Frederick Hsu Living Trust v. Odn Holding Corp.
| Decision Date | 14 April 2017 |
| Docket Number | C.A. No. 12108-VCL |
| Parties | THE FREDERICK HSU LIVING TRUST, Plaintiff, v. ODN HOLDING CORPORATION, OAK HILL CAPITAL PARTNERS III, L.P., OAK HILL CAPITAL MANAGEMENT PARTNERS III, L.P., OHCP GENPAR III, L.P., OHCP MGP PARTNERS III, L.P., OHCP MGP III, LTD., ROBERT MORSE, WILLIAM PADE, DAVID SCOTT, DEBRA DOMEYER, JEFFREY KUPIETZKY, ALLEN MORGAN, LAWRENCE NG, SCOTT JARUS, KAMRAN POURZANJANI, ELIZABETH MURRAY, TOOD H. GREENE, and SCOTT MORROW, Defendants. |
| Court | Court of Chancery of Delaware |
P. Clarkson Collins, Jr., Lewis H. Lazarus, Nicolas Krawitz, MORRIS JAMES LLP, Wilmington, Delaware; Steven Kaufhold, KAUFHOLD GASKIN LLP, San Francisco, CA, Counsel for The Frederick Hsu Living Trust.
William M. Lafferty, Kevin M. Coen, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; David J. Berger, Catherine E. Moreno, WILSON SONSINI GOODRICH & ROSATI, PC, Palo Alto, California, Counsel for Oak Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P., OHCP GenPar III, L.P., OHCP MGP Partners III, L.P., OHCP MGP III, Ltd., Robert Morse, William Pade, and David Scott.
A. Thompson Bayliss, April M. Ferraro, ABRAMS & BAYLISS LLP, Wilmington, Delaware, Counsel for ODN Holding Corporation.
Colm F. Connolly, Jody C. Barillare, MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware; Stephen D. Alexander, Emily L. Calmeyer, MORGAN, LEWIS & BOCKIUS LLP, Los Angeles, California; Timothy D. Katsiff, MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania, Counsel for Debra Domeyer, Jeffrey Kupietzky, Allen Morgan, Scott Jarus, Kamran Pourzanjani, Elizabeth Murray, Todd H. Greene, and Scott Morrow.
Kurt M. Heyman, Samuel T. Hirzel II, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Douglas Fuchs, GIBSON DUNN & CRUTCHER, Los Angeles, California, Counsel for Lawrence Ng.
In 2008, funds sponsored by the venture capital firm Oak Hill Capital Partners1 invested $150 million in Oversee.net, a California corporation. To facilitate the investment, the parties formed ODN Holding Corporation (the "Company") as a holding company for Oversee.net. In return for its cash, Oak Hill received shares of Series A Preferred Stock (the "Preferred Stock") from the Company. Oak Hill had the right to require the Company to redeem its Preferred Stock in 2013.
In 2009, Oak Hill became the Company's controlling stockholder. Initially, little changed. The Company continued to expand through acquisitions and reinvested its capital for growth. Then, in 2011, the Company switched into liquidation mode. It stopped investing for growth, sold two of its four lines of business, and hoarded the resulting cash. When Oak Hill exercised its redemption right in 2013, the Company used as much of its cash as possible for redemptions. When that wasn't enough to redeem the Preferred Stock in full, the Company sold its third line of business and used the resulting cash for more redemptions. The process turned a once-promising company into a shell of its former self.
Frederick Hsu—one of the Company's founders—brought this action against Oak Hill, the Company's board of directors (the "Board"), and certain of the Company's officers. His complaint asserts claims sounding in both law and equity. At law, the complaint contends that the redemptions violated statutory limitations and common law doctrine because the Company lacked sufficient funds legally available to make theredemptions. In equity, the complaint contends that the individual defendants and Oak Hill breached their duty of loyalty by seeking in bad faith to benefit Oak Hill by maximizing the value of Oak Hill's redemption right, rather than by striving to maximize the value of the corporation over the long-term for the benefit of the undifferentiated equity. The Complaint asserts fallback counts against Oak Hill for aiding and abetting breaches of duty by the other defendants, against the directors for waste, and against Oak Hill and the officers for unjust enrichment.
The Complaint fails to state a claim for an unlawful redemption. Because of the capital-generating actions that the individual defendants took, the Company had sufficient funds legally available to make them.
