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Tilden v. Cunningham

Court of Chancery of Delaware

October 26, 2018

JEFFREY I. TILDEN, derivatively on behalf of Blucora, Inc., Plaintiff,
JOHN E. CUNNINGHAM, IV; DAVID H.S. CHUNG; LANCE DUNN; STEVEN W. HOOPER; ELIZABETH J. HUEBNER; ANDREW M. SNYDER; CHRISTOPHER WALTERS; MARY ZAPPONE; WILLIAM J. RUCKELSHAUS; GEORGE ALLEN; GCA ADVISORS, LLC, a Delaware Limited Liability Company (known at all relevant times as GCA SAVVIAN ADVISORS, LLC); and CAMBRIDGE INFORMATION GROUP, INC., a Maryland corporation, and its wholly owned and controlled subsidiary, CAMBRIDGE INFORMATION GROUP I LLC, a Delaware limited liability company, Defendants, and BLUCORA, INC., a Delaware corporation, Nominal Defendant.

          Submitted: July 11, 2018

          Chad J. Toms, Esquire and Kaan Ekiner, Esquire of Whiteford, Taylor & Preston LLC, Wilmington, Delaware; Ian S. Birk, Esquire of Keller Rodrback, L.L.P., Seattle, Washington; Chelsey L. Mam, Esquire and David M. Simmonds, Esquire of Gordon Tilden Thomas & Cordell, Seattle, Washington, Attorneys for Plaintiff Jeffrey I. Tilden.

          A. Thompson Bayliss, Esquire, Michael A. Barlow, Esquire and Daniel J. McBride, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware and Daniel J. Dunne, Esquire of Orrick, Herrington & Sutcliffe LLP, Seattle, Washington, Attorneys for Defendants John E. Cunningham, IV, David H.S. Chung, Lance Dunn, Steve W. Hooper, Elizabeth J. Huebner, Christopher Walters, and Mary Zappone.

          D. McKinley Measley, Esquire and Lauren Neal Bennett, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Christopher B. Durbin, Esquire and Jeff Lombard, of Cooley LLP, Seattle, Washington, Attorneys for Defendant William J. Ruckelshaus.

          Rudolf Koch, Esquire and Diana M. Joskowicz, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Paul H. Beattie, Esquire of Rimon P.C., Seattle, Washington, Attorneys for Defendant GCA Advisors, LLC.

          Garrett B. Moritz, Esquire and R. Garrett Rice, Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and Peter L. Simmons, Esquire and Michael P. Sternheim, Esquire of Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York, Attorneys for Defendants Cambridge Information Group, Inc., Cambridge Information Group I, LLC, Andrew M. Snyder and George Allen.

          Bradley D. Sorrels, Esquire, Lori W. Will, Esquire and Andrew D. Berni, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Wilmington, Delaware and Barry M. Kaplan, Esquire and Gregory L. Watts, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Seattle, Washington, Attorneys for Nominal Defendant Blucora, Inc.



          Ignoring a Delaware forum selection clause in the bylaws of the Delaware company whose interests he purports to represent, the plaintiff in this stockholder derivative action has adopted an ill-fated "anywhere but Delaware" litigation strategy. As either attorney or named plaintiff, he filed derivative claims against certain directors of the Nominal Defendant, Blucora, Inc., first in the Superior Court of King County, Washington, and then, in expanded form, in the Superior Court of California in San Francisco. Both courts pointed to the forum selection bylaw and determined that Plaintiff's case belonged in Delaware. Apparently wanting to avoid the third strike, Plaintiff has finally landed here-where he should have been all along-bringing the same claims he unsuccessfully attempted to prosecute elsewhere.

         Plaintiff challenges three unrelated transactions authorized by Blucora's board of directors (the "Board") at various times beginning in 2013 through 2015: two separate Blucora acquisitions (the so-called "Monoprice" and "HD Vest" transactions) and certain Blucora stock repurchases that allegedly facilitated favorable stock trades by Blucora insiders. As for the acquisitions, Plaintiff contends that the Board members in place at the time of the transactions violated their fiduciary duties by failing to heed clear indicators that the transactions were overpriced and would fail to deliver any value for the Company. While Plaintiff now seeks to recast his Monoprice and HD Vest claims, even a cursory review of the operative pleading reveals that these derivative claims are pled as failures of oversight, "possibly the most difficult theory in corporation law upon which [he] might hope to win a judgment."[1] As for the claims relating to Blucora's stock repurchases, Plaintiff couches these transactions as corporate waste and then invokes the seminal Brophy v. Cities Serv. Co.[2] to allege that certain Blucora insiders breached their fiduciary duties by exploiting nonpublic information when trading Blucora stock in the wake of the wasteful repurchases. These claims, also derivative, require well-pled facts that allow a reasonable inference of intentional misconduct.

