IBEW Local Union 481 Defined Contribution Plan & Tr. v. Winborne

• Court: Court of Chancery of Delaware
• Writing for the Court: LASTER, V.C.
• Docket Number: C. A. 2022-0497-JTL
• Decision Date: 24 August 2023
• Citation: IBEW Local Union 481 Defined Contribution Plan & Tr. v. Winborne, C. A. 2022-0497-JTL (Del. Ch. Aug 24, 2023)
• Parties: IBEW LOCAL UNION 481 DEFINED CONTRIBUTION PLAN AND TRUST, Derivatively on Behalf of GODADDY, INC., Plaintiff, v. RAYMOND E. WINBORNE, et al., Defendants, and GODADDY, INC., Nominal Defendant.

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IBEW LOCAL UNION 481 DEFINED CONTRIBUTION PLAN AND TRUST, Derivatively on Behalf of GODADDY, INC., Plaintiff, v. RAYMOND E. WINBORNE, et al., Defendants, and GODADDY, INC., Nominal Defendant.

C. A. No. 2022-0497-JTL

Court of Chancery of Delaware

August 24, 2023

Submitted: May 24, 2023

Joel Friedlander, Jeffrey M. Gorris, Christopher M. Foulds FRIEDLANDER &GORRIS, P.A., Wilmington, Delaware; Randall J. Baron, Benny C. Goodman III, ROBBINS GELLER RUDMAN &DOWD LLP, San Diego, California; Gladriel Shobe, Jarrod Shobe, SHOBE &SHOBE LLP, Provo, Utah; Counsel for Plaintiff.

S Mark Hurd, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT &TUNNELL LLP, Wilmington, Delaware; Jordan Eth, Philip T Besirof, David J. Wiener, MORRISON &FOERSTER LLP, San Francisco, California; Counsel for Defendants and Nominal Defendant.

OPINION DENYING MOTION TO DISMISS

LASTER, V.C.

The defendants paid $850 million to settle a liability that the company contemporaneously valued on its audited financial statements at $175.3 million. The plaintiff contends that the directors breached their fiduciary duties by approving the payment in bad faith. They contend that the company's chief financial officer provided the directors with manufactured financial information to support their decision. They also say that the payment constituted waste.

Those claims are derivative, and the defendants moved to dismiss the complaint under Rule 23.1. That motion is denied. A majority of the directors who would consider the demand are defendants on the merits, and the complaint alleges particularized facts that collectively support a pleading-stage inference that the directors approved the payment in bad faith. That inference both rebuts the business judgment rule and renders exculpation unavailable, resulting in those directors facing a substantial risk of liability and rendering demand futile.

The defendant directors also moved to dismiss the claims under Rule 12(b)(6). The standard for pleading a claim that gives rise to a substantial threat of liability is higher than the standard for pleading a reasonably conceivable claim, so the former analysis dictates the outcome of the latter motion.

I. FACTUAL BACKGROUND

The facts are drawn from the operative complaint, the documents it incorporates by reference, and public documents that are subject to judicial notice.^[1] At this stage of the proceedings, the complaint's allegations are assumed to be true, and the plaintiff receives the benefit of all reasonable inferences.

A. The Up-C IPO And The Tax Agreements

GoDaddy Inc. ("GoDaddy" or the "Company") is a Delaware corporation headquartered in Tempe, Arizona. It provides web hosting, Internet domain registration, and other cloud-based services.

Robert Parsons founded GoDaddy's predecessor in 1997. In 2011, Parsons sold a majority of his equity stake, representing a controlling interest in GoDaddy, to Kohlberg Kravis Roberts &Co. L.P. ("KKR"), Silver Lake Partners ("Silver Lake"), and Technology Crossover Ventures ("TCV").

In 2015, GoDaddy completed an Up-C IPO. That chimeric structure layers a parentlevel corporation on top of a limited liability company that is treated as a partnership for tax purposes. The member interest in the LLC is divided into a number of units. The corporation owns some, but not all, of the units. The insiders taking the company public own the remaining units.

The parent-level corporation issues two classes of stock. Class A stock is straight common stock, and each share carries voting rights and reflects a proportionate economic ownership interest in the corporation. Class B stock is special stock. It only carries voting rights. The Class B stock does not reflect any economic ownership in the corporation.

In the Up-C IPO, public investors receive Class A shares. Insiders receive Class B shares. The number of units in the LLC is adjusted to match the number of outstanding shares.

The result is a hybrid entity in which public stockholders participate in governance and economically through their Class A shares. The insiders participate in governance through their Class B shares and economically through their LLC units. The combination allows insiders to take a company public while retaining the benefit of pass-through tax treatment. They also get the benefit of liquidity, because the transaction documents authorize an insider to convert one Class B share plus one LLC unit into one Class A share, which can then be sold.