The Complaint states a claim for breach of the duty of loyalty against Oak Hill and all but one of the individual defendants. The Complaint's detailed factual allegations support a reasonable inference that the individual defendants acted in bad faith to benefit Oak Hill by maximizing the value of its contractual redemption right, and the actions of Oak Hill's representatives are attributable to Oak Hill. The allegations support a reasonable inference that the entire fairness standard will apply and that the defendants will be unable to show that their course of conduct was entirely fair. The motions to dismiss the fiduciary duty claims are granted in one respect: defendant Kamran Pourzanjani is dismissed because it is not reasonably conceivable that he will not be entitled to exculpation.
The Complaint states a claim for aiding and abetting against Oak Hill. In the event that Oak Hill is found not to have acted in a fiduciary capacity, Oak Hill could be liable for knowingly participating in the breaches of duty committed by other defendants.
The Complaint fails to state a claim for waste. Although the Complaint supports a reasonable inference the defendants acted in bad faith when selling Company assets, the Company nonetheless received non-trivial consideration. The Complaint accordingly fails to meet the stringent standard required to state a claim for waste.
The Complaint states a claim for unjust enrichment. Oak Hill and the officer defendants received financial benefits from the course of conduct described in the Complaint. If those benefits resulted from breaches of duty, and if the defendants who received the benefits are not liable under a different theory, then the claim for unjust enrichment could serve as a vehicle for the Company to recover some or all of the improperly received benefits.
The facts for purposes of the motions to dismiss are drawn from the well-pled allegations of the Verified Class Action and Derivative Complaint (the "Complaint") and the documents it incorporates by reference. At this stage, the allegations of the complaint are assumed to be true, and the plaintiff receives the benefit of all reasonable inferences.
This decision does not consider documents which the defendants submitted but which the Complaint did not quote or reference. Before filing suit, the plaintiff demanded books and records, thereby heeding the repeated admonition of the Delaware courts.2 TheCompany and the plaintiff entered into a confidentiality agreement, and the plaintiff gained access to corporate minutes and other documents. The defendants claim that the drafters of the Complaint selected certain documents and misconstrued them, while ignoring other documents that contradicted their theories. The defendants ask that the omitted documents be deemed incorporated by reference into the Complaint, citing Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016).
In Yahoo!, after a long and contentious fight over a demand for books and records, I ordered a corporation to produce certain documents. The corporation asked that the production be conditioned on the plaintiff incorporating the documents by reference into any subsequent complaint. I granted the request, relying on the court's authority under Section 220(c) to "prescribe any limitations or conditions with reference to the inspection,or award such other or further relief as the Court may deem just and proper." 8 Del. C. § 220(c); see United Techs. Corp. v. Treppel, 109 A.3d 553, 557-58 (Del. 2014) ().
In this case, there has not been a prior ruling imposing an incorporation-by-reference condition, and the parties did not agree to one. Consequently, the Complaint and the documents it cites or incorporates by reference define "the universe of facts that the trial court may consider in ruling on a Rule 12(b)(6) motion to dismiss." In re Gen. Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006).
Hsu and Lawrence Ng co-founded Oversee.net in 2000. Under their stewardship, Oversee became a "leading provider of technology-based marketing solutions to online publishers and advertisers worldwide." By 2007, the Company's annual revenue exceeded $200 million and its net income exceeded $19 million. At that point, the Company had four lines of business:
• Domain Monetization Services. This business drove Internet traffic derived from the Company's network of owned and managed domain names to online advertisers.
• Vertical Markets. This business provided marketers with leads from personal information collected by the Company's websites.
• Domain Aftermarket Services. This business sold domain names predominantly for third parties.
• Domain Registrar Services. This business charged fees for domain name registration and ancillary services.
Oversee grew internally by developing its own products and externally through acquisitions. During the eighteen-month period leading up to December 2007, Oversee made five acquisitions:
• In June 2006, Oversee paid $8.4 million for Field, Lake, and Sky LLC, an entity in the domain name acquisition space.
• In October 2006, Oversee paid $1.1 million for the assets of One Technologies L.P., a lead generator.
• In January 2007, Oversee paid $21.9 million for Lowfares.com, Inc., a company whose websites could be used to generate leads for the Vertical Markets business.
• In June 2007, Oversee paid $6.4 million for SnapNames.com, Inc. and an affiliate, both in the domain name acquisition space.
• In December 2007, Oversee paid $24.6 million for DomainSystems, Inc., a leader in...
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