         Against this backdrop, the specific claims raised in the Verified Derivative First Amended Complaint (the "FAC")[3] comprise six counts:

• Count I, against Director Defendants John Cunningham, David Chung, Lance Dunn, Steven Hooper, Elizabeth Huebner, Andrew Snyder, Christopher Walters, Mary Zappone and William Ruckelshaus "for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty in connection with the Company's [October 13, 2015] acquisition of HD Vest"[4];
• Count II, against GCA Advisors, LLC ("GCA")[5] "for monetary damage and other injury to Blucora resulting from . . . GCA's aiding and abetting the breach of fiduciary duties by [Director Defendants] Cunningham, Chung, Dunn, Hooper, Huebner, Snyder, Walters, Zappone and Ruckelshaus in connection with the Company's [October 13, 2015] acquisition of HD Vest"[6];
• Count III, against Director Defendants Andrew Snyder, John Cunningham, Elizabeth Huebner, Steven Hooper, David Chung, Lance Dunn and William Ruckelshaus "for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty"[7] by disregarding "observable red flags"[8] "in connection with the Company's [August 22, 2013] acquisition of Monoprice"[9];
• Count IV, against Director Defendants Andrew Snyder, John Cunningham, David Chung, Lance Dunn, Steven Hooper, Elizabeth Huebner and William Ruckelshaus "for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty in connection with the Company's share repurchases in December 2013 and throughout 2014, "[10] and [Director Defendant] Christopher Walters "for monetary damage and other injury to Blucora resulting from his breach of the duty of loyalty in connection with the Company's share repurchases from May 13, 2014 through December 2014"[11];
• Count V, against Director Defendant Andrew Snyder, his two companies, Cambridge Information Group, Inc. ("CIG") and Cambridge Information Group I, LLC ("CIG I"), and Defendant George Allen "for the full amounts of ill-gotten gains obtained through sales of Blucora shares while in possession of material nonpublic information" from November 2013 through January 2014[12]; and
• Count VI, where the plaintiff seeks "[t]he imposition . . . of substantive and verifiable corporate governance reforms" on Blucora.[13]

         Defendants have moved to dismiss the FAC on the grounds that Plaintiff has failed to plead demand futility under Court of Chancery Rule 23.1 and failed to state viable claims under Court of Chancery Rule 12(b)(6).[14] I agree on both fronts. Plaintiff has failed to plead particularized facts to raise a reasonable doubt that a majority of the members of the Board in place when he filed the FAC (the "Demand Board") could have impartially exercised their business judgment when considering a pre-suit demand.[15] Even if he had pled demand futility, Plaintiff has failed to state claims upon which relief may be granted. Several of the claims are barred by laches. Even if timely, the claims fail on the merits, either because the FAC fails to plead a viable oversight claim or because the claims cannot pass through the Section 102(b)(7) exculpatory provision in Blucora's certificate of incorporation.[16]As for the aiding and abetting claim against GCA, that fails because the underlying breach of fiduciary duty claims fail. Accordingly, the Motions to Dismiss must be granted.

         I. BACKGROUND

         I draw the facts from the allegations in the FAC, documents incorporated by reference or integral to that pleading and judicially noticeable facts.[17] In resolving the four Motions to Dismiss, I have accepted as true the FAC's well-pled factual allegations and have drawn all reasonable inferences in Plaintiff's favor.

         A. The Parties and Relevant Non-Parties

         As noted, Plaintiff challenges three discrete transactions approved by three different compositions of the Board. The FAC individually names nine former and current members of the Board (the "Director Defendants"). Of the nine Director Defendants, only three served on the Demand Board. Given the importance of these distinctions to the demand futility analysis, I specify which of the individual defendants have been named in which count(s) of the FAC and set the Demand Board apart from the other Director Defendants.

         1. The Plaintiff

         Plaintiff, Jeffrey Tilden, has been a Blucora shareholder at all times relevant to the FAC.[18] He alleges he is an attorney and named partner at Gordon Tilden Thomas & Cordell LLP, one of the law firms representing him in this action.[19] He also alleges "[h]e is serving as the representative plaintiff in order to protect the claims asserted herein from even arguable statute of limitations defenses."[20] According to his lawyers, Plaintiff will step aside to make room for another representative plaintiff as soon as a Blucora stockholder willing to assume that role comes forward.

