Enzo Biochem, Inc. v. Harbert Discovery Fund, LP
| Decision Date | 09 December 2021 |
| Docket Number | 20-cv-9992 (PAC) |
| Parties | ENZO BIOCHEM, INC., Plaintiff, v. HARBERT DISCOVERY FUND, LP, HARBERT DISCOVERY CO-INVESTMENT FUND I, LP, HARBERT FUND ADVISORS, INC., HARBERT MANAGEMENT CORP., and KENAN LUCAS, Defendants. |
| Court | U.S. District Court — Southern District of New York |
ENZO BIOCHEM, INC., Plaintiff,
v.
HARBERT DISCOVERY FUND, LP, HARBERT DISCOVERY CO-INVESTMENT FUND I, LP, HARBERT FUND ADVISORS, INC., HARBERT MANAGEMENT CORP., and KENAN LUCAS, Defendants.
No. 20-cv-9992 (PAC)
United States District Court, S.D. New York
December 9, 2021
OPINION & ORDER
HONORABLE PAUL A. CROTTY UNITED STATES DISTRICT JUDGE
After the Court granted in part and denied in part Defendants' motion to dismiss Plaintiff Enzo Biochem, Inc.'s claims under Section 14(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder, Defendants Harbert Discovery Fund, LP and Harbert Discovery Co-Investment Fund I, LP (collectively, "HDF") answered and asserted six counterclaims (the "Counterclaims") against Enzo and several of its individual directors (collectively, "Enzo").
Enzo now moves to dismiss the Counterclaims pursuant to Rules 12(b)(1), 12(b)(6), and 23.1 of the Federal Rules of Civil Procedure. For the reasons set forth below, the motion is GRANTED in part, and DENIED in part.
BACKGROUND
Because the Court has already issued a detailed ruling in this matter, [1] it presumes
familiarity with the general background of this litigation. It thus includes here only a recitation of the allegations in the Counterclaims. All well-pleaded allegations are presumed true for purposes of this Order.
a. Enzo's Corporate Governance
HDF's Counterclaims arise from a series of actions that Enzo's board of directors (the "Board") allegedly took to preserve power over the company, to the detriment of its largest shareholder, HDF. (See Ans. & Counterclaims ¶ 18, ECF No. 35.) The five-person Board, which for decades was "dominated" by brothers-in-law and individual counterclaim-defendants Elazar Rabbani (Enzo's Chairman and CEO) and Barry Weiner (Enzo's President, and formerly its CFO and Executive Vice President), currently consists of individual counterclaim-defendants Rabbani, Rebecca Fischer, Dov Perlysky, Mary Tagliaferri, and Ian Walters. (Id. ¶¶ 1, 18-28.) Perlysky, whom Enzo describes as "lead independent director," is a "longtime family friend" of Rabbani and has served on the Board since 2012. (Id. ¶ 24.) Individual counterclaim-defendants Weiner and Bruce Hanna are former directors; Weiner served from 1977 until March 2020, and Hanna from January 2017 until February 2020. (Id. ¶ 21, 23.) Enzo is a New York corporation with its principal place of business in New York City. (Id. ¶ 19.)
b. 2019 Proxy Season
Like Enzo's claims, many of HDF's grievances concern events from the 2019 Proxy Season. At that time, the Board consisted of Rabbani, Weiner, Perlysky, Hanna, and Fischer.[2]
(Ans. & Counterclaims ¶ 28.) Believing fresh leadership could jumpstart Enzo's recent lackluster performance, HDF nominated two "highly qualified independent" candidates for the Board- Fabian Blank and Peter Clemens (the "HDF Nominees")-to supplant Weiner and Hanna, each of whom was up for reelection at the 2019 Annual Meeting. (Id. ¶¶ 29-37.) Enzo opposed the HDF Nominees and threw its support behind Weiner and Hanna. (Id. ¶ 37.)
On December 5, 2019, Enzo announced the 2019 Annual Meeting would take place on January 31, 2020. (Ans. & Counterclaims ¶ 37.) In the interim, both camps waged aproxy contest through a series of public statements and rebuttals. (Id. ¶¶ 40-41.) To this end, Enzo stated in its December 5 Schedule 14A filing that (1) Clemens "appears to be a home-town friend of [HDF] from Alabama"; (2) HDF "Seeks Fire Sale of Company at Depressed Prices"; and (3) HDF had "No Plan" for Enzo. (Id. ¶ 115.) In the following month's filing, Enzo added that HDF "has no experience with investments in Healthcare." (Id. ¶ 116.)
As January 31, 2020 approached, the HDF Nominees emerged as overwhelming favorites in the looming Board election, backed by the three leading proxy advisory firms and a comfortable majority of shares voted as of January 28, 2020. (Ans. & Counterclaims ¶¶ 42-46.) In response, Enzo issued a press release after close of market on January 28, 2020 announcing several "changes to the agenda" of the 2019 Annual Meeting. (Id. ¶ 47; Ex. A at 4, ECF No. 35-1.) The changes included: (1) a proposed amendment to the By-Laws that would add a sixth director to the Board; (2) Hanna's announced resignation from the Board; and Enzo's proposal that shareholders (3) elect both HDF Nominees and (4) re-elect Weiner to the newly-created sixth Board seat. (Ex. A at 4.) Enzo explained it was "taking these actions today to provide shareholders with additional choices" should an "amicable resolution" with HDF prove impossible. (Id. at 5.) The proposed Board expansion, it continued, reflected the "feedback and desire of Enzo's shareholders." (Ans. &
Counterclaims ¶ 52.) Finally, because it was "required to file and mail a proxy supplement" to shareholders and allow them "sufficient time to review those proxy materials," Enzo announced it had decided to "delay" the Annual Meeting until February 25, 2020. (Ex. A at 5.)