In the Company's version of the Up-C structure, GoDaddy was the holding company. An entity named Desert Newco, LLC was the LLC. GoDaddy's public stockholders received Class A shares. Parsons, the private equity investors, and various pre-IPO senior officers and stockholders (together, the "Founding Investors") received Class B shares and Desert Newco units. Consistent with the Up-C structure, the Founding Investors could convert one Class B share plus one Desert Newco unit into one Class A share.

Immediately before the IPO, GoDaddy and the Founding Investors entered into tax revenue agreements (the "Tax Agreements" or "TRAs"). They provide that if GoDaddy reduces its taxable income by using a tax asset generated by a Founding Investor, then GoDaddy must pay the Founding Investor 85% of the savings. GoDaddy has no obligation to make any payment to a Founding Investor unless and until GoDaddy uses the tax asset to generate savings.

The principal tax asset that a Founding Investor might create would result if a Founding Investor exercised its conversion right and sold the resulting Class A share for more than the IPO price. That sale would result in a proportionate step up in the tax basis of GoDaddy's assets, and GoDaddy could claim depreciation on the increased value to reduce its taxable income. If GoDaddy lacked sufficient taxable income to use the tax asset in a given year, it could carry the asset forward to a later year, creating a deferred tax asset (sometimes abbreviated "DTA") that GoDaddy could use once it had taxable income.

B. The Founding Investors Sell Their Equity Stakes.

By February 2019, Parsons and the three private equity investors had fully exited from their equity positions, generating tax assets with a total value of $2.2 billion (the "Tax Asset"). GoDaddy's commitment to pay 85% of that benefit to the Founding Investors resulted in a nominal liability of approximately $1.8 billion (the "Nominal Liability").

Despite the size of the Nominal Liability, GoDaddy had not made any payments under the Tax Agreements because GoDaddy did not generate taxable income. GoDaddy also had little prospect of generating taxable income. Its business model relied heavily on mergers and acquisitions, which create tax benefits of their own. In the four years since its IPO, GoDaddy completed acquisitions valued at over $2 billion. GoDaddy had every intention of continuing that business strategy.

GoDaddy's strategy of growth by acquisition reduced the likelihood that GoDaddy would be able to use the Tax Asset and have to make payments to the Founding Investors. Since the IPO, GoDaddy had repeatedly pushed out the date when it expected to begin making payments under the Tax Agreements. In 2016, the start date was expected to be 2017. At the beginning of 2019, the start date was 2021. During 2019, it was pushed back to 2022. And once the payments began, they would be spread out over fifteen years.

For the private equity investors, the right to receive a stream of future payments beginning at some indefinite point in the future and extending over a decade and a half was not an attractive asset. The private equity firms invested in GoDaddy through funds formed in 2006 and 2007. By 2019, those funds had grown stale. It is reasonable to infer that the private equity investors wanted to convert their rights under the Tax Agreements from a speculative long-term revenue stream into cash so that they could liquidate their aging funds and return capital to their investors.

Although the private equity investors had sold off their shares in the Company, Silver Lake and KKR still had influence on the nine-member board of directors (the "Board"). Silver Lake had two designees: Lee Wittlinger, a managing director of Silver Lake, and Gregory Mondre, Silver Lake's co-CEO. KKR had one designee-Herbert Chen-who had worked for KKR from 1995 to 1997 and again from 2007 to 2019. Chen was personally entitled to payments from the Tax Agreements.

The other six members of the Board were Amanpal Bhutani, Charles Robel, Brian Sharples, Mark Garrett, Caroline Donahue, and Ryan Roslansky. Robel served as Board Chair, and Bhutani served as the Company's Chief Executive Officer.

C. The December 2019 Meeting

During a meeting of the Board in December 2019, GoDaddy's Chief Financial Officer Raymond Winborne gave a standard presentation about the Company's financial performance. The thirty-sixth page of the presentation was titled "Capital structure | Capacity and Liquidity." DX 2 at '254. The first comment on that page stated: "Cash and short-term investments at $1.8B+ by end of 2020 brings net leverage ratio under 1X. Excess liquidity growing to $3B+ at year end 2020 (4x leverage cap)." Id. The next comment stated: "M&A/share repurchases remain capital allocation priorities" and that "TRA payments (~$1.8B gross) start in ~2022 at 2023+." Id.

The presentation did not refer to using capital to acquire the Founding Investors' rights to payments under the Tax Agreements (a "TRA Buyout"). Nor do the minutes reflect any discussion of a TRA Buyout. See PX 3.

D. The Formation Of The Special Committee

After the start of the New Year, Nima Kelly, GoDaddy's General Counsel, circulated an email asking the directors to execute a...