         2. The Entity Defendants

         Nominal Defendant, Blucora, is a publicly traded Delaware corporation headquartered in Irving, Texas.[21] Blucora operated an e-commerce business through 2016 and an internet search and content business until 2017.[22] Blucora now provides technology-enabled financial solutions through tax preparation and wealth management businesses.[23]

         Defendant, GCA, is a Delaware limited liability company that Blucora retained as its financial advisor to identify acquisition opportunities.[24] GCA advised the Company on the HD Vest acquisition and ultimately delivered a fairness opinion that endorsed the transaction.[25]

         Defendant, CIG, is a Maryland corporation; Defendant, CIG I, is a Delaware limited liability company. "CIG, directly or through CIG I, became a shareholder of Blucora in 2010 or 2011."[26] A stockholder agreement between Blucora and CIG granted CIG the right to designate an "Investor Representative" to serve as a member of the Blucora Board.

         3. The Director Defendants, Non-Party Directors and Non-Director Individual Defendant

         Director Defendant, Andrew Snyder, served as CIG's Board designee from August 2011 through May 25, 2017.[27] He served as Chairman of Blucora's Mergers & Acquisitions Committee ("M&A Committee") from August 2013 until its dissolution in June 2016. Plaintiff alleges Snyder failed to fulfill his director oversight duties in bad faith by approving the HD Vest (Count I) and Monoprice (Count III) acquisitions, breached his fiduciary duty of loyalty in connection with the share repurchases (Count IV)[28] and engaged in insider trading in the midst of the challenged share repurchases (Count V).[29]

         Director Defendant, John Cunningham, served on the Board from July 1998 until February 28, 2017.[30] Cunningham became Chairman of the Board in January 2011.[31] He is named in Counts I (HD Vest), III (Monoprice) and IV (share repurchases).

         Director Defendant, William Ruckelshaus, served on the Board from May 2007 until March 31, 2016.[32] He also served as the Company's President and Chief Executive Officer beginning in November 2010.[33] He is named in Counts I (HD Vest), III (Monoprice) and IV (share repurchases).

         Director Defendant, David Chung, served on the Board from May 2013 through February 28, 2017.[34] Director Defendant, Steven Hooper, served on the Board from April 2011 until June 1, 2017.[35] And Director Defendant, Elizabeth Huebner, served on the Board from May 2009 through August 10, 2017.[36] Each are named in Counts I (HD Vest), III (Monoprice) and IV (share repurchases).

         The Demand Board:

         Director Defendant, Lance Dunn, has served on the Board since August 2012.[37] At all times relevant to Plaintiff's allegations, Dunn served as a member of the Board's Audit and Nominating and Corporate Governance committees.[38] He is named in Counts I (HD Vest), III (Monoprice) and IV (share repurchases).

         Director Defendant, Christopher Walters, has served on the Board since May 2014.[39] He has been a member of the Board's M&A, Nominating and Corporate Governance and Compensation committees.[40] He is named in Counts I (HD Vest) and IV (share repurchases).

         Director Defendant, Mary Zappone, has served on the Board since March 2015.[41] She has served as a member of the Board's Nominating and Corporate Governance and Compensation committees.[42] She is named only in Count I (HD Vest).

         Non-parties, William Atwell, John Clendening and H. McIntyre Gardner began serving on the Board as of March 1, 2017.[43] Non-parties, Steven Aldrich and Georganne Proctor, joined the Board after May 25, 2017.[44] Proctor serves as Chair of Blucora's Audit Committee.[45]

         The Non-Director Individual Defendant:

         Defendant, George Allen, was an independent contractor retained by Blucora in October 2011 to assist with the Company's merger and acquisition activity.[46]Allen subsequently served as Blucora's Executive Vice-President for Corporate Development from May 2012 through July 2015, when he led the Company's "corporate development team tasked with finding additional acquisition opportunities."[47] Allen left Blucora in July 2015 to serve as CIG's Chief Investment Officer.[48] Plaintiff alleges (in Count V) that Allen, CIG, CIG I and Snyder engaged in an insider trading scheme as the Board was authorizing the challenged share repurchases.[49]

         B. The Monoprice Acquisition

         On August 22, 2013, Blucora closed on a $182.9 million all-cash acquisition of Monoprice, an online retailer of consumer electronics and accessories.[50]According to Plaintiff, Blucora "expended a significant percentage of its cash, as well as cash equivalents and short-term investments available-for-sale, a substantial portion of which was comprised of borrowed funds" to acquire a failing company.[51]

