EXHIBIT 99.2
Order of Delaware Court of Chancery Dated March 17, 2006
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
HIGHLAND LEGACY LIMITED, )
)
Plaintiff, )
)
v. )
)
) C.A. No. 1566-N
)
STEVEN G. SINGER, GARY SINGER, )
TEJAS, INC., TEJAS SECURITIES )
GROUP, INC., GERALD S. KITTNER, )
CHRISTOPHER W. DOWNIE, )
COMMUNICATION TECHNOLOGY )
ADVISORS LLC, CAPITAL & )
TECHNOLOGY ADVISORS, INC., )
PETER D. AQUINO, JARED E. )
ABBRUZZESE, BARRY A. )
WILLIAMSON, RAYMOND L. STEELE, )
and C. GERALD GOLDSMITH, )
)
Defendants, )
and )
)
MOTIENT CORPORATION, )
)
Nominal Defendant. )
MEMORANDUM OPINION AND ORDER
Submitted: February 21, 2006
Decided: March 17, 2006
Kevin R. Shannon, Esquire, Michael A. Pittenger, Esquire, Matthew E. Fischer,
Esquire, POTTER ANDERSON & CORROON, LLP, Wilmington, Delaware; Brian D. Hail,
Esquire, Haynes and Boone LLP, New York, New York, Attorneys for the Plaintiff.
Gregory P. Williams, Esquire, Lisa A. Schmidt, Esquire, Richard T. Rollo,
Esquire, Harry Tashjian, IV, Esquire, RICHARDS LAYTON & FINGER, PA, Wilmington,
Delaware; Attorneys for Steven G. Singer, Barry A. Williamson, Gerald S.
Kittner, Raymond L. Steele, C. Gerald Goldsmith, Christopher W. Downie, and
Motient Corporation.
William J. Marsden, Esquire, Stamoulis, Esquire, FISH &RICHARDSONN, PC,
Wilmington; William B. Mateja, Esquire, Paul E. Coggins, Esquire, FISH &
RICHARDSON, PC, Dallas, Texas, Attorneys for Gary Singer.
David C. McBride, Esquire, Martin S. Lessner, Esquire, Michele Sherretta,
Esquire, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Gregory A.
Markel, Esquire, Martin L. Seidel, Esquire, Jason Jurgens, Esquire, CADWALADER,
WICKERSHAM & TAFT LLP, New York, New York, Attorneys for Tejas, Inc., Tejas
Securities Group, Inc., Communications Technology Advisors, Inc., and Jared E.
Abbruzzese.
Andre G. Bouchard, Esquire, Joel Friedlander, Esquire, BOUCHARD MARGULES &
FRIEDLANDER, P.A., Wilmington, Delaware; Douglas W. Henkin, Esquire, Renee H.
Sekino, Esquire, MILBANK, TWEED, HADLEY & McCLOY, LLP, New York, New York,
Attorneys for Peter D. Aquino.
LAMB, Vice Chancellor.
A large stockholder brought this derivative action alleging that the
directors committed corporate waste by paying exorbitant fees and warrants over
a period of years to two financial advisory firms for their services. In
addition, the plaintiff stockholder alleges an unrelated claim that the
directors breached their fiduciary duties by allowing the brother of one of them
to act in a managerial position in violation of a federal court order that
forbids him from acting as an officer or director of any public company. The
complaint names as defendants five of the seven directors, the two financial
advisory firms, several former directors and a current corporate officer, and
the "banned" brother.
The defendants have moved to dismiss the complaint under Rule 23.1 for
failure to allege with particularity facts establishing demand futility. The
court's review of the complaint reveals that it does not allege with
particularity facts from which the court could reasonably conclude that the
majority of the directors in office when the complaint was filed were disabled
from impartially considering a demand. In particular, the court cannot
reasonably infer from the scant particularized facts alleged that there is a
reasonable doubt that either (1) the majority of the directors were
disinterested and independent, or that (2) the challenged transactions were
otherwise the product of a valid exercise of business judgment. For these
reasons, the motion to dismiss under Rule 23.1 will be granted.
1
I.
