68 F. Supp. 3d 579
E.D. Va.2014Background
- Three Virginia REITs (Apple REIT Seven — A7, Eight — A8, and Nine — A9) with overlapping directors and shared management merged in March 2014 after shareholder votes; A8 and A7 merged into A9 (which renamed to Apple Hospitality).
- Many directors and managers served on multiple Apple REIT boards; Glade Knight was CEO/chair of the REITs and owned companies that managed the REITs.
- Plaintiffs (DCG & T), A9 shareholders, alleged the merger resulted from a conflicted, flawed process that diluted common-shareholder value and sought damages and rescission.
- Plaintiffs pleaded four counts: (I) direct class claim for fiduciary duty breaches by A9 directors; (II) derivative fiduciary breach claim on behalf of A9 against directors; (III) direct class claim against directors and managers for breaches of loyalty and candor; (IV) direct and derivative claims to rescind the merger as a conflicted or affiliated transaction under Virginia statutes.
- Court addressed a Rule 12(b)(6) motion to dismiss: it dismissed the direct fiduciary (Counts I & III) and certain parts of Count IV, but allowed Count II (derivative fiduciary breach) and Count IV’s derivative conflicted-transaction claim to proceed; the affiliated-transaction and direct conflicted-transaction claims were dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fiduciary breach claims can be pursued as direct (class) actions | DCG & T: some injuries were individual so direct class claims are proper | Directors: Virginia law requires fiduciary breach claims be derivative | Court: Dismisses direct claims (Counts I & III); fiduciary breaches must be brought derivatively under Virginia law (Remora/Simmons) |
| Whether the derivative fiduciary-breach claim (Count II) states a claim | DCG & T: directors acted in bad faith, favored insiders, relied on stale fairness opinions, harming A9 | Directors: business judgment rule and charter exculpation shield them | Court: Denies dismissal as complaint plausibly pleads fiduciary duty, breach, and damages; defenses (business judgment rule, exculpation) are factual and not resolved on 12(b)(6) |
| Whether conflicted (interested director) transaction claim can be brought directly and/or derivatively under Va. Code § 13.1-691 | DCG & T: merger was interested transaction; shareholders can seek rescission | Defendants: statutory remedies belong to the corporation; shareholders cannot bring direct claim; shareholders ratified disclosures; appraisal-rights limits | Court: Direct conflicted-transaction claim dismissed; derivative conflicted-transaction claim allowed to proceed — plaintiff met initial burden to plead interested directors; factual defenses reserved |
| Whether the affiliated-transaction claim under Va. Code § 13.1-725.1 is sufficiently pled | DCG & T: Knights exercised control and the merger was an affiliated transaction | Defendants: plaintiffs fail to allege the statutory 10% ownership/interest or other required facts | Court: Dismisses affiliated-transaction claim for failure to plead required elements (10% threshold, affiliate status); proxy materials do not cure the deficiency |
Key Cases Cited
- Simmons v. Miller, 261 Va. 561 (Va.) (Virginia requires fiduciary-breach suits against officers/directors be derivative)
- Remora Investments, LLC v. Orr, 277 Va. 316 (Va.) (reiterating fiduciary-duty claims must be derivative; duties run to shareholders as a class)
- Surowitz v. Hilton Hotels Corp., 383 U.S. 363 (U.S.) (discussing derivative actions and shareholder protection principle)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.) (framework for sale-of-company duties; noted but rejected for Virginia law)
- Willard v. Moneta Bldg. Supply, Inc., 258 Va. 140 (Va.) (rejecting application of Revlon duties in Virginia)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S.) (pleading standard: plausibility required to survive 12(b)(6))
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S.) (pleading standard for plausible claims)
- Byelick v. Vivadelli, 79 F. Supp. 2d 610 (E.D. Va.) (discussing § 13.1-691 and availability of relief under interested-director statute in close corporations)