McPadden v. Sidhu, Civil Action No. 3310-CC.
| Citation | 964 A.2d 1262 |
| Decision Date | 29 August 2008 |
| Docket Number | Civil Action No. 3310-CC. |
| Parties | John P. McPADDEN, Sr., Plaintiff, v. Sanjiv S. SIDHU, Stephen Bradley, Harvey B. Cash, Richard L. Clemmer, Michael E. McGrath, Lloyd G. Waterhouse, Jackson L. Wilson, Jr., Robert L. Crandall and Anthony Dubreville, Defendants, and i2 Technologies, Inc., Nominal Defendant. |
| Court | Court of Chancery of Delaware |
CHANDLER, Chancellor.
Though what must be shown for bad faith conduct has not yet been completely defined,1 it is quite clearly established that gross negligence, alone, cannot constitute bad faith.2 Thus, a board of directors may act "badly" without acting in bad faith. This sometimes fine distinction between a breach of care (through gross negligence) and a breach of loyalty (through bad faith) is one illustrated by the actions of the board in this case.
In June 2005, the board of directors of i2 Technologies, Inc. ("i2" or the "Company") approved the sale of i2's wholly owned subsidiary, Trade Services Corporation ("TSC"), to a management team led by then-TSC vice president, defendant Anthony Dubreville ("Dubreville") for $3 million. Two years later, after first rejecting an offer of $18.5 million as too low just six months after the sale, Dubreville sold TSC to another company for over $25 million. These transactions engendered this lawsuit and the motions to dismiss presently before me. Plaintiff alleges that the Company's directors caused the Company to sell TSC to Dubreville's team for a price that the directors knew to be a mere fraction of TSC's fair market value.
Plaintiff utilized a section 220 books and records demand to investigate the TSC sale. He later initiated this action on behalf of i2 to recover the losses it sustained as a result of the alleged bad faith conduct of the board and Dubreville. Plaintiff alleges that demand is excused for futility because the board's approval of the sale was not a proper exercise of business judgment. In his complaint, plaintiff alleges two causes of action. First, he asserts a breach of fiduciary duty claim against the directors who approved the sale of TSC and against Dubreville. Second, plaintiff alleges unjust enrichment against Dubreville alone. All defendants, including nominal defendant i2, together move to dismiss plaintiff's complaint pursuant to Chancery Rule 12(b)(6) for failure to state a claim and Chancery Rule 23.1 for failure to plead particularized facts excusing plaintiff's failure to make a demand upon the board.
Nominal defendant i2, a Delaware corporation headquartered in Dallas, Texas, sells supply chain management software and related consulting services. i2's charter includes an exculpatory provision, which protects i2's directors from liability to the fullest extent under Delaware law. The Company operated a division known as the Content and Data Services Division ("CDSD"), which included both TSC and another subdivision known as CDS. TSC occupied a niche market unrelated to i2's main line of business.
Defendants Sanjiv S. Sidhu ("Sidhu"), Stephen Bradley ("Bradley"), Harvey B. Cash ("Cash"), Richard L. Clemmer ("Clemmer"), Michael E. McGrath ("McGrath"), Lloyd G. Waterhouse ("Waterhouse"), Jackson L. Wilson, Jr. ("Wilson"), and Robert L. Crandall ("Crandall" and, together, the "Director Defendants") were or still are members of the i2 board of directors. All Director Defendants approved the 2005 sale of TSC. Of these directors, defendants Cash, Crandall, Clemmer, Bradley, Waterhouse, and Wilson were members of the board's special committee that was charged with reviewing the Sonenshine fairness opinion. Defendant Dubreville was not a director of i2; he was vice president of CDCS, which, as described above, was a division of i2 that included TSC.
The gravamen of plaintiff's complaint is that i2's directors caused the Company to sell TSC, its wholly owned subsidiary, to members of TSC's management in bad faith for a price that defendants knew was a fraction of TSC's fair market value.
In early 2001, i2 acquired TSC and a related company for $100 million. By that time, Dubreville was CEO and president of TSC. After i2's acquisition of TSC, Dubreville remained in charge of TSC. By late 2004 or early 2005, i2 decided to sell TSC after determining that TSC was a non-core business that should be divested.