A. The Parties(1)
-------------
Motient Corporation is a Delaware corporation with its principal place
of business in Lincolnshire, Illinois. Motient provides two-way wireless mobile
data services and nationwide wireless internet services.(2) Motient's primary
asset is its interest in Mobile Satellite Ventures, L.P., which provides mobile
satellite-based communication services. Communication Technology Advisors LLC is
a financial and operational restructuring firm with offices in Albany, New York
and Reston, Virginia.(3) Capital & Technology Advisors, Inc. is a Delaware
corporation affiliated with Communication Technology Advisors LLC.(4)
Communication Technology Advisors and Capital & Technology Advisors are referred
to herein collectively as CTA. Tejas, Inc. is a Delaware corporation with its
principal place of business in Austin, Texas.(5) Tejas is a full service
brokerage and investment banking firm that operates primarily through its
subsidiary, Tejas Securities Group, Inc., a Texas corporation.(6) Tejas, Inc.
and Tejas Securities Group, Inc. are referred
_____________________
(1) The facts recited in this opinion are taken from the well-pleaded
allegations of the First Amended Complaint, unless otherwise noted, and are
presumed to be true for the purposes of this motion. Grobow v. Perot, 539 A.2d
180, 187 (Del. 1988) ("upon a motion to dismiss, only well-pleaded allegations
of fact must be accepted as true; conclusionary allegations of fact or law not
supported by allegations of specific fact may not be taken as true").
(2) Compl. P. 16.
(3) Compl. P. 4.
(4) Id.
(5) Compl. P. 5.
(6) Id.
2
to herein collectively as Tejas. On July 1, 2005, Tejas acquired CTA for
approximately $65 million in cash and stock paid to CTA's shareholders, and CTA
became a wholly owned subsidiary of Tejas. (7)
The plaintiff, Highland Legacy Limited, is the largest single holder of
Motient common stock.(8) Highland purchased its shares of Motient stock in 2002
when Motient emerged from bankruptcy.(9) James Dondero is the President of
Strand Advisors, Inc., the general partner of Highland Capital Management, L.P.,
which is the collateral manager and equity investor in Highland.(10)
B. The Individual Defendants
-------------------------
At the time the complaint was filed, Motient had a seven-member board
of directors consisting of Dondero, Jonelle St. John, and defendants Steven
Singer, Gerald Kittner, Raymond Steele, Barry Williamson, and C. Gerald
Goldsmith.(11) Steven Singer has been a Motient director since May 2002 and
chairman of the board since June 2003. Kittner has been a Motient director since
May 2002 and was also an advisor, consultant, and executive officer of CTA.
Steele and Goldsmith have been Motient directors since May 2004 and June 2005,
_____________________
(7) Compl. P. P. 5, 37.
(8) Compl. P. 2. Highland Legacy Limited is a company organized under the laws
of the Cayman Islands. It owns 223,880 shares of Motient common stock.
(9) Id.
(10) Compl. P. 3.
(11) Id. Dondero recently resigned from Motient's board of directors.
3
respectively. While each is alleged to have certain affiliations with Steven
Singer, neither has any ties to CTA or Tejas. Williamson was appointed to the
Motient board in 2005 and also serves as an outsider director of Tejas.
The complaint also names as defendants Jared Abbruzzese and Peter
Aquino, who are former members of Motient's board of directors.(12) Abbruzzese
served as a Motient director from May 2002 to June 2003. Abbruzzese was also the
founder and managing principal of CTA prior to its merger with Tejas.(13) Aquino
was the senior managing director of CTA from February 2002 until July 2005.
Aquino replaced Abbruzzese on the Motient board and served until March 2005 when
he was replaced by Williamson.(14)
Defendant Christopher Downie is Motient's principal executive officer
who earlier served as its executive vice president, chief operating officer, and
treasurer.(15)
Lastly, the named defendants include Gary Singer, the brother of
defendant Steven Singer. Gary Singer was convicted of fraud, money laundering,
and racketeering arising out of his management of another corporation.(16) In
connection
_____________________
(12) Compl. P. 3.
(13) Compl. P. 13.
(14) Compl. P. 12.
(15) Compl. P. 3.
(16) Compl. P. 7.
4
with that case, the government obtained a permanent injunction barring Gary
Singer from acting as an officer or director for any public company.(17)
C. Background Facts
----------------
In May 2002, Motient emerged from bankruptcy and, thereafter in 2002,
hired CTA to provide financial and restructuring consulting services.(18) At
that time, two Motient directors, Abbruzzese and Kittner, were affiliated with
CTA.(19) Abbruzzese was the founder and managing principal of CTA, and Kittner
was an advisor, consultant, and senior executive at CTA.(20) Somewhat
imprecisely, the complaint alleges that CTA and Abbruzzese have functioned as
Motient's executive management since May 2002.(21)
Since May 2002, Motient has paid CTA significant fees, totaling over $3
million. At the time the complaint was filed, CTA was receiving a fee of $60,000
per month. Over the course of its retention by Motient, CTA has also received
warrants to purchase hundreds of thousands of shares of Motient stock, now
allegedly worth tens of millions of dollars.(22) The complaint alleges that
these payments were so excessive as to amount to corporate waste.