         The M&A Committee identified Monoprice as a potential target after reviewing financial and marketing materials in which Monoprice identified itself as a company with "a unique and defensible market position."[52] The Board then conducted a competitive analysis of Monoprice, which identified competition from Amazon as a primary impediment to the success of the transaction.[53] As further diligence, the Board instructed Blucora's corporate development team to advise the M&A Committee on Monoprice-specifics, including its deteriorating online conversion rates, [54] and then sent Allen to China, in his capacity as Blucora VP for Corporate Development, to evaluate Monoprice's manufacturing facilities.[55] Upon his return, Allen prepared a thirty-page report in which he noted his observations of poor working conditions, very old equipment, disorganized business processes and an overall sense that the Monoprice team in China was "a bit out of [its] league."[56]

         Even though several negative aspects of the transaction were identified during its due diligence, on July 30, 2013, the M&A Committee "informed th[e] Board that the . . . Committee . . . had reviewed and thoroughly considered the proposed terms of the Stock Purchase Agreement ["SPA"] and . . . unanimously recommended that the Board authorize and approve the [deal] . . . ."[57] The Board followed the M&A Committee's recommendation, approved the acquisition on July 30, 2013, disclosed the SPA to the market the following day and closed the transaction on August 22, 2013, with a final purchase price of $182.9 million.[58]

         Monoprice did not perform well post-closing. Within the first year, Blucora fired Monoprice's President and wrote-down $62.6 million of its investment.[59] Two years after closing, Blucora began shopping Monoprice "with the goal of completing a divestiture in the first half of 2016."[60] By September 2016, Monoprice remained for sale and Blucora had written off $146.4 million of the Monoprice purchase.[61] All the while, Monoprice continued to miss revenue forecasts.[62] According to Plaintiff, the Board would have seen this disaster coming had it only bothered to look. The failure to look, it is alleged, constituted bad faith.[63]

         On November 14, 2016, Blucora announced a definitive agreement to sell Monoprice for $40 million cash, substantially less than the $182.9 million price it paid just three years earlier.[64] The $142 million delta between what Blucora paid and ultimately received for Monoprice is not the only alleged loss. According to Plaintiff, the ill-conceived transaction also depleted Blucora's much needed cash and forced it to take on substantial debt to fund its operations.[65]

         C. Blucora Share Repurchases and Alleged Insider Trading

         Blucora initiated a share repurchase program in February 2013.[66] The Board's repurchase authorization included a price ceiling of $20 per share and limited the total size of any authorization to $50 million.[67] On November 14, 2013, the Board unanimously adopted a resolution that eliminated "the maximum price per share limitation . . . ."[68] A month later, with the price ceiling removed, Blucora repurchased $6.4 million of its shares at an average price of $28.66.[69] This was substantially more than the Board had ever authorized for share repurchases.[70]

         Blucora's share repurchases continued apace through the following May, when the Board increased Blucora's repurchase authorization from $50 million to $85 million.[71] Following the increase, during 2014, Blucora repurchased an additional $38.6 million of its shares at an average cost of $16.85, [72] bringing the December 2013 through 2014 repurchase total to more than $45 million.[73] Plaintiff alleges Blucora's "unprecedented share repurchases" served no valid corporate purpose and occurred during a time when Blucora was especially cash-strapped.[74]In this regard, Plaintiff points to the Company's $322 million debt and "dwindling available cash" as of December 2013.[75]

         Around the time the Board eliminated the authorization price ceiling, Snyder notified Blucora's General Counsel/Compliance Officer of his intent to sell a portion of CIG's Blucora holdings.[76] On November 20, 2013, through CIG I, Snyder sold 1, 006, 093 Blucora shares for $28.50 per share.[77] The next day CIG I exercised a warrant it was issued in 2011 to purchase one million shares at a strike price of $9.62.[78] Allen allegedly entered a Rule 10b5-1 plan that same day.[79] He then sold 27, 000 shares between December 26, 2013 and January 2, 2014, at share prices ranging from $28.33 to $29.52.[80]

         Plaintiff alleges the insider trades were part of a plan to exploit Blucora's share repurchases as a means to boost Blucora's share price just in time for Snyder, CIG, CIG I and Allen to sell their Blucora shares.[81] As pled, this scheme was motivated by Monoprice's underperformance, information known to Snyder, Allen and the other Board members, but not disclosed to the market until February 11, 2014.[82] According to Plaintiff, "[b]y year-end 2014, Blucora's stock price had fallen to less than half the price at which CIG had sold [its] 1, 006, 093 shares . . . ."[83]

