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Silverberg v. Padda

Court of Chancery of Delaware

October 18, 2019

Jeffrie J. Silverberg
v.
Shan Padda,

          Robert Karl Hill, Esquire Seitz, Van Ogtrop & Green, P.A.

          Marc S. Casarino, Esquire White & Williams LLP

          Samuel A. Nolen, Esquire Richards, Layton & Finger, P.A.

          Thad Bracegirdle, Esquire Wilks, Lukoff & Bracegirdle, LLC

          David J. Teklits, Esquire Morris Nichols Arsht & Tunnell LLP

          Edward B. Micheletti, Esquire Skadden, Arps, Slate, Meagher & Flom LLP

          Gregory W. Hauswirth, Esquire Leech Tishman Fuscaldo & Lampl, LLC

         Dear Counsel:

         This letter addresses Plaintiffs' motion to reargue (the "Motion")[1] portions of the September 19, 2019, Memorandum Opinion (the "Opinion")[2] granting Defendants' motion to dismiss in part and ordering supplemental briefing.

         The Motion seeks reargument concerning dismissal of Counts Thirteen and Fourteen, which challenge an offering of convertible debentures conducted by Health Integrated, Inc. in 2015. Count Thirteen alleges that the directors who approved this 2015 offering did so in breach of their fiduciary duties, and Count Fourteen alleges that some of the investors who participated in the offering- defendants Rivers Cities, Midwest, and Stonehenge[3] (referred to in this decision as the "Venture Capital Defendants")-aided and abetted the directors' breaches.

         Plaintiffs conceded that Count Thirteen is derivative in nature, but they argued that it should also be regarded as direct under Gentile v. Rossette.[4] The Opinion considered the merits of Plaintiffs' Gentile argument concerning Count Thirteen, [5]only to reject it. As discussed in the Opinion, for a Gentile claim to be viable, a plaintiff must adequately allege the existence of a controller or control group.[6] The Opinion concluded that because Plaintiffs had not adequately alleged either a controller or control group, Gentile did not apply, and thus the dismissal of Count Thirteen was appropriate.[7] The Motion seeks reargument of this aspect of the Opinion.

         "A motion for reargument under Court of Chancery Rule 59(f) will be denied unless the court has overlooked a controlling decision or principle of law that would have controlling effect, or the court has misapprehended the law or the facts so that the outcome of the decision would be different."[8] "Reargument motions may not be used to relitigate matters already fully litigated or to present arguments or evidence that could have been presented before the court entered the order from which reargument is sought."[9] "A party may not present a new argument for the first time in a motion for reargument."[10]

         In support of reargument, Plaintiffs contend that the Opinion both overlooked principles of law and misapprehended certain factual allegations supporting Plaintiffs' claim that the Venture Capital Defendants comprised a control group at the time of the 2015 offering.

         Turning first to the principles of law, Plaintiffs direct the Court to a Delaware Supreme Court decision issued within a month after the Opinion-Sheldon v. Pinto Technology Ventures, L.P., [11] which affirmed the Court of Chancery's dismissal of a Gentile claim where the complaint failed to allege stockholder connections sufficient to form a control group.[12] In directing the Court to Sheldon, Plaintiffs suggest that Sheldon articulates a new legal principle that might alter the outcome of the Opinion. Plaintiffs are mistaken.

         Sheldon involved allegations that the venture capital defendants: (i) collectively controlled a majority of the company's voting equity; (ii) "were parties to a voting agreement that gave them the right to appoint three directors to [the board]"; (iii) "acted in concert" to complete the challenged transactions; and (iv) enjoyed a "long and close relationship of investing together."[13]

         In evaluating whether these allegations supported the finding of a control group at the trial level, Vice Chancellor Zurn cited the standard set forth in Dubroff v. Wren Holdings, LLC: "A group of stockholders 'can collectively form a control group where those shareholders are connected in some legally significant way-e.g., by contract, common ownership, agreement, or other arrangement-to work together toward a shared goal.'"[14]

         To guide the Court's analysis, the Vice Chancellor then turned to two Court of Chancery decisions that applied the Dubroff standard at the pleadings stage.[15] In van der Fluit, this Court deemed an agreement between alleged group members insufficient to show that they were "connected in some legally significant way" where the agreement did not relate to the underlying challenged transaction and was not entered into exclusively by members of the control group.[16] In Hansen, this Court denied a motion to dismiss a control group theory where the two group members were identified by the company as "key stockholders," were allegedly given exclusive power to negotiate the challenged transaction, and were alleged to have coordinated their investment strategy in at least seven different companies over the course of two decades.[17]

         Using van der Fluit and Hansen as barometers, the Vice Chancellor concluded that the complaint failed to plead the existence of a control group.[18] The Vice Chancellor observed that in Sheldon, like in van der Fluit, the agreement at issue did not bind the signatories with respect to their votes on the challenged transaction and included persons other than the purported control group members.[19] The Vice Chancellor further observed that in Sheldon, unlike in Hansen, the complaint failed to sufficiently plead a factual basis for the allegation that the alleged group members enjoyed a long-standing relationship of co-investments.[20] For these reasons, the Vice Chancellor concluded that Sheldon "more closely resemble[d] van der Fluit than Hansen," and thus found that the complaint failed to allege that the venture capital defendants comprised a control group.[21]

         On appeal, the Supreme Court adopted Dubroff and related cases as the standard for demonstrating the existence of a control group, stating:

To demonstrate that a group of stockholders exercises control collectively, the Appellants must establish that they are connected in some legally significant way-such as by contract, common ownership, agreement, or other arrangement-to work together toward a shared goal. To show a legally significant connection, the Appellants must allege that there was more than a mere concurrence of self-interest among certain stockholders. Rather, there must be some indication of an actual agreement, although it need not be formal or written.[22]

         The Supreme Court then proceeded to track the Court of Chancery's comparative analysis using van der Fluit and Hansen as the two poles of the spectrum, and then independently reached the conclusion that the facts alleged in Sheldon failed to establish "anything but a 'mere concurrence of self-interest.'"[23]Thus, although Sheldon is notable in that it was the Delaware Supreme Court's first opportunity to address the standard for establishing that a group of stockholders exercised control collectively, Sheldon did not alter Delaware law concerning control group requirements.

         The Opinion applied the same standard as, and in a manner consistent with, Sheldon. The Opinion applied the Dubroff standard, searching the complaint for any legally significant connection among the alleged group members.[24] The Opinion concluded that the complaint failed "to allege more than parallel interests among the alleged group members."[25] The Opinion, therefore, did not misapprehend any legal principle germane to the control group analysis that would affect the outcome. Thus, Sheldon does not support reargument.

         The Motion further cites to four additional authorities in support of reargument. The Opinion did not overlook these authorities; rather, Plaintiffs failed to cite to them.[26] By failing to include them in briefing, Plaintiffs waived their right to rely on them.[27] In any event, these authorities do not alter the outcome of the Opinion. Of these four decisions, three involve distinguishable allegations that supplied a legally significant relationship among group members sufficient to support the existence of a control group, [28] and the fourth does not reach the merits of the control group issue.[29] These four additional authorities do not support reargument.

         Turning next to the factual issues, the Motion describes Count Thirteen's ...


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