_____________________
(17) Id.
(18) Compl. P. P. 2, 17.
(19) Compl. P. P. 8, 17.
(20) Compl. P. P. 4, 8, 13.
(21) Compl. P. 17.
(22) Id.
5
In 2004, the Motient board decided to raise capital by conducting a
private placement offering. CTA, Abbruzzese (who by then had been replaced on
the board by Aquino, the senior managing director of CTA), and Gary Singer, the
brother of director Steven Singer, encouraged the Motient directors to use
Tejas, Inc., a regional financial advisor, as its private placement agent.(23)
According to the complaint, "CTA also discouraged any competitive bidding for
the service provided by Tejas, pressuring the board that no adequate
alternatives existed and contriving urgency that did not exist."(24) As a
result, the complaint alleges, "the board felt compelled to follow CTA's advice
without proper consideration of alternatives or alternative service
providers."(25) Furthermore, it is alleged that the directors, other than
Dondero, provided little input and had basically no deliberation on these
private placement transactions.(26)
The plaintiff alleges that CTA and Abbruzzese failed to disclose that
Tejas was unqualified to perform the services for which it was retained.(27)
Tejas's investment banking revenue was a de minimis part of its business,
accounting for less than 1% of its revenue.(28) However, after Tejas began
working for Motient, it
_____________________
(23) Compl. P. P. 5, 19, 20, 21.
(24) Compl. P. 19.
(25) Id.
(26) Id.
(27) Compl. P. P. 20, 21.
(28) Compl. P. 21.
6
is alleged that Tejas investment banking revenue increased over 25,000%, its
annual profit increased over 2,600%, and its stock price appreciated 900% in one
year.(29)
Like CTA, Tejas was allegedly paid an above-market rate for its
services.(30) The complaint states that Motient compensated Tejas with
exorbitant fees and granted it significant warrants to purchase Motient common
stock worth tens of millions of dollars.(31) For example, in July 2004, it is
alleged that Tejas received warrants valued at $11.6 million at the time of
issuance even though Motient received only $30 million of proceeds from the
offering.(32) In total, the alleged estimated value of the warrants issued to
CTA and Tejas is over $50 million.(33) In July 2005, Tejas acquired CTA. As a
result, CTA and persons affiliated with it, including Abbruzzese, Kittner, and
Aquino, substantially benefitted from the supposed excessive compensation paid
to CTA and Tejas by Motient.(34)
_____________________
(29) Id.
(30) Compl. P. 22.
(31) Compl. P. 21.
(32) Compl. P. 22.
(33) Compl. P. 23.
(34) Compl. P. P. 5, 20, 37.
7
D. Procedural Posture
------------------
Highland, which is managed by director Dondero, brought this derivative
action on behalf of Motient, arguing inter alia, that the directors and the
shareholders were duped into approving exorbitant fees to unqualified financial
advisers.(35) For this, the complaint asserts the following causes of action:
(1) a claim against directors Singer, Aquino, Kittner, Williamson, Steele, and
Goldsmith, and Downie, Motient's principal executive officer, for breaching
their fiduciary duties by hiring and paying exorbitant fees and warrants to CTA
and Tejas; (2) a claim against Gary Singer, Abbruzzese, CTA, and Tejas for
aiding and abetting these breaches of fiduciary duties; and (3) a claim against
Steven Singer, Abbruzzese, Kittner, Aquino, Downie, CTA, and Tejas for unjust
enrichment.(36)
In addition, the plaintiff alleges a separate unrelated claim that the
board breached its fiduciary duties by allowing Gary Singer to actively
participate in the management of Motient in contravention of the federal
injunction against him acting as an officer or director of any public
company.(37) The complaint alleges that Gary Singer participated in many of
Motient's board meetings and conference calls and acted as a de facto officer
and director of the company.(38) The plaintiff also
_____________________
(35) Compl. P. 20.
(36) Compl. P. P. 48-60.
(37) Compl. P. P. 7, 57.
(38) Compl. P. P. 34, 57.