At 7:07 a.m. on January 31, 2020, however, Enzo filed a proxy statement announcing that the Annual Meeting would in fact be convened (and immediately adjourned) at 9:00 a.m. that day at the Yale Club in New York City. (Ans. & Counterclaims ¶ 56; Ex. B at 6, ECF No. 35-2.) In the proxy statement, Enzo reiterated its rationales for the delay, adding that both the proposed Board expansion and Weiner's re-election enjoyed the Board's unanimous support, and that the Board was "not opposing" the HDF Nominees. (Ex. B at 5-6.) It also explained that because the provision fixing the number of directors at five had been "inadvertently added" to a section of the By-Laws requiring a supermajority vote to amend, the Board expansion would require only a simple majority to pass. (Ans. & Counterclaims ¶¶ 62-69; Ex. B at 13.)[3]
The eleventh-hour announcement that the Annual Meeting would convene and adjourn, was, per HDF, "designed to ensure that no stockholder attended the 2019 Annual Meeting on January 31, so that the Company could buy itself more time to save Weiner's Board seat." (Ans. & Counterclaims ¶ 57.) Under Enzo's By-Laws, the absence of shareholders would permit the company to unilaterally adjourn the Annual Meeting. (Id. ¶ 58.) According to HDF, the plan worked to perfection: given less than two hours' notice, Alabama-based HDF was unable to make
it to the meeting, as were other stockholders who had "canceled their plans to attend" upon the January 28 announcement. (Id. ¶ 58.) HDF claims that, "[h]ad the Company not falsely stated that the 2019 Annual Meeting was delayed, HDF would have attended the 2019 Annual Meeting on January 31, prevented the meeting's adjournment, and elected its two nominees, as HDF possessed sufficient proxies to do so." (Id. ¶ 60.) Instead, Enzo was able to adjourn, and HDF was forced to incur additional expenses responding to Enzo's misstatements and fighting a now-prolonged proxy battle. (Id. ¶ 125.) The three leading proxy advisor services criticized Enzo's actions as "brazen" and "deceptive" attempts to "further entrench ineffective directors." (Id. ¶ 77.)
Shareholders apparently did not view Enzo's proposals any more favorably. When the reconvened 2019 Annual Meeting went forward as scheduled on February 25, 2020, only 11.7 million shares were voted in favor of the proposed Board expansion amendment, with 21.7 million shares voted against. (Ans. & Counterclaims ¶¶ 79-80.) The HDF Nominees were comfortably elected. (Id. ¶ 79; Ex. H at 8, ECF No. 35-8.) Without a sixth Board seat for him to occupy, Weiner's re-election bid failed. (Ex. H at 8.)
c. HDF Nominees' Tenure
Upon their election to the Board, the HDF Nominees were met with resistance. First, Weiner, Enzo's president and newly-ousted director, denied the HDF Nominees' request to visit the Enzo laboratory while they were still in New York (before returning to their respective homes in Tennessee and Germany) for the 2019 Annual Meeting. (Ans. & Counterclaims If 82.) Later, they were accused of "disloyalty" for directly communicating with HDF, [4] and in May 2020, the Board implemented a policy prohibiting individual directors from speaking to shareholders
without the full Board's participation. (Id. ¶¶ 86, 91.) In addition to open hostility from other directors, and pretextual demands to submit materials contrived to create opportunities for their colleagues to impugn their qualifications, the HDF Nominees found their attempts to on board and learn about the company consistently undermined. (Id. ¶¶ 86-90.)
On November 9 and 10, 2020, after serving for less than nine months, both HDF Nominees resigned from the Board. (Ans. & Counterclaims ¶ 93.) HDF alleges it was "surprised" by these resignations and that, based on their "timing and unexpected nature," it "believes that Rabbani had created such an extremely hostile environment in the boardroom that the HDF Nominees found their position untenable." (Id. ¶¶ 93-94.) Although appointing new directors usually takes at least a month, the HDF Nominees were replaced on November 17, 2020 and November 25, 2020 by, respectively, Tagliaferri and Walters. (Id. ¶¶ 95-96.) HDF alleges the availability of these replacements "on apparent standby" confirms that the other directors had planned all along to force the HDF Nominees out. (Id. ¶ 96.)
d. Litigation
The lion's share of these events occurred as Enzo and HDF were already litigating their disputes. On February 5, 2020, HDF brought an action against Enzo and its then-directors in this District seeking to prevent any further delays of the 2019 Annual Meeting. (Ans. & Counterclaims ¶ 73.)[5] In July 2020, just prior to Enzo filing its motion to dismiss, HDF voluntarily dismissed its claims without prejudice to avoid "the unnecessary burden and expense of litigation." (Id. ¶ 92.)
In November 2020, Enzo initiated the instant action against HDF. (Ans. & Counterclaims ¶ 98.) HDF...
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