         D. The HD Vest Acquisition

         In 2015, Blucora was looking to realign its business.[84] To this end, it launched a six-month process with its financial advisor, GCA, to identify potential acquisition targets.[85] At the time, Blucora's business focused on Internet Search, e-commerce (Monoprice) and online tax filing software businesses.[86] If Blucora and GCA could find the right acquisition opportunity, Blucora was prepared to divest its Internet Search and Monoprice businesses to facilitate the realignment.[87]

         By letter dated April 17, 2015, GCA confirmed discussions with Allen regarding GCA's engagement "to assist with target identification and potential execution of a buyside transaction."[88] The engagement agreement confirmed an initial term of three months that would be extended automatically for an additional three months if GCA had not yet located a suitable opportunity.[89] GCA's fee structure comprised: (1) a fixed $25, 000 monthly retainer; (2) five transaction fee tiers ranging, on the low end, from a $1, 700, 000 fee for consummation of a transaction valued at $200, 000, 000 or less, up to a $4, 250, 000 fee for consummation of a transaction valued at $500, 000, 000 or more; and (3) a $500, 000 flat fee for the delivery of a fairness opinion (to be credited against any transaction fee payable to GCA).[90]

         By June 2015, GCA had identified HD Vest, a "leading independent broker-dealer providing wealth management and advisory solutions for tax professionals, "[91]as a potential target.[92] Soon after, GCA presented the Board with an initial "valuation overview" of HD Vest based on selected comparable transactions.[93]GCA's overview applied a range of "Transaction Multiples" to value HD Vest from $360 million to $495 million.[94] As the HD Vest negotiations progressed, GCA determined that HD Vest would not accept less than $600 million.[95] GCA conveyed this view to Blucora, as reflected in an email from Ruckelshaus to certain other Director Defendants.[96]

         On October 13, 2015, following weeks of negotiations and due diligence, the Board held a twenty-five minute meeting to review and discuss a twenty-nine page GCA presentation and separate fairness opinion in which GCA concluded that the HD Vest acquisition, now priced at $580 million, was "fair, from a financial point of view, to Blucora."[97] The following day, Blucora publicly announced that it had entered into a merger agreement with HD Vest and would explore the divestiture of Monoprice.[98]

         Plaintiff alleges the Board improperly incentivized GCA to pursue and then recommend the HD Vest acquisition through the five-tier fee structure.[99] The Board then failed properly to scrutinize GCA's work and ultimately allowed a flawed fairness opinion to stand untested.[100] The result of this failure, according to Plaintiff, is that the Board caused Blucora to pay far more for HD Vest than it was worth.

         E. Procedural Posture

         Despite Blucora's clear Delaware forum selection bylaw, on March 5, 2015, Plaintiff's law firm filed a derivative complaint on behalf of another plaintiff, Remigius Shatas, against Snyder and CIG for insider trading in the Superior Court of King County, Washington.[101] Citing Blucora's forum selection bylaw, the Company moved to dismiss the Washington Complaint for improper venue. The trial court enforced the bylaw and dismissed the complaint. Shatas appealed.[102] The Washington Court of Appeals reversed and remanded with directions that the trial court first determine whether Snyder and CIG were subject to personal jurisdiction in Delaware before enforcing the Delaware forum selection bylaw.[103] Following remand, the parties agreed to a stipulated dismissal without prejudice.[104]

         Plaintiff's law firm filed a second derivative action in San Francisco on December 12, 2016.[105] While that action was pending, Blucora filed its quarterly Form 10-Q on May 4, 2017, in which it stated, "[t]he Company believes that the plaintiffs' claims [in the California action] are without merit and will vigorously defend this lawsuit."[106] Soon after, the California court dismissed Tilden's complaint (by now he was the representative plaintiff) on the ground that Tilden's claims were "subject to Blucora's Forum Bylaw designating the state of Delaware as the sole and exclusive forum for actions of this nature."[107] The FAC is the third rendition of Plaintiff's "identical derivative claims."[108]

         While the appeal in Washington was pending, Plaintiff demanded and obtained certain books and records from Blucora under 8 Del. C. § 220.[109] On July 28, 2017, Plaintiff made an additional demand and Blucora produced more documents.[110] Plaintiff commenced this derivative action on November 22, 2017. On January 31, 2018, the Director Defendants, GCA, CIG, CIG I and Allen filed separate motions to dismiss the FAC.

