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Zalmanoff v. Hardy

Court of Chancery of Delaware

November 13, 2018


          Date Submitted: October 22, 2018

          Ronald A. Brown, Jr., Esquire, J. Clayton Athey, Esquire and Samuel L. Closic, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware and Jeffrey S. Abraham, Esquire of Abraham, Fruchter & Twersky, LLP, New York, New York, Attorneys for Plaintiff Samuel Zalmanoff.

          David J. Teklits, Esquire and D. McKinley Measley, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Howard S. Suskin, Esquire of Jenner & Block LLP, Chicago, Illinois; and Elizabeth A. Edmondson, Esquire, Lorenzo Di Silvio, Esquire and Rémi J.D. Jaffré, Esquire of Jenner & Block LLP, New York, New York, Attorneys for Defendants John A. Hardy, Kenneth I. Denos, Fraser Atkinson, Alessandro Benedetti, Richard F. Bergner, Henry W. Hankinson, Robert L. Knauss, Bertrand Des Pallieres and Equus Total Return, Inc.



         Plaintiff, Samuel Zalmanoff, has brought a single-count complaint (the "Complaint") against the members of the board of directors (the "Board" or "Defendants") of Equus Total Return, Inc. ("Equus" or the "Company") in which he alleges that Defendants breached their fiduciary duty of disclosure when seeking stockholder approval of an equity incentive plan. Defendants have moved for summary judgment (the "Motion"). For reasons explained below, I am satisfied that when the disclosures provided in the operative proxy statement are considered alongside those made in a simultaneously mailed Form 10-K, it is indisputable that Defendants adequately fulfilled their disclosure obligations. Defendants' Motion for Summary Judgment, therefore, must be granted.


         A. Parties and Relevant Non-Parties

         Plaintiff, Samuel Zalmanoff ("Plaintiff"), owned Equus common stock at all times relevant to the Complaint. He brings this action on behalf of himself and a class of similarly situated Equus stockholders.

         The Defendants-John A. Hardy ("Hardy"), Kenneth I. Denos ("Denos"), Fraser Atkinson, Richard F. Bergner, Henry W. Hankinson, Robert J. Knauss and Bertrand des Pallieres-comprise the Equus Board of Directors at the time of the events giving rise to the Complaint. Hardy is Equus's CEO and Denos is its Chief Compliance Officer.

         Equus is a Delaware corporation with its principle place of business in Houston, Texas. At the time this action was filed, Equus was classified as a business development company ("BDC") under the Investment Company Act of 1940, 15 U.S.C. § 80a, et seq.[1] Equus's previous focus was on investments in non-public debt and equity securities. Equus's stock trades on the New York Stock Exchange under the symbol "EQS."

         B. Summary of the Dispute

         This is a class action challenging the Board's adoption of an Equity Incentive Plan (the "EIP") following overwhelming approval of the EIP by Equus stockholders. Plaintiff, an Equus stockholder, alleges that Defendants breached their fiduciary duty of disclosure by omitting material facts and making false and misleading disclosures in the 2016 Schedule 14A (the "2016 Proxy") that Equus filed with the Security Exchange Commission ("SEC") to solicit stockholder approval of the EIP.

         The Board proposed the EIP to stockholders as Equus was in the midst of significant transition. Specifically, in May 2014, Equus disclosed that it was considering a merger or consolidation with MVC Capital, Inc. ("MVC") through a two-step Plan of Reorganization. In the first step, effected in May 2014, Equus engaged in a share exchange with MVC for 20% of its shares. The exchange ratio was based on respective net asset values ("NAV"). The second step contemplated that MVC and Equus would merge, although this has yet to occur and, according to Defendants, likely will not occur.

         According to the Complaint, since the announcement of the Plan of Reorganization, Equus's core investment activity has slowed substantially. Indeed, as disclosed in the company's 2015 Form 10-K (the "2015 10-K"), as of the time it sought to implement the EIP, Equus held 46% of its assets in the form of cash or cash equivalents. As a BDC, reduced investment activity means reduced returns for Equus stockholders.

         The 2016 Proxy disclosed that the EIP would allow Equus to grant options to Equus directors and officers to acquire up to 25% of Equus's shares at a price equal to the current market value, which is at a discount to NAV. It also disclosed that the purpose of the EIP was to encourage Equus officers, employees and directors "to remain with and devote their best efforts to the business . . . [and] enhance the ability of the Company and its affiliates to attract and retain the services of individuals who are essential to the growth and profitability of the Fund."[2]

         In his Complaint, Plaintiff alleges the 2016 Proxy failed to disclose and/or misstated five facts that were material to the stockholders' consideration of the EIP: (1) "the reasons why Equus has not merged or consolidated with MVC and the current status of that transaction"; (2) "that Equus no longer engages in any meaningful new investment activities and holds over $32 million or 61% of its assets in cash or cash equivalents, making the claimed premise of needing to compensate Equus's executive or the Board through awarding stock options false or misleading"; (3) "that Equus has previously sold shares to MVC at prices reflecting the Fund's NAV while the EIP seeks to grant options based upon current market value which represents a substantial discount to NAV"; (4) "that Equus is in the process of being acquired by MVC, which acquisition was expected to be commenced and/or completed in 2016, which, at a minimum, raises serious questions as to the necessity of providing additional compensation to Equus's executive and directors through the proposed EIP"; and (5) "that [D]efendant Hardy is a director of Versatile Systems."[3]According to Plaintiff, these omissions were material and ultimately misleading since the stockholders were being asked to approve an EIP that was meant to incentivize present and future officers of Equus to perform at their best, even as the company's investment activity had slowed to a near halt and even as the Company was on the brink of merging itself out of existence.

         II. ANALYSIS

         The Defendants move for summary judgment. Their principal argument is that, even if the Court were to assume that the five facts identified by Plaintiff are material, these facts were disclosed to Equus stockholders either in the 2016 Proxy or in the 2015 10-K that was mailed to stockholders along with the 2016 Proxy. Plaintiff opposes the Motion on the ground that Defendants are not entitled to rely upon disclosures in the 2015 10-K as evidence that they discharged their fiduciary duty of disclosure with respect to the EIP. I disagree with Plaintiff and grant summary judgment to Defendants.

         A. Summary Judgment Standard

         Under Court of Chancery Rule 56, summary judgment shall be granted if "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law."[4] "The moving party bears the initial burden of demonstrating that even with the evidence construed in the light most favorable to the non-moving party there are no genuine issues of material fact."[5] If the moving party carries that initial burden, then the burden shifts to the non-moving party to point to genuine issues of material fact that remain in dispute.[6]

         B. The Undisputed Evidence Reveals that Defendants Complied With Their Duty of Disclosure

         Our law is settled that, when seeking stockholder approval of a corporate action, a board must disclose all facts that are material to the requested action so that shareholders may cast an informed vote.[7] While Defendants have not conceded the materiality of the information that Plaintiff alleges was missing from the "total mix," they have not sought summary judgment on materiality. Instead, Defendants maintain that the information was adequately disclosed in the 2016 Proxy and the 201510-K. The argument rests on two threshold factual predicates and then a single legal proposition: (1) the Equus stockholders received the 2015 10-K along with the 2016 Proxy; (2) the 2015 10-K contained the allegedly omitted information regarding the EIP; and (3) accordingly, the Board was entitled as a matter of law to rely upon ...

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