatively, respectively, that NEA breached its fiduciary duty as the controlling stockholder of the Company.[33] Counts II and V assert, directly and derivatively, respectively, that the Director Defendants breached their fiduciary duties.[34] Counts III and VI assert, directly and derivatively, that NEA aided and abetted the Board's breach of its fiduciary duty.[35] Carr did not make a demand on the Board with respect to any putative derivative claims, arguing that such a demand would have been futile.[36]

         On July 25, 2017, the Director Defendants filed a motion to dismiss under Court of Chancery Rules 12(b)(6) and 23.1 for failure to state a claim and failure to make a demand on the Board.[37] On July 26, 2017, NEA filed an analogous motion.[38]The court heard argument on the motions on November 7, 2017, during which the court requested supplemental briefing on whether Revlon duties apply to the Warrant Transaction.[39] The supplemental submissions were filed on December 8, 2017.[40]

         III. ANALYSIS

         A threshold issue to analyzing the six claims in the Complaint is whether the Series A-2 Financing and Warrant Transaction should be analyzed together as part of a unitary plan, as Carr proposes, or as separate transactions, as defendants argue. I address this issue first.

         A. The Series A-2 Financing and the Warrant Transaction Shall Be Treated as Separate Transactions

         Delaware courts sometimes will view multiple transactions as part of a unitary plan under the step-transaction doctrine, which "treats the 'steps' in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan."[41] This doctrine applies if the transactions at issue meet one of three tests:

First, under the end result test, the doctrine will be invoked if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result. Second, under the interdependence test, separate transactions will be treated as one if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. The third and most restrictive alternative is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.[42]

         I decline to view the Series A-2 Financing and the Warrant Transaction as a single transaction because, under the facts alleged, none of the three tests has been met. The binding commitment test does not apply because Carr has not alleged that there was a contractual tie between the two transactions. The interdependency test does not compel aggregation because the Series A-2 Financing and the Warrant Transaction were executed about seven months apart and each transaction had its own standalone strategic business rationale.[43] Finally, the end result test has not been met because Carr's allegations that the two transactions were part of a unitary plan "'cast from the outset to achieve the ultimate result" are wholly conclusory.[44] Carr simply has not alleged a reasonably conceivable set of facts supporting an inference that NEA and the Director Defendants concocted a scheme as of April 2014 to: (1) allow NEA to gain control of ACT while diluting the other stockholders; and (2) use NEA's control of the Company as a bargaining chip with Abbott almost seven months later to facilitate Abbott's transactions with two other NEA portfolio companies.[45] Accordingly, the ensuing analysis focuses on each of the transactions individually.[46]

         B. The Warrant Transaction Claims are not Moot

         Viewing the transactions separately, defendants assert that the claims regarding the Warrant Transaction are moot because Abbott never exercised the Warrant, which ACT repurchased in 2016. I disagree.

         "Under Delaware law, a plaintiffs cause of action accrues at the moment of the wrongful act-not when the harmful effects of the act are felt-even if the plaintiff is unaware of the wrong."[47] Any challenge to the Warrant Transaction thus accrued upon the execution of the underlying transaction, and not upon a later exercise of the Warrant. Accordingly, even if the Warrant was never exercised, any claims relating to its issuance would not be rendered moot. The court's reasoning in In re Sirius XMShareholder Litigation is instructive on this point.[48]

         In that case, Sirius XM Radio Inc. negotiated an Investment Agreement in 2009 whereby Liberty Media received preferred stock in Sirius that was convertible into a 40% common equity interest.[49] Sirius also negotiated contractual provisions limiting Liberty Media's ability to take control of Sirius for three years, but once that standstill period expired, the Investment Agreement prohibited Sirius from using a poison pill or any other charter or bylaw provision to interfere with Liberty Media's ability to purchase additional Sirius stock.[50] In 2012, after the standstill period expired, Liberty Media announced its intention to acquire majority control of Sirius.[51]

