RICHARD FRANK, On Behalf of Himself and All Others Similarly Situated v. MICHAEL MULLEN and B. RILEY FINANCIAL, INC.
C.A. No. 2023-0381-MTZ
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
May 5, 2025
MEMORANDUM OPINION
Date Submitted: January 22, 2025
Date Decided: May 5, 2025
Raymond J. DiCamillo, Sandy Xu, Nicholas F. Mastria, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Adam S. Paris, Michael S. Drell, Emily D. Olsen, SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for Defendants B. Riley Financial, Inc. and Michael Mullen.
ZURN, Vice Chancellor.
A former stockholder of National Holdings Corporation (“National” or the “Company”) brings this putative class action challenging the 2021 sale of National to its largest stockholder, B. Riley Financial, Inc. (“BRF”). The plaintiff did not sue National’s board: instead, he brought breach of fiduciary duty claims against BRF and National’s former Chairman and CEO.
This opinion addresses BRF’s motion to dismiss the claim against it. The plaintiff contends BRF controlled National for purposes of the 2021 sale, making it a conflicted transaction subject to entire fairness review. At the time, BRF owned 46.4% of National’s stock and appointed one nonvoting observer to National’s board. The plaintiff claims BRF controlled the merger process by controlling the negotiations in the shadow of its significant stake. From there, the plaintiff asserts the transaction was marred by an unfair process and unfair price.
The complaint fails to support a reasonable inference that BRF controlled National for purposes of the merger such that it owed any fiduciary duties. The claim against BRF is dismissed.
I. BACKGROUND1
National is a Delaware corporation headquartered in New York City.2 It operates as a full-service investment banking and asset management firm.3 National’s business includes investing in early-stage companies.4 Before BRF took National private, it was publicly traded.5
In March 2012, BRF’s co-CEO Bryant Riley participated in an investment into
A. BRF Invests In National.
BRF itself offered to buy National in November 2014, May 2015, and October 2015, but nothing came of it.10 In November 2018, BRF acquired 56.1% of National’s stock and entered into a standstill agreement (the “Standstill Agreement”).11 As best as can be discerned from the complaint,12 that deal gave BRF board observer rights, waived Section 203 of the Delaware General Corporation Law (“DGCL”), and required a waiver for BRF to propose taking National private.13 BRF named Riley as its observer.14
Shortly after its investment, BRF identified National’s “executive and board compensation [wer]e materially above appropriate levels.”15 In 2019, it twice urged the board to cut management compensation.16
B. BRF Bids To Take National Private.
On April 27, 2020, BRF asked the board for permission to submit a takeprivate proposal.17 By then, BRF’s stake had declined to 46.4%.18 National’s second-largest shareholder, Daniel Asher, held 18% at that time.19 Defendant Michael Mullen was National’s CEO and Chairman.20 National’s board also included nonparties Fagenson, Barbara Creagh, Jeff Gary, Daniel Hume, Nassos Michas, and Michael Singer.21
On April 30, National’s board granted BRF a limited waiver of the Standstill Agreement.22 That same day, BRF submitted its first bid: $2 per share for all outstanding National shares it did not already own.23 The offer excluded shares held by management, citing dilution concerns tied to equity awards that would accelerate
On May 5, the board discussed BRF’s bid and determined to enforce procedural safeguards set out in Kahn v. M & F Worldwide Corp. (“MFW”).26 It required that any transaction must meet two non-negotiable conditions: approval by an independent special committee, and approval or tender by a majority of the minority stockholders unaffiliated with BRF.27 At that meeting, the board formed a special committee comprising Creagh, Gary, Hume, and Michas.28 The special committee retained Skadden, Arps, Slate, Meagher & Flom LLP as its legal advisor and Keefe, Bruyette & Woods, Inc. (“KBW”) as its financial advisor.29
At its first meeting, the special committee recognized BRF was “a large stockholder,” and discussed it “could potentially be viewed as a controlling stockholder.”30
C. Management Submits A Competing Bid.
Management opposed the sale.31 They believed National should stay independent.32 On May 8, they presented a growth plan to the board, pushing back against a deal with BRF.33 Riley sat in as an observer.34 Later that day, management formed a consortium (the “Management Consortium”) and proposed buying up to five million National shares at $2.75 per share.35
Faced with competing offers, the special committee met at least six times in the weeks that followed.36 It ordered Mullen not to discuss management’s bid with BRF or anyone else.37 It insisted that BRF’s offer include full MFW protections.38 And it instructed KBW not to begin negotiations until BRF confirmed those conditions.39 It predicted BRF would not support the Management Consortium’s proposal or any alternative bid.40 BRF confirmed that stance: upon learning of management’s bid, BRF said it had no intention of selling its stake.41 On June 3, the special committee decided not to reach out to any other potential buyers.42
