Opinion
Consolidated C.A. No. 12698-VCS
07-12-2019
Re: In re Xura, Inc. Stockholder Litigation
A. Thompson Bayliss, Esquire
Abrams & Bayliss LLP
20 Montchanin Road, Suite 200
Wilmington, DE 19807 John L. Reed, Esquire
DLA Piper LLP (US)
1201 N. Market Street, Suite 2100
Wilmington, DE 19801 Robert S. Saunders, Esquire
Skadden, Arps, Slate,
Meagher & Flom LLP
One Rodney Square
Wilmington, DE 19801 Marcus E. Montejo, Esquire
Prickett, Jones & Elliott, P.A.
1310 King Street
Wilmington, DE 19801 Rudolf Koch, Esquire
Richards, Layton & Finger, P.A.
920 North King Street
Wilmington, DE 19801 Dear Counsel:
As you know, this case arises from the merger of Xura, Inc. and an affiliate of Siris Capital Group, LLC (the "Merger"). The Merger has prompted certain Xura stockholders to seek statutory appraisal of their Xura stock in this Court. One of those stockholders, Obsidian Management LLC, filed a separate complaint in this Court (the "Obsidian Complaint") in which it raised breach of fiduciary duty claims related to the Merger against Xura's CEO, Philippe Tartavull, and aiding and abetting breach of fiduciary duty claims against Siris, Frank Baker, a Siris Managing Partner, and Michael Hulslander, also a principal of Siris (collectively the "Siris Defendants"). On December 10, 2018, the Court granted the Siris Defendants' motion to dismiss Obsidian's aiding and abetting claims but denied the motion to dismiss brought by Tartavull (the "Obsidian Opinion"). The facts relating to the Merger and Obsidian's claims against those involved in consummating the transaction are spelled out in detail in the Obsidian Opinion.
In re Xura, Inc. S'holder Litig., 2018 WL 6498677 (Del. Ch. Dec. 10, 2018).
Ten days after the Court issued the Obsidian Opinion, another appraisal petitioner, Istvan Szoke, filed a complaint in this Court (the "Szoke Complaint") that is nearly identical to the Obsidian Complaint raising the same claims against the same defendants named by Obsidian, including the Siris Defendants. Unlike Obsidian, however, Szoke purports to bring his claims on behalf of a class of Xura stockholders. In doing so, he acknowledges that he read the Obsidian Opinion, took note of the pleading deficiencies identified by the Court with respect to the aiding and abetting claim and then attempted to cure those deficiencies with additional pled facts in his complaint.
The Siris Defendants are not pleased. They believed they had achieved a dismissal with prejudice and yet they now face another round of litigation relating to the same Merger-related conduct at issue in the Obsidian Opinion. They have moved to dismiss. Not surprisingly, their lead-off argument is that Szoke's aiding and abetting claim is barred by res judicata. In this regard, they point out that Szoke and Obsidian's principal are close friends and both Szoke and Obsidian have joined together with a select few other Xura stockholders to seek appraisal. Szoke and Obsidian are represented by the same counsel and there appears to have been some degree of coordination between the litigants. According to the Siris Defendants, these connections justify a finding that Szoke is bound by the Court's disposition of the claims against the Siris Defendants in the Obsidian Opinion. Alternatively, the Siris Defendants urge the Court to adhere to stare decisis by finding that all of the claims and issues raised by Szoke have been decided in the Obsidian Opinion.
It is tempting to take on the Siris Defendants' res judicata argument. The filing of the Szoke Complaint on the heels of the Court's dismissal of Obsidian's aiding and abetting claim raises legitimate concerns that may justify claim preclusion. But I need not go there for the simple reason that I am satisfied Szoke, like Obsidian, has failed to state a viable aiding and abetting claim against the Siris Defendants. For that reason, the Siris Defendants' motion to dismiss must be granted.
The Siris Defendants have also moved for fees on the ground that Szoke has engaged in bad faith litigation conduct in bringing claims against the Siris Defendants that are nearly identical to those dismissed in the Obsidian Opinion. I do not see it that way. First, Szoke is purporting to represent a class of Xura stockholders. He arguably had a duty to his fellow stockholders to take a shot at the aiding and abetting claim again. Second, Szoke has added allegations in his complaint that were not pled in the Obsidian Complaint. That I have ultimately determined those allegations are inadequate to state an aiding and abetting claim does not mean that Szoke acted in bad faith in asserting the claims to begin with.
I note that Tartuvall has filed a motion to dismiss the Szoke Complaint as well. Because Szoke's claims against him mirror those found to have been adequately pled by Obsidian, I denied that motion summarily. (D.I. 388).