         II. ANALYSIS

         Before reaching the merits of Plaintiff's claims, the Court must first determine whether Plaintiff has met his burden to plead particularized facts that support a finding of demand futility as to a majority of the Demand Board. As explained below, he has not. Although the analysis could end there, for the sake of completeness, I have elected to take up Defendants' arguments that Plaintiff has failed to state any viable claims. Here again, Defendants are correct. Plaintiff has failed to state claims upon which relief may be granted.

         A. Demand Is Not Excused

         "[A] cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation."[111] Each of Plaintiff's claims allege harm suffered by Blucora. As such, the parties agree that the claims are derivative.[112] Because stockholder derivative suits "by [their] very nature . . . impinge on the managerial freedom of directors, "[113] our law requires that a stockholder satisfy the threshold demand requirements of Court of Chancery Rule 23.1 before he may assume control of a claim belonging to the corporation. To do so, the plaintiff must demand that the board of directors pursue the claim or, alternatively, demonstrate that a demand on the board would be futile such that the demand requirement should be excused.[114]

         Plaintiff acknowledges he made no pre-suit demand.[115] Accordingly, Rule 23.1 places a heightened burden on Plaintiff to plead demand futility by meeting "stringent requirements of factual particularity that differ substantially from the permissive notice pleadings" embodied in Court of Chancery Rule 8 and facilitated by Court of Chancery Rule 12(b)(6)'s reasonable conceivability standard.[116]

         This Court employs one of two tests when determining whether demand upon the board would be futile. The first applies when a plaintiff challenges a decision of the board of directors to take affirmative action.[117] The second, established in Rales v. Blasband, [118] applies where, as here, a plaintiff challenges board inaction or challenges action taken by less than a majority of the board.[119] Under the Rales test, the court "must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."[120]

         The following chart, set forth in Blucora's Opening Brief, [121] depicts the distinction and overlap between the Director Defendants and the Demand Board:

Director Defendants

Demand Board

John E. Cunningham

David H.S. Chung

Steven W. Hooper

Elizabeth J. Huebner

Andrew M. Snyder

William J. Ruckelshaus

Lance Dunn

Lance Dunn

Christopher Walters

Christopher Walters

Mary Zappone

Mary Zappone

William Atwell

Steven Aldrich

H. McIntyre Gardner

Georganne C. Proctor

John S. Clendening

         Of the eight member Demand Board, five joined after the three transactions at issue were consummated and seven are considered independent under NASDAQ listing rules.[122] For purposes of demand futility, therefore, the Court will focus on Aldrich, Atwell, Clendening, Gardner and Proctor, the five Demand Board members who indisputably joined the Board after any challenged conduct occurred. Given Plaintiff's tacit acknowledgement that these Demand Board members do not face a "substantial likelihood of liability" on any of Plaintiff's claims, [123] the Court's function is to determine whether they face other conflicts that would disable them from impartially considering a demand.[124] I address each director in turn.

         1. Aldrich

         Plaintiff does not question the independence or disinterestedness of Aldrich who joined the board on June 1, 2017, [125] after any challenged conduct occurred and after the Board publicly expressed its view of the merits of Plaintiff's California claims. Aldrich is indisputably fit, therefore, to consider a pre-suit demand under Rales.

         2. Atwell and Gardner

         Non-party Directors Atwell and Gardner were appointed to the Board on February 28, 2017.[126] Plaintiff's only proffered basis to argue that Atwell and Gardner could not impartially consider a pre-suit demand is that they were directors when Blucora filed its quarterly Form 10-Q with the SEC on May 4, 2017. In that filing, the Board stated its belief that the claims brought in the California Action were "without merit" and announced its intent to "vigorously defend" the lawsuit.[127]According to Plaintiff, this disclosure reveals that the Board had improperly prejudged the merits of his claims, thereby rendering them incapable of impartially considering any demand he might have made prior to initiating this litigation.