D. The Special Committee Negotiates With BRF.
On June 4, BRF resubmitted its $2 offer, formally conditioned on the MFW protections and again excluding management’s
Seeing their compensation at risk under BRF’s plan, management presented the special committee with a revised proposal.45 They proposed to buy up to five million shares from Asher and Riley, but not shares held by any minority stockholders.46 If that failed, their backup plan was to have National issue up to five million new shares and use the proceeds to fund growth.47
The special committee recognized it had more leverage to negotiate with BRF before the standstill expired.48 It began evaluating BRF’s proposal and preparing a response. It directed management and KBW to prepare updated projections to assess National’s value.49 Those projections were presented in late June.50 Based on that data, the special committee countered on June 29 with an offer of $2.75 per share.51 The counteroffer asked BRF to extend its bid to “all stockholders,” including management.52 BRF responded with two conditions: management could not tender their shares, and they had to renegotiate their equity awards to address dilution.53 BRF asked for the special committee’s approval to negotiate those terms directly with management.54
The special committee knew BRF would not back another deal or sell its stake, to the Management Consortium or anyone else.55 On July 12, the special committee decided to focus on BRF alone and work toward a better price.56 On July 15, the special committee countered at $3.25.57 BRF responded on July 24 with $2.75—again conditioned on MFW—but stated it could go to $3.25 if it could reach a deal over management compensation.58
The special committee did not respond right away.59 On July 28, Riley filled the silence: he “stated that if the proposed transaction did not proceed, [BRF] intended to affect a change-of-control transaction after the Standstill Agreement expired.”60 Two days later, the special committee moved forward: it told Mullen the special committee’s decision to exclusively pursue a transaction with BRF, and authorized Riley and management to negotiate compensation
From July 31 to August 21, Riley and management (mostly Mullen) negotiated compensation but failed to reach a deal.62 As talks broke down, BRF saw two options: wait for the standstill to expire to buy more shares, or sell its stake.63 BRF “hoped” the latter option could also be made available to Asher, National’s second-largest stockholder, and Mullen looked for buyers for their shares.64 On August 26, BRF withdrew its proposal and filed a Schedule 13D/A.65
With BRF’s exit, the Management Consortium saw an opening.66 The special committee did not see it that way and recommended ending the sale process.67 The board decided to hear management’s pitch.68 Management’s presentation called out “[BRF’s] partnership with Asher” as a concern and contended their “controlling ownership” suppressed the stock price.69
E. Asher Increases His Stake.
At this point, Asher entered the chat. He was dissatisfied with National’s performance. On September 7, he sent a letter to the board and management criticizing National’s results and calling for changes to leadership and governance.70 Mullen met with Asher to discuss those concerns.71
Four days after Asher’s letter, Riley emailed the board’s counsel to share his own frustration with National’s performance (the “September 11 Email”).72 He wrote that although he would be “better served staying quiet and not ‘threatening’ the board,” National was “by far the worst performing financial services company that I track, fraught with conflicts and corporate governance issues.”73 He closed by declaring, “I won’t stop holding you, management, and the board accountable.”74 The complaint suggests Mullen then connected with Riley, who conveyed BRF’s renewed interest in acquiring National.75
With pressure from National’s two largest stockholders, the board met on September 15.76 Mullen updated the board on his talks with Asher and BRF’s rekindled interest.77 The board agreed to reconstitute the special committee to negotiate with BRF and address management compensation.78 The board also sought to understand “how [Mullen’s] compensation arrangement . . . was arrived at,” and weighed inviting “outside advisors to participate”
On September 17, 2020, Asher filed a Schedule 13D disclosing a 19.55% stake in National and his recent conversations with the board.80 The plaintiff alleges Asher did so “as if [he was] acting in concert” with BRF.81