8
alleges that "Gary Singer routinely pressures the board for compensation."(39)
Allegedly, in February 2005, after Motient paid CTA $3.7 million in connection
with the closing of Motient's acquisition of certain assets, CTA assigned
approximately $1.1 million of this fee to the Singer Children's Management Trust
controlled by Gary Singer.(40)
The defendants have moved to dismiss the complaint claiming, among
other things, that the plaintiff failed to satisfy the pleading requirements of
Rule 23.1, and that the plaintiff is not a fair and adequate class
representative. Specifically, the defendants argue that the plaintiff did not
make a demand on the board before proceeding with this derivative suit and has
not shown that demand was excused as futile. In addition, Gary Singer argues
that the complaint should be dismissed as to him for lack of personal
jurisdiction.(41)
The plaintiff filed an answering brief in opposition to the motions to
dismiss, contending that the complaint pleads sufficient facts demonstrating the
futility of demand. First, the plaintiff argues that a majority of Motient's
board are either
_____________________
(39) Compl. P. 34.
(40) Compl. P. 32.
(41) The argument that the court lacks personal jurisdiction over Gary Singer is
two-fold. First, he argues that 10 Del. C. ss. 3114 does not provide a statutory
basis for the exercise of personal jurisdiction over him since he is not an
officer or director of Motient or any other Delaware corporation. Second, the he
contends that the exercise of personal jurisdiction over him, a nonresident who
lacks minimum contacts with the State of Delaware, would violate the due process
clause of the Fourteenth Amendment. Because the court finds that the complaint
must be dismissed for other reasons, it does not reach the issue of personal
jurisdiction over Gary Singer.
9
interested or not independent.(42) The plaintiff contends that director Steven
Singer is conflicted because of the allegations against his brother Gary Singer,
and that directors Steele and Goldsmith lack independence because they are
dominated and controlled by Steven Singer. Directors Kittner and Williamson
allegedly lack independence due to their connections with CTA and Tejas. Second,
the plaintiff claims that just three days after the filing of this complaint,
the company stated in a Form 8-K filed with the Securities and Exchange
Commission that "Motient believes that these lawsuits have no merit and intends
to vigorously defend these lawsuits."(43) According to the plaintiff, "Motient
and the defendant board members should not be entrusted to prosecute claims that
they have declared dead on arrival."(44) Lastly, the plaintiff alleges that the
board retaliated against director Dondero for bringing this action by forming an
executive committee which excluded Dondero on the day this complaint was
filed.(45)
II.
As is well known, Section 141(a) of the Delaware General Corporation
Law provides that the board of directors of a corporation manages the business
and
_____________________
(42) Compl. P. 62.
(43) Compl. P. 47.
(44) Id.
(45) Compl. P. 44.
10
affairs of the corporation.(46) This authority includes the decision whether or
not to initiate litigation on behalf of the corporation.(47) With that said, a
stockholder may pursue derivative litigation without obtaining the board's prior
approval pursuant to Court of Chancery Rule 23.1 by establishing through
particularized factual allegations that a pre-suit demand on the board would
have been futile.(48) The test of futility is whether at the time of the filing
of the suit a majority of the directors could have impartially considered and
acted upon the demand.(49) As the Delaware Supreme Court stated in Aronson v.
Lewis:
Our view is that in determining demand futility the
Court of Chancery in the proper exercise of its
discretion must decide whether, under the
particularized facts alleged, a reasonable doubt is
created that: (1) the directors are disinterested and
_____________________
(46) 8 Del. C. ss. 141(a) ("The business and affairs of every corporation
organized under this chapter shall be managed by or under the direction of a
board of directors, except as may be otherwise provided in this chapter or in
its certificate of incorporation").
(47) Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (stating that "[t]he demand
requirement is a recognition of the fundamental precept that directors manage
the business and affairs of the corporation"); Grimes v. Donald, 673 A.2d 1207,
1215 (Del. 1996) (stating that "[i]f a claim belongs to the corporation, it is
the corporation, acting through its board of directors, which must make the
decision whether or not to assert the claim"); Levine v. Smith, 591 A.2d 194,
200 (Del. 1991) (stating that "[t]he directors of a corporation and not its
shareholders manage the business and affairs of the corporation . . . and
accordingly, the directors are responsible for deciding whether to engage in
derivative litigation").