         After this announcement, Sirius stockholders filed suit, complaining that the Sirius board had breached its fiduciary duty by adhering to the contract with Liberty Media and not blocking its takeover attempt.[52] Chief Justice Strine, writing as Chancellor, held that plaintiffs' claims for breach of fiduciary duty were time-barred because they had accrued over three years earlier in 2009 when Sirius and Liberty Media entered into the Investment Agreement:

Here, the board made the decision to take Liberty Media's capital in 2009, and, in an arm's-length transaction, agreed that in exchange they would not adopt a poison pill or any other anti-takeover measures against Liberty Media after the standstill period expired. The terms of that deal were fully disclosed in 2009. The board's actions in 2012 were anticipated by and, in fact, required under the Investment Agreement. Therefore, the board's inability to block Liberty Media's so-called "creeping takeover" was merely the manifestation of the bargain struck between Sirius and Liberty Media in 2009. If the plaintiffs ever had a meritorious claim that the Anti-Takeover Provisions in the Investment Agreement were enforceable ... then they had it in 2009.[53]

         Applying the logic of the Sirius court here, an exercise of the Warrant by Abbott merely would have been a product of the bargain it struck with ACT in October 2014. Any potential breach of fiduciary duty with respect to the Warrant Transaction thus occurred then, irrespective of whether Abbott actually exercised the Warrant at some later time. To be sure, quantifying the damages resulting from entering into the Warrant Transaction may be a difficult task, but that does not mean that a breach of fiduciary duty claim challenging the transaction becomes moot just because the Warrant was never exercised. Accordingly, I decline to dismiss the claims challenging the Warrant Transaction on mootness grounds.

         I turn next to considering whether the claims challenging the Series A-2 Financing and the Warrant Transaction are direct or derivative.

         C. The Series A-2 Financing Claims are Derivative and the Warrant Transaction Claims are Direct

         "In every case the court must determine from the complaint whether the claims are direct or derivative."[54] Whether a claim is direct or derivative "must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?"[55]"[A] court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation."[56] For the reasons explained below, I conclude that Carr's claims with respect to the Series A-2 Financing are derivative and his claims with respect to the Warrant Transaction are direct.

         1. The Series A-2 Financing

         Carr contends that defendants executed the Series A-2 Financing to dilute unfairly certain other ACT stockholders, including himself.[57] A claim for improper dilution is "a quintessential example of a derivative claim."[58] In Gentile v. Rossette, however, the Delaware Supreme Court announced "one transactional paradigm" where an alleged improper dilution could be both direct and derivative in nature.[59]This dual status may exist where: "(1) a stockholder having majority or effective control causes the corporation to issue 'excessive' shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) stockholders."[60] In other words, as the emphasized language in the preceding quotation makes clear, to invoke the dual dynamic recognized in Gentile, a controlling stockholder must exist before the challenged transaction.

         Here, Carr's invocation of Gentile to characterize as direct his claims challenging the Series A-2 Financing fails because the Complaint is devoid of any well-pled facts supporting the assertion that there was a controlling stockholder at the time of that transaction. The Complaint does not allege that NEA was a controlling stockholder before the Series A-2 Financing but rather that the Series A-2 Financing "resulted in NEA gaining ownership of more than 65% of ACT's stock an as-converted basis."[61] Carr also has failed to plead facts supporting his assertion that NEA and the Trust together constituted a controlling stockholder group before the Series A-2 Financing.