F. BRF Reengages, And The Merger Closes.
After the board reconstituted the special committee, Riley connected with Mullen.82 They made progress on the management equity awards issue and “outlined” a possible solution.83 Riley then told the board he believed the matter “can be resolved.”84 Riley reassured the board’s counsel that he could work out a deal with Mullen and was “now calling Asher.”85
The reconstituted special committee then reviewed the recent developments involving BRF and Asher.86 It asked about the “relationship between BRF and [] Asher.”87 It also directed its counsel to question BRF’s counsel about that relationship.88 The plaintiff does not allege anything came out of those inquiries. The special committee considered that “BRF’s support was necessary for the [Management] Consortium’s proposal to proceed,” and noted BRF’s recent signal that it was open to selling its stake.89 The special committee again treated BRF and management as competing bidders and limited their ability to speak to each other.90
BRF soon clarified it would not sell its National stake, given its tentative agreement over management compensation.91 Despite that agreement, the Management Consortium resubmitted its proposal to buy up to five million shares from Asher and BRF.92
With BRF’s refusal to sell, the special committee determined the Management Consortium proposal was not in stockholders’ best interest, and continued towards a deal with BRF.93 It directed its advisor to facilitate compensation negotiations between BRF and management, with special committee representatives present.94 KBW pushed BRF to raise its offer.95 BRF declined, reiterating it would either proceed at $2.75 per share or wait for the Standstill Agreement to expire.96 The special committee, seeing little room for price movement, prepared to seriously consider the $2.75 offer.97
On November 11, BRF formally renewed its July 24 offer of $2.75 subject to
By that time, National’s value had increased. National had invested in Palantir Technologies Inc. and Airbnb, Inc., both of which had recently gone public and enjoyed rapid stock price increases.102 At its December 10 meeting, the board discussed whether those IPOs might entitle National to significant fees.103 Riley attended the meeting as an observer—his first and only attendance since the deal process restarted in September.104 The special committee came to understand the Palantir fees were significant relative to National’s market capitalization.105 It ordered management to halt all compensation talks to assess the Palantir fees’ impact on National’s value.106
On January 5, 2021, KBW estimated the potential value impact from the Palantir fees at up to $0.74 per share.107 The special committee countered BRF’s $2.75 offer with $3.50.108 BRF immediately replied at $3.25.109 On January 6, the special committee accepted.110
The parties executed the merger agreement on January 10.111 BRF began the tender offer on January 27, and National filed its recommendation statement.112 The merger closed on February 25.113
G. Litigation Ensues.
Just before closing, plaintiff Richard Frank (“Plaintiff”) demanded inspection of National’s books and records under Section 220 of the DGCL.114 National denied the request.115 On February 23, Plaintiff filed suit to compel inspection.116 I held a half-day trial on a paper record on July 15, 2022.117 By trial, the issues had narrowed to “board and management communications.”118 On July 22, I issued a telephonic ruling denying those documents.119
On March 30, 2023, Plaintiff filed his class action complaint against BRF and Mullen—not National’s board.120 Plaintiff alleges the merger delivered inadequate value due to a “flawed and conflicted sales process” that fell short of MFW’s requirements.121
Mullen answered the complaint.123 BRF moved to dismiss the claim against it for failure to state a claim on February 15, 2024, and amended its motion on October 18.124 The parties completed briefing on December 3.125 I heard oral argument on January 22, 2025.126 This opinion concludes BRF’s motion to dismiss is granted.
II. ANALYSIS
BRF moves to dismiss the complaint under
Those reasonable inferences “must logically flow from particularized facts alleged by the plaintiff.”131 The Court need not “accept as true conclusory allegations without specific supporting factual allegations.”132 The Court is not “required to accept every strained interpretation of the allegations proposed by the plaintiff.”133
Here, Plaintiff argues BRF exerted control over National for purposes of the merger, assumed fiduciary duties to National and its stockholders, and forced National into a conflicted transaction that warrants, and fails, entire fairness review.134 Plaintiff pleads that BRF had a great deal of leverage in the negotiations. But leverage in an arm’s-length negotiation is not tantamount to control over the special committee or board. The question is not what cards BRF held; the question is whether BRF controlled how the special committee played its cards. Plaintiff fails to plead facts that show BRF controlled the special committee or National’s board in the merger process. BRF’s motion to dismiss is granted.