(48) DONALD J. WOLFE, JR. & MICHAEL A. PITTENGER, CORPORATE AND COMMERCIAL
PRACTICE IN THE DELAWARE COURT OF CHANCERY ss. 9-2(b) (2005) p. 9-46-52
(explaining that "the derivative action by its very nature constitutes an
impingement upon the managerial freedom and authority vested in the board under
the Delaware General Corporation Law").
(49) Aronson, 473 A.2d at 809-10 (stating that "futility is gauged by the
circumstances existing at the commencement of a derivative suit").
11
independent and (2) the challenged transaction was
otherwise the product of a valid exercise of business
judgment.(50)
This court must grant the defendant's motion to dismiss in accordance with Rule
23.1 if the stockholder does not plead sufficient facts to satisfy either prong
of the Aronson test.(51)
Here, the plaintiff did not make a pre-suit demand on the board, but
rather argues that such demand would be futile.(52) Primarily, the plaintiff
argues that the facts alleged in the complaint are sufficient to satisfy the
first prong of Aronson. The plaintiff alleges that a majority of Motient's
directors are incapable of impartially considering a demand to pursue claims
relating to transactions involving CTA, Tejas, and Gary Singer. The plaintiff
concedes independence and disinterest of directors Dondero and St. John.
Therefore, the plaintiff must establish a basis to excuse demand on at least
four of the five remaining directors.
_____________________
(50) Id. at 814; see also Brehm v. Eisner, 746 A.2d 244, 254-255 (Del. 2000)
(explaining that Rule 23.1 requires that the plaintiff must allege with
particularity facts raising a reasonable doubt that the corporate action being
questioned was properly the product of business judgment).
(51) White v. Panic, 783 A.2d 543, 549 (Del. 2001) (stating that "at the motion
to dismiss stage of the litigation, plaintiffs are entitled to all reasonable
factual inferences that logically flow from the particularized facts alleged,
but conclusory allegations are not considered as expressly pleaded facts or
factual inferences"); Kaufman v. Belmont, 479 A.2d 282, 284 (Del. Ch. 1984)
(stating that "[i]n response to the motion to dismiss for failure to make a
pre-suit demand, it is necessary to review the complaint in detail to ascertain
if the plaintiff has alleged with particularity facts which show that a pre-suit
demand for redress of the alleged wrongs would have been futile").
(52) Ch. Ct. R. 23.1.
12
A. First Prong Of Aronson
----------------------
The plaintiff alleges that director Steven Singer lacks independence
because of the claims asserted against his brother, and that directors Steele
and Goldsmith are dominated and controlled by Singer.(53) Specifically, the
plaintiff claims that Goldsmith and Steele are beholden to Singer because they
have a history of doing business together. This contention is based solely on
the alleged facts that Singer served with Steele and Goldsmith on the boards of
other companies.(54) The complaint alleges that Steele and Goldsmith served with
Singer on the board of directors of American Banknote Company, and that Steele
also served with Singer on the board of directors of Globix Corp.(55) In
addition, the complaint alleges that, at approximately the same time Goldsmith
retired from the American Banknote board, he was nominated to serve on the
Motient board.(56) From this, the plaintiff claims that Goldsmith and Steele are
dependent on Singer for the compensation they receive as directors of these
companies.(57) Therefore, the plaintiff alleges,
_____________________
(53) Compl. P. P. 40, 42. The complaint makes no allegations that Steele and
Goldsmith have any ties to CTA or Tejas, and there is no allegation that Steven
Singer has any interest in CTA or Tejas.
(54) Compl. P. P. 6, 9 11.
(55) Compl. P. P. 39, 40, 42. Globix and American Banknote are not claimed to be
parties to, or affiliated with any parties to, any of the entities that engaged
in the challenged transactions.
56 Compl. P. 42.
57 Compl. P. P. 9, 11, 39, 40, 42. The complaint alleges that Steele received a
total of approximately $50,000 in annual fees for serving on the boards of these
two corporations. It is also alleged that Steele received various stock options
and warrant grants from both entities in connection with his service as a
director. However, no details are provided concerning how many options or
warrants Steele received from either entity or the terms or conditions of them.
13
there is reasonable doubt as to whether Steele and Goldsmith can impartially
consider a lawsuit adverse to Singer.