         To adequately plead the existence of a control group, a plaintiff must allege that its members:

[B]e connected in some legally significant way-such as by contract, common ownership, agreement, or other arrangement-to work together toward a shared goal. The law does not require a formal written agreement, but there must be some indication of an actual agreement. Plaintiffs must allege more than mere concurrence of self-interest among certain stockholders to state a claim based on the existence of a control group.[62]

         Carr contends that "[b]y March 17, 2014, shortly in advance of a refinancing led by NEA, the Defendants amended ACT's Amended and Restated Voting Agreement in a manner that changed the structure of the board of directors and, as a contractual matter, gave NEA complete control of [sic] over the board and reduced voting power from other stockholders."[63] But this allegation mischaracterizes the plain terms of the March 17 amendment of the Voting Agreement.[64]

         The March 17 amendment merely provides that NEA and the Trust agree that the "Preferred Designees" "shall be elected by the holders of a majority of the outstanding Preferred Stock of the Company" and that the initial "Preferred Designees" would be Pederson and one vacancy.[65] Thus, the March 17 amendment only concerned two of the seven authorized slots on ACT's Board and plainly did not afford NEA and the Trust complete control over the Board. Nothing else in the March 17 amendment, moreover, otherwise could be said to constitute a pact for NEA and the Trust to work together to dilute unfairly ACT's other stockholders.

         In sum, because Carr has not adequately pled that there was a controller at the time of the Series A-2 Financing, the transaction does not meet the paradigm described in Gentile, and his claims for improper dilution resulting from the Series A-2 Financing are derivative. Parenthetically, because the Complaint's allegations that the Trust was part of a control group with NEA are not well-plead, the Trust will be dismissed from this case because the only claims asserted against the Trust flow from this unsubstantiated premise.[66]

         2. The Warrant Transaction

         Carr argues that the sale of the "[W]arrant and the process (or lack of process) underlying it were the equivalent of an end-stage transaction in which a plaintiff alleges that breaches of fiduciary duty resulted in a change-of-control despite inadequate merger consideration and without adequate protections for individual stockholders who thus may bring claims directly."[67] Carr is correct that claims challenging the validity of a merger, usually by alleging breach of fiduciary duty, give rise to a direct claim.[68] The transaction here, however, is different from the "fairly standard" ones "wherein the stockholders of one corporation (the 'target') receive consideration for agreeing to give up their shares in a merger with another corporation (the 'acquiror')."[69]

         Here, in exchange for $25 million, Abbott purchased the right to buy ACT for a period of time for an up-front payment of $75 million plus potential milestone payments capped at total consideration of $185 million. Thus, the operative question is whether Carr "suffered harm independent of any injury to the corporation that would entitle him to an individualized recovery" due to the Warrant Transaction.[70]In my view, he has, so his claim is direct.[71]

         If Carr was merely challenging the fairness of the $25 million purchase price of the Warrant, then his claims would fit the classic derivative mold of a company selling an asset too cheaply, because that consideration flowed directly to the Company, not the ACT stockholders.[72] The Warrant transaction was more complicated than that, however, with the Board locking in an exercise price and milestone payments and providing Abbott the exclusive ability to buy the Company for approximately 30 months. Thus, the Warrant Transaction established the maximum price that the ACT stockholders might receive in an end-game transaction. To repeat, quantifying the alleged damages from approving the Warrant Transaction might be difficult, but Carr's underlying breach of fiduciary duty claims concerning the Warrant Transaction are akin to challenging the outcome of a merger and thus are direct.

         As noted above, all six claims in the Complaint challenge the Series A-2 Financing and the Warrant Transaction together, with Counts I-III pled as direct claims and Counts IV-VI pled, in the alternative, as derivative claims. Each group of three claims also pleads claims in the alternative against NEA: Counts I and IV (breach of fiduciary duty) flow from the premise that NEA is a controlling stockholder of ACT and thus owes a fiduciary duty as a controller, while Counts III and VI (aiding and abetting) flow from the premise that it is not.