         This court rejected Plaintiff's "prejudgment" demand excusal argument in Highland Legacy Ltd. v. Singer.[128] There, a derivative plaintiff argued the company's statement in a Form 8-K-that "[the company] believes . . . these lawsuits have no merit and intends to vigorously defend these lawsuits"-evidenced the board's inability to consider a demand to prosecute those claims.[129] Vice Chancellor Lamb unequivocally rejected the argument:

The bare allegation that a company publicly announced that it believed the litigation lacked merit cannot by itself reach the heightened pleading standard of Rule 23.1. Public statements about the merits (or lack thereof) of derivative litigation are routinely made in SEC filings. It would be unreasonable for this court to conclude that a board made up of a majority of independent directors could not be asked to pursue this litigation simply because the company expressed a belief in a public filing that the claims in a series of related litigations were unfounded.[130]

         Plaintiff maintains that Singer is somehow distinguishable because "Blucora board members met regularly with outside counsel to receive updates and discuss [litigation] strategy."[131] If anything, this would suggest that the Board was informed when it publicly disclosed its view of the California claims. In any event, the fact that the Board received legal advice from the company's outside counsel does not alter its ability impartially to assess the merits of pending legal claims, and does not in any way undermine the rationale of the holding in Singer. Independent and disinterested directors are presumed to be fit to evaluate impartially the merits of a demand to pursue legal claims.[132] That the Board assessed the merits of the claims after they were filed in California but before receiving a demand, without more, cannot overcome this presumption.[133]

         3. Clendening

         Non-party Director Clendening became a director and Blucora's President and Chief Executive Officer on April 4, 2016.[134] Plaintiff proffers two reasons why Clendening is not fit to consider a pre-suit demand. First, he argues Clendening was on the Board when Blucora issued the Form 10-Q in which the Board improperly prejudged Plaintiff's claims. I have already rejected this fact as a basis to plead demand futility. Next, Plaintiff alleges that "[i]t is against Clendening's immediate personal financial interests to in any way prolong the life of claims" that may depress Blucora's stock price because Clendening is a Blucora stockholder and a party to a Rule 10b5-1 stock trading plan that allows him to sell "up to 213, 100 shares" of Blucora stock between February and May 2018.[135] This states no basis to challenge Clendening's fitness under Rales.

         "Speculation on motives for undertaking corporate action are wholly insufficient to establish a case of demand excusal."[136] Plaintiff's purely speculative belief that Clendening would be unable to exercise his otherwise independent business judgment in considering a demand simply because he would fear that the litigation might depress the value of his Blucora stockholdings falls far short of the mark. This is particularly so given that Plaintiff has not even attempted to plead that these holdings are material to Clendening.[137] Indeed, nearly every director of every publicly traded company owns stock in the company, some more than others. If it were enough to plead director interestedness merely by alleging that the director's holdings might be devalued as a result of derivative litigation, it is difficult to imagine how a plaintiff would not carry his heightened burden to plead demand futility in nearly every derivative case. That is not our law.

         4. Proctor

         Proctor joined the Board on June 1, 2017.[138] Prior to joining the Board, she was a member of SunEdison, Inc.'s board of directors and chaired its audit committee.[139] Plaintiff alleges Proctor is involved in litigation in the United States District Court for the Southern District of New York arising from her board service at SunEdison.[140] According to Plaintiff, SunEdison "collapsed" in 2016 and Proctor "is an individually-named defendant in a multitude of resulting shareholder and ERISA litigation" where the company's D&O coverage may be inadequate to cover the liability.[141] This, according to Plaintiff, renders Proctor unable impartially to consider a demand because the Defendants face similar liability on similar claims here.[142]

         Plaintiff's allegation that Proctor faces a "situational conflict," given her liability exposure in unrelated litigation, is not novel. In Guttman v. Huang, then- Vice Chancellor Strine observed that "directors can be compromised for purposes of considering a demand if they face a significant likelihood of liability relating to the subject matter of the complaint."[143] Because the directors in Guttman were not named defendants in the supposedly related federal securities litigation, the court ultimately determined that demand was not excused.[144] In Pfeiffer v. Toll, the court found demand was futile because a majority of the demand board faced a significant likelihood of liability in companion federal securities litigation.[145] Under those circumstances, the court was satisfied that if "the Company pressed forward with its rights of action against the defendants in [the Delaware] case, then the Company's efforts would undercut or even compromise the defense of the federal securities action."[146]

         This case bears no resemblance to Guttman or Pfeiffer. First, the SunEdison litigation is not parallel litigation or even related to this derivative litigation. Nothing the defendants say or do here will "undercut or even compromise" the defense of the SunEdison case, or vice versa. Second, and more importantly, the FAC says nothing of (much less allege with any particularity) how Proctor's defenses in the SunEdison litigation could render her unable to exercise her disinterested business judgment regarding a demand on Blucora. Given that Plaintiff has failed to plead any specifics regarding how Proctor faces legal jeopardy, the FAC's speculative allegations of a situational conflict are inadequate to disqualify her from considering a demand.[147]


         The FAC raises no reasonable doubt that at least five of the eight members of the Demand Board are disinterested, independent and fully capable of impartially exercising their business judgment when considering a pre-suit demand. Accordingly, Plaintiff has failed to carry his burden of pleading that demand is excused and the FAC must be dismissed for this reason alone. Even though the analysis could end here, for the sake of completeness, and given that the named Defendants have argued separately and strenuously that Plaintiff has failed to state viable claims against them, I take up those arguments as well.