Szoke's complaint presents the same theories of aiding and abetting that were advanced in Obsidian's complaint. Specifically, Szoke alleges the Siris Defendants aided and abetted Tartavull (and perhaps other Xura fiduciaries) (collectively, the "Xura Fiduciaries") in breaching their fiduciary duties because Siris consummated the Merger after: (i) knowing that Tartuvall had steered Xura into an underpriced transaction with Xura, (ii) knowing that Xura stockholders were "dissatisfied with Tartavull and that his hold on his CEO role was slipping," and then "knowingly exploit[ing]" this conflict by "deliberately induc[ing] Tartavull to believe that he would be CEO of the Company after the Merger," (iii) knowing that Francisco Partners had approached Xura about a transaction and was diverted by the Xura Fiduciaries to join Siris on the buy-side of the Merger, and (iv) facilitating the Xura Fiduciaries' allegedly inadequate public disclosures to Xura stockholders about the Merger. As noted, I determined in the Obsidian Opinion that the plaintiff there had not well-pled facts that would support any of these aiding and abetting theories.
See Szoke Compl. ¶¶ 83-84, 90, 101-104, 107, 139-140.
The following chart, borrowed from the Siris Defendants' Opening Brief, lays out the allegations borrowed from the Obsidian Complaint, highlights the new aiding and abetting allegations in the Szoke Complaint (as underlined), and then compares these allegations to the findings of inadequate pleading identified in the Obsidian Opinion:
| Pleading Deficiency Identified in theObsidian Plenary Complaint | Redline Excerpt Showing NewAllegation in the Szoke Complaint |
|---|---|
| "Plaintiff conspicuously stops short ofalleging any precedent facts, even oninformation and belief, from which apleading stage adverse inference couldbe drawn that Tartavull told orotherwise indicated to Siris that he wasin danger of losing his job if theTransaction fell through or that he wasmotivated to steer Xura into theTransaction for self-interested reasons."(Mem. Op. at 40) | "On information and belief, Siris knewthat major Xura stockholders hadexpressed displeasure with Tartavull'sperformance and that Tartavull's holdon his job was slipping." (SzokeCompl. ¶ 83; Ex. 1, new ¶ 83)"On information and belief, Sirisdeliberately induced Tartavull tobelieve that he would be CEO of theCompany after the Merger and wouldreceive lucrative employment benefits.By doing so, Siris knowingly exploitedTartavull's conflict to secure an ally onthe inside and to obtain informationfrom Tartavull that it could use againstthe Company and drive down thetransaction price." (Szoke Compl. ¶ 84;Ex. 1, new ¶ 84)"On information and belief, Baker,Hulslander and Siris knew that Xura'sstockholders and its board weredissatisfied with Tartavull and that his |
| hold on his CEO role was slipping."(Szoke Compl. ¶ 139; Ex. 1, new ¶ 139)"Baker, Hulslander, and Siris eachknowingly participated in Tartavull's | |
|---|---|
| "Plaintiff has not alleged anything tosupport its conclusory allegation that'[t]he Siris Defendants knew thatFrancisco Partners had expressedinterest and [were] diverted to the buy-side of the transaction.'" (Mem. Op.at 43) | "But Francisco Partners did not bid.Instead, it somehow learned that Siriswas Xura's counterparty. Oninformation and belief, Tartavull toldFranscico [sic] Partners that Siris wasthe Company's counterparty. Instead ofsubmitting a competing proposal andbidding against a rival private equityfirm, Francisco Partners reached out toSiris about a potential co-investment onthe buy-side of the transaction. Oninformation and belief, Siris signaled toFrancisco Partners that it was open tobuy-side participation to avoid abidding war, but it told FranciscoPartners that it would need to obtainapproval from Xura before officiallybeginning discussions about a buy-side |
| partnership." (Szoke Compl. ¶ 90; Ex.1, new ¶ 90) | |
|---|---|
| "Plaintiff's allegations that Sirissomehow aided and abetted in theBoard's deficient disclosures also fallshort. At the outset, I note that an aidingand abetting claim based on a third-party's alleged failure somehow toprevent a board from providingmisleading disclosures to stockholdersrests on thin ice. Yet that is whatPlaintiff alleges here. It has pled no factsto support an inference that Sirisknowingly facilitated alleged disclosuredeficiencies or otherwise 'knowinglyparticipated" in that aspect of thealleged breach of fiduciary. Instead, atbest, Plaintiff alleges (albeit summarily)that Siris knew certain facts and knewthat the Board was not disclosing thosefacts to stockholders." (Mem. Op. at42-43)"I note Plaintiff alleges Siris Defendantsaided and abetted