         Based on the conclusions I have reached so far, many of the claims in the Complaint can be disposed of in whole or in part. First, given my conclusion that the transactions must be analyzed separately and that the claims challenging the Series A-2 Financing are derivative while the claims challenging the Warrant Transaction are direct, Counts I-III must be dismissed insofar as they challenge the Series A-2 Financing and Counts IV-VI must be dismissed insofar as they challenge the Warrant Transaction. Second, given my conclusion that NEA was not a controlling stockholder at the time of the Series A-2 Financing, Count IV fails to state a claim for breach of fiduciary duty against NEA with respect to that transaction and thus Count IV must be dismissed in its entirety.[73] Third, given my conclusion that NEA was a controlling stockholder at the time of the Warrant Transaction, Count III fails to state a claim for aiding and abetting a breach of fiduciary duty against NEA with respect to that transaction and thus Count III must be dismissed its entirety.[74]

         This leaves parts of four claims to be analyzed, specifically Counts V and VI with respect to the Series A-2 Financing, which occurred first in time, and Counts I and II with respect to the Warrant Transaction. The viability of those claims is addressed in that order in Sections C and D below.

         D. Counts V and VI of the Complaint State Viable Claims for Relief Concerning the Series A-2 Financing

         Because the claims challenging the Series A-2 Financing are derivative, I address first whether Carr's failure to make a demand on the Board is excused for those claims. After finding for the reasons stated below that demand is excused, I address whether Counts V and VI state claims for relief under Court of Chancery Rule 12(b)(6) for breach of fiduciary duty and aiding and abetting, respectively, with respect to the Series A-2 Financing.

         1. Demand Is Excused for the Series A-2 Financing Claims

         "A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than stockholders, manage the business and affairs of the corporation."[75] Accordingly, stockholders may not prosecute a claim derivatively on behalf of a corporation unless they: "(1) make a pre-suit demand by presenting the allegations to the corporation's directors, requesting that they bring suit, and showing that they wrongfully refused to do so, or (2) plead facts showing that demand upon the board would have been futile."[76] Making a pre-suit demand is futile when the directors upon whom the demand would be made "are incapable of making an impartial decision regarding such litigation."[77]

         Because Carr did not make a demand on the Board before initiating this action, he must allege with particularity that his failure to do so with respect to the Series A-2 Financing should be excused.[78] In this analysis, I accept as true Carr's particularized allegations of fact and draw all reasonable inferences that logically flow from those allegations in Carr's favor.[79]

         Under Delaware law, depending on the factual scenario, there are two tests for determining whether demand may be excused: the Aronson test and the Rales test.[80] The test articulated in Aronson v. Lewis[81] applies when "a decision of the board of directors is being challenged in the derivative suit."[82] The test set forth in Rales v. Blasband, on the other hand, governs when "the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit."[83] This situation arises "in three principle scenarios":

(1) where a business decision was made by the board of a company, but a majority of the directors making the decision have been replaced; (2) where the subject of the derivative suit is not a business decision of the board; and (3) where ... the decision being challenged was made by the board of a different corporation.[84]

         Taking into account changes in board composition is critical to a demand futility analysis because "[w]hat, in the end, is relevant is not whether the board that approved the challenged transaction was or was not interested in that transaction but whether the present board is or is not disabled from exercising its right and duty to control corporate litigation."[85]

         Here, the Board experienced turnover between its approval of the Series A-2 Financing and when Carr filed suit over three years later. On April 2, 2014, when the Series A-2 Financing was approved, the Board consisted of six members: Klein, Rohlen, Tanaka, Olson, Pederson, and Constantinides.[86] On May 18, 2017, when Carr filed the Complaint, the Board consisted of four members: Klein, Rohlen, Tanaka, and Drant. Thus, between these two events, three of six members (Olson, Pederson, and Constantinides) left the Board and a new director (Drant) was added. Because there was turnover of less than a majority of the directors on the Board between the Series A-2 Financing and when the Complaint was filed, the Aronson test applies for claims concerning that transaction.[87]

         To survive a motion to dismiss under the Aronson test, a plaintiff must plead facts that "raise a reasonable doubt as to (i) director disinterest or independence or (ii) whether the directors exercised proper business judgment in approving the challenged transaction."[88] The demand futility analysis "is conducted on a claim-by-claim basis" under Delaware law.[89] Thus, the court must consider whether the Board, at the time of the Complaint, could have impartially considered bringing actions against those ...


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