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From Securities Regulation Daily, October 26, 2018

‘Anywhere but Delaware’ strategy goes nowhere

By John M. Jascob, J.D., LL.M.

A shareholder-attorney who adopted an ill-fated "anywhere but Delaware" litigation strategy has failed in his third attempt to bring a derivative suit against certain directors of Blucora, Inc. The Delaware Chancery Court ruled that the plaintiff failed to plead demand futility on his claims that the directors violated their fiduciary duties by heedlessly pursuing overpriced acquisitions and by authorizing stock repurchases that allegedly facilitated favorable stock trades by Blucora insiders. Even if he had pleaded demand futility, the court opined, the claims failed on their merits. Accordingly, the Chancery Court dismissed the suit with prejudice (Tilden v. Cunningham, October 26, 2018, Slights, J.).

Delaware not the "first state." The plaintiff, a named partner at Gordon Tilden Thomas & Cordell LLP, challenged three transactions authorized by Blucora’s board of directors between 2013 and 2015. Specifically, the plaintiff alleged that the board engaged in bad faith by failing to investigate several negative aspects identified during its due diligence for Blucora’s 2013 acquisition of Monoprice, Inc., an online electronics retailer that Blucora divested just three years later at a loss of over $140 million. The plaintiff also claimed that the board caused Blucora to pay far more for than it was worth for independent broker-dealer HD Vest in 2015 by improperly incentivizing its financial adviser through a tiered fee structure and failing properly to scrutinize the adviser’s work, thereby allowing a flawed fairness opinion to stand untested. Finally, the plaintiff alleged that the board authorized "unprecedented share repurchases" that served no valid corporate purpose and occurred during a time when Blucora was especially cash-strapped.

Despite Blucora’s Delaware forum selection bylaw, the plaintiff’s law firm filed a derivative complaint in March 2015 on behalf of another plaintiff in Washington state, but the parties ultimately agreed to a stipulated dismissal after the case was remanded by the Washington Court of Appeals for a determination of whether certain defendants were subject to personal jurisdiction in Delaware. The plaintiff’s law firm then filed a second derivative action in San Francisco in December 2016, but the California court dismissed that complaint because the claims were subject to Blucora’s Delaware forum bylaw. As noted by the Chancery Court, the Delaware complaint thus represented the third rendition of the plaintiff’s identical derivative claims.

Demand not excused. The Chancery Court held, however, that the plaintiff failed adequately to plead demand excusal and, in any event, failed to plead viable claims upon which relief could be granted. The court stated that under the applicable Rales test, the complaint raised no reasonable doubt that at least five of the eight members of the relevant board were disinterested, independent and fully capable of exercising their business judgment when considering a pre-suit demand.

Among other things, the court rejected arguments that certain members of the board had improperly prejudged the merits of the plaintiff’s claims because they were directors when Blucora filed a Form 10-Q with the SEC expressing the belief that the claims brought in the California action were "without merit" and the company’s intent to "vigorously defend" the lawsuit. The Chancery Court cited its opinion in Highland Legacy Ltd. v. Singer (Del. Ch. 2006), where Vice Chancellor Lamb stated that it would be unreasonable for the court to conclude that a board made up of a majority of independent directors could not be asked to pursue litigation simply because the company publicly announced that it believed the suit lacked merit.

Failure on the merits. Although noting that the claims required dismissal simply based on the failure to plead demand futility, the court addressed the claims on their merits "for the sake of completeness." The Chancery Court found that the claims arising from the Monoprice acquisition and share repurchases were barred by laches. The court observed that the claims were not only time-barred by the applicable statutes of limitations, but the consequences of the plaintiff’s deliberate litigation tactics exposed the actual prejudice. By filing actions in Washington and California asserting the very same claims he eventually was forced to bring in Delaware, the plaintiff gambled and lost, not once but twice, while forcing the defendants to defend in the wrong fora every step of the way. "This amounts to prejudice," the court opined.

Moreover, the complaint also failed to plead bad faith on the part of the Blucora board with respect the HD Vest acquisition. Although the plaintiff alleged that the board's reliance upon the work of its financial adviser reflected an "intentional dereliction of duty" and "conscious disregard of red flags," the complaint failed to plead facts to support the allegation that the structure of the fee agreement resulted in the adviser manipulating its financial analysis to inflate its valuation and thereby earn a higher fee. "The bottom line is Plaintiff would have the Court second-guess the Board’s informed decision to acquire HD Vest even though he has pled no facts to suggest that the Board had any interest in the transaction other than pursuing the best interests of Blucora stockholders. Our fiduciary duty law does not work that way," stated the court.

The case is No. 2017-0837-JRS.

Attorneys: Chad J. Toms (Whiteford, Taylor & Preston LLC), Ian S. Birk (Keller Rodrback, L.L.P.), and Chelsey L. Mam (Gordon Tilden Thomas & Cordell) for Jeffrey I. Tilden. A. Thompson Bayliss (Abrams & Bayliss LLP) and Daniel J. Dunne (Orrick, Herrington & Sutcliffe LLP) for John E. Cunningham, IV, David H.S. Chung, Lance Dunn, Steve W. Hooper, Elizabeth J. Huebner, Christopher Walters, and Mary Zappone. D. McKinley Measley (Morris, Nichols, Arsht & Tunnell LLP) and Christopher B. Durbin (Cooley LLP) for William J. Ruckelshaus. Rudolf Koch (Richards, Layton & Finger, P.A.) and Paul H. Beattie (Rimon P.C.) for GCA Advisors, LLC. Garrett B. Moritz (Ross Aronstam & Moritz LLP) and Peter L. Simmons (Fried, Frank, Harris, Shriver & Jacobson LLP) for Cambridge Information Group, Inc., Cambridge Information Group I, LLC, Andrew M. Snyder, and George Allen. Bradley D. Sorrels (Wilson Sonsini Goodrich & Rosati, P.C.) for Blucora, Inc.

Companies: Blucora, Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers DelawareNews

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