the purporteddisclosure deficiencies for the first timein its Answering Brief. ... TheComplaint simply claims SirisDefendants aided and abetted a breachof fiduciary duty 'by engaging in directand improper communications withTartavull throughout the negotiationsthat led to the Merger.' ... This alone is | "Shortly after the execution of theMerger Agreement, Xura and Sirispersonnel began working on a draft ofthe Proxy. On information and belief,Xura and Siris exchanged multipledrafts of the Proxy, and advisers forboth sides were intimately involved inthe drafting process. On informationand belief, Xura and Siris personnelcarefully reviewed and approved eachportion of the Proxy, including the"Background of the Merger" section ofthe document. On information andbelief, both Baker and Huslander [sic]were given the opportunity to commenton the Proxy, and both approved itbefore it was issued." (Szoke Compl.¶ 101; Ex. 1, new ¶ 101)"On July 12, 2016, Xura issued theProxy. |
| enough to disregard the claim." (Mem.Op. at 42 n.147 (citation omitted))"In any event, with regard to the specificdisclosure violations Siris allegedlyaided and abetted Xura in committing,Plaintiff has not alleged anything tosupport its conclusory allegation that'[t]he Siris Defendants knew thatFrancisco Partners had expressedinterest and [were] diverted to the buy-side of the transaction.'" (Mem. Op.at 43 (alterations in original; citationomitted)) | fact that Xura contacted '26 prospectivebuyers' and that '[n]one of the partiescontacted during the go-shop process...submitted an Acquisition Proposal tothe Company.' On information andbelief, Siris and Xura jointly determinedthat the Proxy should not include anyreference to Francisco Partners."(Szoke Compl. ¶ 102 (alteration inoriginal); Ex. 1, new ¶ 102)"The Proxy also failed to mention anumber of meetings and directcommunications between Tartavull andSiris, including the February 24, 2016meeting at which they discussed priceand other sensitive topics. As a result,the Proxy painted an inaccurate pictureof the nature and frequency ofcommunications between Tartavull andSiris. On information and belief, Sirispersonnel commented on the Proxy'sportrayal of the negotiating process andwere intimately involved in determiningwhat should and should not bedisclosed." (Szoke Compl. ¶ 103; Ex. 1,new ¶ 103)"The Proxy described the StrategicCommittee as a committee the boardcreated to 'review, evaluate andnegotiate the terms of a potentialtransaction with Siris and to makecertain decisions between meetings ofthe board of directors.' On information |
|---|
| and belief, Xura and Siris jointlydetermined to describe the Strategy[sic] Committee in this way. But in fact,as both the Company and Siris knewperfectly well, the Strategic Committeenever met with Siris, never took formalaction, and was just a forum in whichTartavull raised questions or concernsabout the business generally." (SzokeCompl. ¶ 104; Ex. 1, new ¶ 104)"On information and belief, personnelfrom Xura and Siris jointly developedthe Supplemental Proxy. Baker andHulsander [sic] were afforded theopportunity to comment on theSupplemental Proxy, and, oninformation and belief, they approvedthe Supplemental Proxy before it wasissued." (Szoke Compl.¶ 107; Ex. 1, new ¶ 107)"Baker, Hulslander, and Siris eachknowingly participated in Tartavull's |
|---|
What is clear from this comparison is that Szoke has attempted to plug in the pleading gaps the Court identified in the Obsidian Opinion principally with allegations based "on information and belief." This is so even though Szoke, and his counsel, have had access to a fully developed discovery record in the Obsidian appraisal and fiduciary duty actions for months. Pleading serial facts "on information and belief" is no substitute for well-pled facts that will support a reasonable inference of wrongdoing.
Fact discovery in this consolidated action is complete or nearly complete. Trial will commence on October 7, 2019.
See In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *4 n.28 (Del. Ch. Oct. 17, 2007) ("[i]f a complaint were held sufficient simply because it restates the legal elements of a particular cause of action, Rule 8(a) would be rendered meaningless. Plaintiffs need not offer prolix tales of abuse belabored by needless details, but plaintiffs must allege facts sufficient to show that the legal elements of a claim have been satisfied."), aff'd sub nom. Int'l Bhd. Teamsters v. Coca-Cola Co., 954 A.2d 910 (Del. 2008); Aveta Inc. v. Cavallieri, 23 A.3d 157, 181 (Del. Ch. 2010) (dismissing complaint on stare decisis grounds upon concluding that the new complaint did not plead new facts "beyond what [was] previously considered.").