"In the demand-futile context a plaintiff charging domination and
control of one or more directors must allege particularized facts manifesting a
direction of corporate conduct in such a way as to comport with the wishes or
interests of the corporation (or persons) doing the controlling."(58) In order
to establish lack of independence, the complaint must create a reasonable doubt
that a director is so beholden to an interested director that his or her
discretion would be sterilized.(59) However, an allegation that directors are
dominated and controlled, standing alone, does not meet the demand futility
standard. There must be some alleged nexus between the domination and the
resulting personal benefit to the controlling party.(60)
_____________________
Goldsmith allegedly was paid a consulting fee of $10,000 a month (the complaint
does not allege the duration of this consulting arrangement), was awarded a
participation in American Banknote's restructuring bonus pool at a $100,000
level, and was given $40,000 for past services when he retired from the board.
The court cannot reasonably conclude based on the pleading that these payments
were "part of a pattern of largesse" controlled by Singer.
(58) Aronson, 473 A.2d at 816.
(59) Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993); Beam v. Stewart, 845 A.2d
1040, 1050 (Del. 2004) (explaining that independence is a fact-specific
determination made in the context of a particular case); In re Compucom Sys.
Inc. S'holders Litig., 2005 Del. Ch. LEXIS 145 at *30 (Del. Ch. Sept. 29, 2005)
(stating that "a party alleging domination and control of a company's board of
directors bears the burden of proving such control by showing a lack of
independence on the part of the directors").
(60) Aronson, 473 A.2d at 816.
14
Here, there are no well-pleaded allegations which allow the court to
reasonably infer that Goldsmith and Steele were in any way controlled by or
financially beholden to Singer. The plaintiff does not allege that Singer
controlled Globix or American Banknote such that Goldsmith and Steele were
dependent on Singer for their director positions.(61) Nor does the plaintiff
allege particularized facts that Singer had the ability to deprive Goldsmith and
Steele of their director fees.(62) Moreover, the complaint does not even allege
that these fees were unusually large or material to Goldsmith or Steele.(63)
Rather, the plaintiff simply makes conclusory allegations that
Goldsmith and Steele are dominated by Singer because they served together on a
few boards of unaffiliated companies. It is well settled that "the naked
assertion of a previous business relationship is not enough to overcome the
presumption of a director's
_____________________
(61) Singer is not alleged to be a majority shareholder of either Globix or
American Banknote. Nor is it alleged that Singer dominates and controls the
boards of these companies. Moreover, the plaintiff does not even allege that
Singer appointed Steele or Goldsmith to these boards or otherwise caused them to
be directors. The plaintiff only alleges that Singer serves as the chairman on
the Globix and American Banknote boards and owns a significant stock interest in
the companies. Compl. P. P. 6, 40.
(62) The complaint lacks any particularized factual allegations supporting an
inference that Singer ever caused any financial benefits to flow to Steele or
Goldsmith. See Compl. P. 39 (alleging only the conclusion that Mr. Steele "is
dependent" on Steven Singer for compensation), P. P. 40, 42 (alleging that
Singer dispensed "largesse" upon Smith and Goldsmith).
(63) In addition, the complaint does not allege the existence of any current
relationship between Singer and Goldsmith from which one could reasonably infer
that Goldsmith would be unable to consider the merits of the transactions at
issue in this case. Instead, the complaint focuses on past compensations granted
to Goldsmith by American Banknote without alleging facts suggesting that
Goldsmith would feel indebted to Singer for the receipt of such fees.
15
independence."(64) Therefore, the court concludes that the plaintiff has not
alleged facts sufficient to support a claim that Goldsmith and Steele are unable
to impartially evaluate whether to bring this lawsuit. Thus, at the time the
complaint was filed, four of the seven Motient directors (Dondero, St. John,
Goldsmith and Steele) possessed the necessary independence to consider a
pre-suit demand.(65)
Moreover, the charge that the Motient board formed an executive
committee that excluded Dondero in retaliation for the decision to file this
action is unsupported by the well pleaded allegations of fact found in the first
amended complaint. Paragraph 44 of that pleading alleges, somewhat imprecisely,
that the plaintiff "submitted the original complaint for filing on August 16,
2005, immediately prior to a previously-scheduled Motient board meeting that
began at 2:00 p.m. Central time." Allegedly, "at that board meeting Motient's
dominated, controlled and conflicted board implemented a scheme to exclude the
only truly independent director, Dondero, from management and the board."(66)
While this
_____________________
(64) Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002); Beam, 845 A.2d at 1050
(stating that "allegations of mere personal friendship or a mere outside
business relationship, standing alone, are insufficient to raise a reasonable
doubt about a director's independence"); see also In re Compucom, 2005 Del. Ch.