In June 2002, Dubreville caused TSC to sue VisionInfoSoft and its sister company, Material Express.com, (together, "VIS/ME"), competitors of TSC, for copyright infringement. In 2002 and 2003, while the copyright litigation was pending, VIS/ME inquired about purchasing TSC, apparently for the purpose of resolving the lawsuit. On July 12, 2002, VIS/ME's chairman, Earl Beutler ("Beutler"), sent certified letters to i2 directors, including Sidhu, Cash, and Crandall, informing them that VIS/ME had made several inquiries regarding its interest in acquiring TSC, communicating VIS/ME's strong interest so the board would be aware of it before approving a sale to another party, and suggesting that VIS/ME was prepared to outbid other offerors. On July 27, 2002, i2's vice president, Mike Short ("Short"), telephoned Beutler in response to this letter.
On July 27, 2002, in response to Short's call, Beutler wrote Short a letter stating that he decided to again inquire about the possibility of purchasing TSC and that he also had contacted i2's CFO, but had received no response. Beutler also stated that:
"We have heard rumors that i2 was considering a sale of [TSC] (in fact, we have learned that Anthony Dubreville announced to [TSC] employees that he was planning to purchase the company; he then filed what we believe to be a meritless lawsuit against our companies so that he could use the i2 resources to weaken a competitor and then purchase a stronger company)."4
This is why, Beutler wrote, he was contacting the i2 board. If such a sale was being discussed, he thought that VIS/ME would gain the most value from an acquisition of TSC because of overlap between TSC and VIS/ME customers and products. On July 30, 2002, Short e-mailed Beutler that Short would respond soon. On September 16, 2002, Beutler e-mailed Short and stated that he remained interested in TSC, if and when i2 wanted to sell it. On September 17, 2002, Short e-mailed Beutler stating that i2 was not interested in selling TSC at that time. In that message, Short informed Beutler that Short was leaving i2 and that any further inquiries should be directed to Antonio Boccalandro.
In January 2003, Beutler sent a letter to Sidhu and i2's CFO stating that VIS/ME would be willing to pay up to $25 million for TSC. The letter repeated that there was significant organizational overlap between TSC and VIS/ME, and that Beutler believed the combined operations would produce significant additional cash flow within a short period of time. The i2 board discussed TSC—its business and its effect on i2—at a meeting held a few days later. Director defendants Sidhu, Cash, and Crandall attended the meeting. Later, in June 2004, TSC and VIS/ME settled their copyright infringement dispute with VIS/ME agreeing to pay quarterly licensing fees to TSC. In late 2004, Dubreville contacted VIS/ME's president and CEO to discuss Beutler's January 2003 letter.
Plaintiff alleges a litany of actions purportedly taken by Dubreville (and allegedly permitted by the Director Defendants) to drive down the earnings of TSC, including incurring unnecessary expenses (such as leasing twice the necessary office space); artificially depressing TSC's EBITDA through use of a printing company that Dubreville partially owned (and thereby reaping windfall profits); and causing TSC to incur significant legal expenses in its copyright dispute with VIS/ME though the new owners of TSC (once it was sold in June 2005) were permitted to retain the benefits of the settlement.
In November 2004, i2 conducted a review of CDSD. Dubreville headed CDSD, which included TSC and the other subdivision, CDS. Under Dubreville's direction, CDSD prepared a presentation that included projections of TSC's FY 2005 revenue at $16 million, which was an increase of 2% over FY 2004, and FY 2006 revenue of $16.8 million. This presentation also stated that operational costs reflected in TSC's accounting records included costs attributable to the other business unit in CDSD (i.e., CDS), and recommended a restructuring of the internal reporting system to more accurately track business unit performance.
Plaintiff alleges that these inaccurate allocations enabled Dubreville to make TSC's earnings appear lower than they actually were and that, though not disruptive to day to day operations, such improper cost allocations negatively impacted TSC's value when it was sold.
In December 2004, the i2 board decided to sell TSC. An offering memorandum was prepared in January 2005 to convey information about TSC to prospective purchasers. At a board meeting on February 1, 2005, i2's investment banker, Sonenshine Partners ("Sonenshine"), gave a presentation that included various options for the sale of TSC. One of these options was to sell TSC for $4.2 million to TSC employees. At this...
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