What is lacking in the Szoke Complaint is what was lacking in the Obsidian Complaint—well-pled allegations that Siris "knowingly participated" in the Xura Fiduciaries' alleged breaches of fiduciary duty. "Knowing participation" means just that—the alleged aider and abettor must know the fiduciary is breaching his fiduciary duty and then must participate, in some way, in that breach. The Szoke Complaint, like the Obsidian Complaint, falls short on both fronts. First, there are no well-pled allegations that, as it negotiated and eventually consummated the Merger, Siris (and its negotiators) knew: (1) Tartuvull would be terminated as CEO but for the Merger such that they could exploit that fact (by offering post-Merger employment) to provoke Tartuvull to facilitate their low ball offer; (2) the Xura Fiduciaries had directed Francisco Partners to withdraw its expression of interest to acquire Xura on its own so that it could join Siris in its bid; or (3) Xura had failed to provide adequate disclosures regarding the Merger to its stockholders. Second, there are no well-pled allegations that the Siris Defendants "participated" in any breach of fiduciary duty by giving "substantial assistance or encouragement" to any of the Xura Fiduciaries. In this regard, it is not enough to allege that Siris drove a hard bargain. Instead, Szoke was obliged to allege facts that would allow a reasonable inference that the Siris Defendants took steps to assist the Xura Fiduciaries in breaching their fiduciary duties knowing that the breaches were occurring and knowing that they were assisting in those breaches. The Szoke Complaint falls short of this mark.
Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. 2001).
Binks v. DSL.net, Inc., 2010 WL 1713629, at *10 (Del. Ch. Apr. 29, 2010). See also Restatement (Second) of Torts §876 ("For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself").
See In re Volcano Corp. S'holder Litig., 143 A.3d 727, 750 (Del. Ch. 2016) (noting that the standard for pleading the "requisite scienter" in connection with the "knowing participation" element of aiding and abetting imposes a "high burden"), aff'd, 2017 WL 563187 (Del. Feb. 9, 2017) (TABLE); Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116, 131 (Del. Ch. 1986) (dismissing aiding and abetting claim against acquirer based on the acquirer's alleged knowing participation in false disclosures upon finding that plaintiff had not pled that the acquirer knew the disclosures were misleading or that it participated in the fiduciaries' decision to make the disclosures).
See Restatement (Second) of Torts §876(b); see also Malpiede, 780 A.2d at 1097 n.78 (citing Restatement (Second) of Torts §876(b) with approval); Prairie Capital III, LP v. Double E Hldg. Corp., 132 A.3d 35, 63 (Del. Ch. 2015) (same).
See Tomczak v. Morton Thiokol, Inc., 1990 WL 42607, at *16 (Del. Ch., Apr. 5, 1990) ("Although Dow's purchases certainly had the effect of putting economic pressure on Morton Thiokol, what Dow essentially did was to simply pursue arm's-length negotiations with Morton Thiokol through their respective investment bankers in an effort to obtain Texize at the best price that it could."); Weinberger v. United Fin. Corp. of Cal., 1983 WL 20290, at *13 (Del. Ch., Oct. 13, 1983) (refusing to impose liability on sponsor of a tender offer who negotiated aggressively with target at arm's-length to obtain the best price possible).
For the reasons stated in the Obsidian Opinion, I reject again the argument that the Court should draw adverse inferences at the pleadings stage against the Siris Defendants based on the Szoke Complaint's allegations of spoliation of evidence. The Obsidian Opinion held that Obsidian had "conspicuously stop[ped] short of alleging any precedent facts, even on information and belief, from which a pleading stage adverse inference could be drawn that Tartavull told or otherwise indicated to Siris that he was in danger of losing his job if the Transaction fell through or that he was motivated to steer Xura into the Transaction for self-interested reasons." In re Xura, Inc. S'holders Litig., 2018 WL 6498677, at *9 n.92 (emphasis added)). As noted in the Obsidian Opinion, the inferences a plaintiff asks the court to draw at the pleading stage must be reasonable and they must be grounded in pled facts. Id. at *9 n.92, *14 n.139. No such reasonable inferences, adverse or otherwise, are supported by any of the new "facts" pled in the Szoke Complaint.
Based on the foregoing, Siris' motion to dismiss the aiding and abetting claim, Count II of the Szoke Complaint, must be granted.
I acknowledge Szoke's letter dated June 24, 2019 (D.I. 417), submitted well after oral argument on this motion, in which Szoke's counsel describes at some length certain documents produced by Francisco Partners, and then states that Szoke intends to file a motion for leave to file a second amended complaint. I also acknowledge, and agree with, the Siris Defendants' June 25, 2019 letter (D.I. 419) in which they point out that Szoke's June 24 letter is an improper substitute for a proper motion for leave to amend. More than two weeks have passed since Szoke's June 24 letter, and he has not filed his motion for leave to amend. Because I have concluded that the June 24 letter is not a proper means by which to amend or supplement a pleading, I have not considered the contents of that letter in deciding this motion.
In light of the close proximity of trial, the Siris Defendants shall respond to all ordered, pending (or agreed to) party discovery as if they remained in this case as parties.
Very truly yours,
/s/ Joseph R. Slights III