LEXIS 145 at *37 (dismissing a derivative complaint where the plaintiff alleged
facts that a director formerly served on the board of a controlling
stockholder's entity and currently served on the boards of two of its
subsidiaries).
(65) The complaint does not contain an allegation challenging the independence
or disinterestedness of directors Dondero and St. John. Since the court found
that a majority of the board could exercise independent business judgment in
deciding whether to bring these claims, it need not evaluate whether the
remaining directors, Kittner, Singer, and Williamson, were disinterested or
lacked independence.
(66) Compl. P. 44.
16
allegation is framed to create the impression that the actions taken by the
board at the August 16, 2005 meeting were in reaction to the initiation of this
litigation, that causal relationship cannot be inferred from the complaint.
The complaint does not allege that the board was informed at that
meeting about the present litigation. Dondero was in attendance, yet there is no
allegation that he told his fellow directors about the complaint or that they
otherwise discussed it. Nor does the complaint allege in so many words that the
decision to form an executive committee that excluded Dondero is the result of
the filing of this action. Instead, the plaintiff simply asks this court to
infer that (1) the mere filing of the complaint put the board on notice of this
action, and (2) the board formed an executive committee in retaliation to this
action. The well pleaded allegations of the complaint do not permit the court to
draw such inferences.
A review of the court's docket shows that the complaint was not filed,
as the plaintiff suggests, prior to the board meeting, but was rather filed two
hours after the board meeting commenced.(67) Therefore, the court cannot
reasonably conclude based on the plaintiff's allegations that the board even
knew of this litigation. Nor can the court reasonably infer that the board
formed an executive committee that
_____________________
(67) It is alleged that the April 16, 2005 board meeting began at 2 p.m. Central
time, which is 3 p.m. Eastern time. Compl. P. 44. According to the court's
docket, the original complaint in this action was filed on that day at 5:04 p.m.
Eastern time.
17
excluded Dondero for no other reason than to retaliate against him for bringing
this action.
Lastly, the plaintiff alleges that the company's statement in its Form
8-K, "Motient believes that these lawsuits have no merit and intends to
vigorously defend these lawsuits," evidences the board's inability to prosecute
these claims.(68) 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.(69)
For the foregoing reasons, the court finds that the particularized
factual allegations in the complaint do not create a reasonable doubt that the
majority of
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(68) Compl. P. 47.
(69) Biondi v. Scrushy, 820 A.2d 1148, 1163-67 (Del. Ch. 2003), where the record
revealed "an odd confluence of unusual and highly troubling facts" is not to the
contrary. Unlike the present case in which Motient made a generalized statement
in a Form 8-K filing expressing its management's intention to defend against the
litigation, Biondi involved a great number of troubling facts pointing to a
complete lack of independence on the part of the members of a special litigation
committee, included but not limited to the public statement by one member,
issued upon his resignation, that Scrushy-the principal subject of the
investigation-had done nothing wrong.
18
the Motient board was disinterested or independent. Consequently, the court
concludes that the pleaded facts are insufficient to excuse demand under the
first prong of Aronson.
B. The Second Prong Of Aronson
---------------------------
Under the second prong of Aronson, demand will not be excused unless
the plaintiff alleges sufficient facts to create a reasonable doubt that the
transactions in question were not a valid exercise of the board's business
judgment.(70) In other words, absent particularized allegations to the contrary,
the directors are presumed to have acted on an informed basis and in the honest
belief that their decisions were in furtherance of the best interests of the
corporation and its shareholders. The court must inquire "into the substantive
nature of the challenged transactions and the board's approval thereof."(71)
"The plaintiff faces a substantial burden, as the second prong of the Aronson
test is `directed to extreme cases in which despite the appearance of
independence and disinterest a decision is so extreme or curious as to itself
raise a legitimate ground to justify further inquiry and judicial review.'"(72)
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(70) 473 A.2d at 814.
(71) Id. (explaining that "the court does not assume that the transaction is a
wrong to the corporation requiring corrective steps by the board. Rather, the
alleged wrong is substantively reviewed against the factual background alleged
in the complaint").
(72) Greenwald v. Batterson, 1999 Del. Ch. LEXIS 158 at * 20-21 (Del. Ch. July
16, 1999) (quoting Kahn v. Tremont, 1994 Del. Ch. LEXIS 41, *20 (Del. Ch. Apr.
21, 1994, rev. Apr. 22, 1994)).
