Submitted: October 22, 2018
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.
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.
SLIGHTS, VICE CHANCELLOR
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.
Parties and Relevant Non-Parties
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
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.
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. 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."
Summary of the Dispute
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.
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.
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
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."
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."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.
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
Summary Judgment Standard
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." "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." 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.
The Undisputed Evidence Reveals that Defendants Complied With
Their Duty of Disclosure
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. 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 ...