         B. The FAC Fails to State Viable Claims

         Under Court of Chancery Rule 12(b)(6), dismissal is appropriate only if the plaintiff would be unable to recover under "any reasonably conceivable set of circumstances susceptible of proof" based on the facts pled in the complaint.[148]In considering a motion to dismiss, the court must accept as true all well-pled allegations in the complaint and draw all reasonable inferences from those facts in Plaintiff's favor.[149]

         As explained below, several of Plaintiff's claims are time-barred. Even if timely, none of the claims as pled are viable as a matter of law. These are separate grounds for dismissal.

         1. Laches

         Defendants argue that Counts III, IV and V, which arise from the Monoprice acquisition, share repurchases and alleged insider trading, are barred by laches. I agree.

         "Laches is an equitable defense born from the longstanding maxim equity aids the vigilant, not those who slumber on their rights."[150] It is "generally defined as an unreasonable delay by the plaintiff in bringing suit after the plaintiff learned of an infringement of his rights, thereby resulting in material prejudice to the defendant."[151] To invoke laches at the pleadings stage, Defendants must demonstrate on the face of the operative pleading that: (a) Plaintiff had knowledge of his rights; (b) Plaintiff unreasonably delayed in bringing suit to vindicate those rights; and (c) the delay resulted in injury or prejudice to the Defendants.[152]

         Although statutes of limitations generally do not govern in equity, [153] because equity follows the law, "a party's failure to file within the analogous period of limitations will be given great weight in deciding whether the claims are barred by laches."[154] This is especially so where, as here, a plaintiff brings equitable and legal claims seeking only legal relief. In such circumstances, "when claims are barred by a controlling statute of limitations, a court of equity need not engage in a traditional laches analysis."[155]

         Under 10 Del. C. § 8106, a three-year limitations period applies to claims sounding in breach of fiduciary duty.[156] That statute begins to run upon accrual of the claim. And, "[t]he law in Delaware is crystal clear that a claim accrues as soon as the wrongful act occurs."[157] While our courts will toll the limitation period under certain circumstances, [158] "[m]ere ignorance of the facts by a plaintiff, where there has been no . . . concealment, is no obstacle to operation of the statute [of limitations.]"[159] Here, Blucora is a public company that filed mandated public disclosures (e.g., Form 10-Qs and Form 10-Ks). Plaintiff knew of or easily could have discovered the facts giving rise to his Monoprice, stock repurchase and Brophy claims at the time of the challenged transactions and well within the limitations period. Indeed, Plaintiff, either through his law firm or directly as plaintiff, attempted to litigate his claims in Washington and California within the three-year limitations period. Having ignored Blucora's Delaware forum selection bylaw, however, his attempts to litigate in the improper fora met predictably negative case-dispositive outcomes.

         After the Washington Court of Appeals remanded the jurisdictional question, the parties agreed to a tolling agreement from September 14, 2016 to December 31, 2016. The practical effect of this agreement is that the statute of limitations for fiduciary claims connected to the Monoprice acquisition, that began to run on August 22, 2013 (the date the deal closed), was tolled from September 2016 to December 2016. This, in turn, would have extended the three-year limitations period to May 31, 2017. Because the FAC was filed on November 22, 2017, this claim is time-barred.

         As for the claims arising from Board decisions relating to Blucora's share repurchases-the removal of the $20 per share price ceiling on November 14, 2013[160] and the May 2014 decision to increase the number of shares that could be repurchased[161]-the latest possible date that the statute of limitations could have run was in May 2017. Likewise, Allen and Snyder's challenged stock sales occurred in late-2013 and early-2014 and, as such, any Brophy claim against them expired in early-2017, well before Plaintiff's November 2017 filing.[162]

         Lest there be any doubt that a full-blown laches analysis (including prejudice) might justify a different result, the consequences of Plaintiff's deliberate litigation tactics expose the actual prejudice. Plaintiff chose to file actions in Washington and California where, combined, he asserted the same claims he eventually was forced to bring here.[163] He gambled and lost, not once but twice. And he forced Defendants to defend in the wrong fora every step of the way. This amounts to prejudice. Under these circumstances, "[t]here is nothing ...

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