19
Here, the plaintiff alleges that (1) the directors paid exorbitant fees
to CTA and Tejas to advise the company on certain financial transactions, and
that (2) the directors permitted Gary Singer to manage the company's affairs in
direct violation of an SEC injunction prohibiting him from serving as an officer
or director of a public company.(73) As to the former claim, the complaint does
not plead with particularity facts demonstrating a likelihood that the director
defendants were grossly negligent in fulfilling their duty of procedural due
care. The complaint does not properly allege that the directors failed to
adequately inform themselves in connection with the retention and compensation
of CTA and Tejas. In addition, there are no well-pleaded allegations of fact
that a majority of the directors were financially interested in the transactions
at issue. Ultimately, the complaint makes generalized allegations that do not
raise a reasonable doubt that the challenged transactions were the product of
due care. (74)
At best, the plaintiff has alleged a weak claim of corporate waste. To
excuse demand on the grounds of waste, the complaint must allege particularized
facts
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(73) The plaintiff also asserts an unjust enrichment claim against Singer, CTA,
Abbruzzese, Kittner, Aquino, Downie, and Tejas. Compl. P. 60. However, the
complaint fails to allege how these defendants were enriched. The complaint does
not allege that these individual defendants personally benefitted from the
challenged transactions. Moreover, as a matter of law, the court cannot
reasonably conclude that the defendants were unjustly enriched when Tejas and
CTA received compensation for providing services to Motient pursuant to a
contractual agreement approved by the Motient board.
(74) Compl. P. 19. The complaint merely states in a conclusory fashion that "the
directors, other than James Dondero, provided little input and had basically no
deliberation on these complicated issues involving transactions worth hundreds
of millions of dollars to the company."
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sufficient to create a reasonable doubt that the board authorized action on the
corporation's behalf on terms that no person of ordinary, sound business
judgment could conclude represents a fair exchange.(75) "That extreme test is
rarely satisfied, because if a reasonable person could conclude the board's
action made business sense, the inquiry ends and the complaint will be
dismissed."(76)
In this case, the complaint does not allege that CTA or Tejas were
hired for other than a legitimate business purpose or that they failed to
perform the tasks for which they were retained. In fact, the complaint alleges
that CTA provided financial advice to Motient and Tejas served as a placement
agent for several of Motient's private stock issuances.(77) The complaint merely
alleges that these firms were overcompensated. This claim falls far short of
meeting the stringent requirements of the waste test.
Finally, the complaint does not allege particularized facts from which
the court could reasonably infer that the board did in fact permit Gary Singer
to function as an officer or director of the company in violation of the federal
court injunction. There are no specific allegations that Gary Singer attended
board meetings as a voting participant or approved transactions on behalf of
Motient. The
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(75) Brehm, 746 A.2d at 263.
(76) Green v. Phillips, 1996 Del. Ch. LEXIS 76 at *17 (Del. Ch. June 19, 1996)
(stating that "[t]o state a claim for corporate waste, the complaint must allege
particularized facts showing that the corporation, in essence, gave away assets
for no consideration").
(77) Compl. P. P. 17, 21, 28-31.
21
complaint does not even allege any particularized facts demonstrating that Gary
Singer actively managed Motient.(78) The complaint merely makes the allegation
that CTA compensated Gary Singer for services provided to it in connection with
work done for Motient. However, the complaint does not state that Gary Singer
never provided services to Motient or that this compensation was unusual or
exorbitant. The court therefore cannot reasonably conclude that the board
allowed Gary Singer to participate in managing Motient in violation of the SEC
injunction.
In sum, the court finds that the plaintiff has failed to allege facts
with particularity indicating that the Motient directors lacked independence or
took action to create a reasonable doubt that the challenged transactions were
otherwise the product of a valid exercise of business judgment, and finds that
demand should have been made before pursuing this action.(79)
III.
For the reasons set forth herein, the defendant's motion to dismiss is
GRANTED. IT IS SO ORDERED.
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(78) In addition, the complaint does not allege that the directors were unaware
of Gary Singer's involvement in the company. Thus, the lack of information
regarding this matter was not an issue for the plaintiff. This is especially
true since the plaintiff was a Motient director who attended the board meetings
and would have first-hand knowledge of Gary Singer's alleged involvement in the
company's affairs.
(79) Since the court finds that the plaintiff failed to make proper demand
pursuant to Rule 23.1, it need not evaluate the defendants' other grounds on
which they moved to dismiss the complaint.
22