Chester County Employees Retirement Fund v. New Residential Investment Corp.
11058-VCMR
| Del. Ch. | Oct 6, 2017Background
- Plaintiff (Chester County Employees’ Retirement Fund), a New Residential stockholder, alleges New Residential overpaid for Home Loan Servicing Solutions, Ltd. (HLSS) assets to benefit Fortress and its affiliates (management fees, incentive compensation, options, and related real estate advantages).
- New Residential is a REIT managed by FIG LLC (owned by Fortress affiliates); Fortress and its principals hold minority equity but allegedly exert control via management structure, bylaws, charter provisions, and board composition.
- Transactions: parties terminated an initial equity merger (Initial Merger Agreement) and executed a Termination Agreement (mutual releases) and then closed an asset purchase (Acquisition Agreement) in which New Residential paid ~$1.0B cash plus stock and later paid additional consideration, for total consideration ~ $1.49B.
- Plaintiff brought derivative breach of fiduciary duty claims (and sought a declaratory ruling that the Termination Agreement does not bar claims), and failed to make a pre-suit demand on New Residential’s board.
- Defendants moved to dismiss for failure to plead demand futility under Court of Chancery Rule 23.1 and for failure to state a claim; the Court evaluated demand-futility under Aronson/Rales and dismissed the complaint for failure to plead particularized facts showing demand would be futile.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand is excused because a majority of the board is interested or not independent | A majority of directors are beholden to Fortress (through ties, compensation, social/donor links, past transactions) and thus cannot impartially consider demand | A majority of the board (McGinnis, Saltzman, Sloves, Tyson) are disinterested and independent; allegations are conclusory or insufficiently particularized | Demand not excused — plaintiff failed to plead particularized facts raising reasonable doubt as to independence of a majority of directors |
| Whether the challenged transactions are so egregious that demand is futile (Aronson second prong) | The deal terms (alleged overpayment of $100–200M; termination then asset purchase) are irrational and reflect bad faith/self-dealing, creating a substantial likelihood of director liability | The board’s decision is protected by business judgment; comparisons to the terminated deal are inapposite given changed liabilities; charter contains §102(b)(7) exculpation so only non‑exculpated claims (e.g., loyalty/bad faith) could show substantial likelihood of liability | Demand not excused — plaintiff’s allegations amount to hindsight second‑guessing and fail to plead non‑exculpated claims showing a substantial likelihood of liability |
| Whether Fortress, FIG, and related entities are controlling stockholders owing fiduciary duties | Fortress controls New Residential via corporate structure and affiliations, so its related entities are liable | Fortress and affiliates are minority holders and did not exercise control sufficient to impose fiduciary duties | Court did not reach a controlling‑stockholder finding for demand futility; dismissal rests on failure to plead director disinterest and non‑exculpated liability |
| Ripeness of declaratory judgment re: Termination Agreement release | The Termination Agreement’s mutual release cannot bar New Residential stockholder claims | Defendants say claim is unripe because they have not asserted the release as a defense | Declaratory‑judgment claim is unripe and dismissed (no new facts to alter prior rulings) |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (sets two‑prong test for demand futility—director interest/independence and whether transaction is protected by business judgment)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (applies demand‑futility analysis when plaintiff does not challenge an action of the board in place at filing)
- Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. Ch. 1981) (establishes deference to board and framework for derivative litigation review)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (tests whether a claim is derivative or direct)
- White v. Panic, 783 A.2d 543 (Del. 2000) (courts accept plaintiff’s particularized factual allegations as true for demand‑futility analysis)
- In re Walt Disney Co. Derivative Litigation, 731 A.2d 342 (Del. Ch. 1998) (discusses director independence and materiality of director compensation)