A. The Standard For Alleging A Controlling Stockholder
“Delaware law imposes fiduciary duties on those who effectively control a
Under recent Delaware Supreme Court precedent, a minority stockholder may exercise actual control (i) “over the corporation’s business and affairs” or (ii) “over a specific transaction.”140 Plaintiff has not tried to plead general control; his theory is that BRF exerted control over the merger process.
is limited to transaction-specific control.141 To allege transaction-specific
This opinion proceeds under recent Delaware Supreme Court precedent recognizing that “a minority stockholder can be a controlling stockholder by exercising actual control . . . over a specific transaction.” See Oracle II, 2025 WL 249066, at *11-12; see id. at *12 n.92 (collecting cases). Whether Delaware law has or should have recognized transaction-specific control is subject to a lively debate before the judiciary and in academia. See Individual Dir.-Appellants’ Opening Br., In re Tesla, Inc. Deriv. Litig., No. 534, 2024C (Del. appeal docketed Dec. 30, 2024), D.I. 41, at 17-19 (independent director appellants contending this Court has “never held expressly that transaction-specific control results in controlling stockholder status” and urging rejection of that doctrine); Answering Br. of Plaintiff-Below/Appellee, In re Tesla, Inc. Deriv. Litig., No. 534, 2024C (Del. appeal docketed Dec. 30, 2024), D.I. 81 at 41-43 (plaintiff appellees contending Delaware law has long recognized transaction-specific control); Elizabeth Pollman & Lori W. Will, The Lost History of Transaction-Specific Control, __ J. Corp. L. __ (forthcoming 2025), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5138377 (tracing the doctrinal evolution of transaction-specific control and arguing Delaware should “jettison the concept of transactional control as a distinct concept“). As for the legislature, the DGCL was recently amended in a way that practitioners have read to remove transaction-specific control as a basis for finding a stockholder to be a controller. See
actual control over the board of directors during the course of a particular transaction.”142 “[T]he potential ability to exercise control is not sufficient.”143
That standard requires well-pled facts supporting a reasonable inference that the stockholder “dominated or controlled [the board‘s] ‘corporate decision-making process‘”144 because it possesses power “so potent that independent directors . . . cannot freely exercise their judgment, fearing retribution from the controlling minority blockholder.”145
Pleading actual control is “no easy task.”146 It “call[s] for a holistic evaluation of sources of influence.”147 Delaware
A take-private by a large blockholder sets the stage for a conflicted controller transaction warranting entire fairness review.150 But where that large blockholder does not exercise actual control over the corporation‘s business and affairs, independent directors can still retain their presumed independence and control over
the transaction. In arm‘s-length negotiations, they can keep the blockholder out of the boardroom and so keep the presumptions of the business judgment rule.151 An independent target board may agree with -- or yield to -- a tough negotiator in its own business judgment: independent concession does not support an inference of control.152 When there is an independent special committee, an independent board, and a clean process, a plaintiff cannot plead actual control over the transaction simply by pointing to a large blockholder‘s negotiating leverage.153
B. The Complaint Fails To Allege BRF Controlled National For Purposes Of The Merger.
BRF appointed no directors to the National board, and Plaintiff asserts only one of National‘s six directors on the merger board has any ties to BRF. Plaintiff does not allege BRF had any operational or managerial influence over National. BRF was subject to a Standstill Agreement. And National negotiated with BRF primarily through an undisputedly independent and empowered special committee,
whose approval was required under the MFW conditions National imposed. Against that backdrop, Plaintiff leans on
- Stock ownership: BRF held 46.4% of National‘s stock.154
- Voting support: BRF had backing from either Asher (raising voting power to 65%)155 or from management (raising it to 55%).156
- Board and management influence: BRF had “outsized influence” over the board and management because of its (i) purported longstanding interest in National, dating back to NGSP‘s 2012 investment, (ii) high water mark of ownership of 56.1% in 2018, and (iii) Riley‘s “business relationship” with National director Fagenson.157
- Control over the merger process: BRF pushed the merger, sidelined the special committee, cut side deals with management, threatened a potential change-of-control transaction, coordinated with Asher and Mullen, and dictated the merger terms.158
- Perceptions: the board and management viewed BRF as a controller.159
Assessing transaction-specific control requires “a holistic evaluation of” those
sorts of factors.160 The nature of a written opinion requires considering each factor in turn before evaluating them holistically.161 Here, none offers the clout over National‘s board Plaintiff says it does, and their combination does not amount to actual control.
1. Stock Ownership
Plaintiff argues that BRF, with its 46.4% stake in National, held a “large enough block” to qualify as a controlling stockholder.162 Delaware law is clear: only a stake over 50% is “large enough” to confer controller status based solely on “mathematical voting control.”163
To be sure, the law recognizes “power conferred by large block[s].”164 BRF‘s 46.4% stake is significant. A relatively
obtaining a supermajority.165 But beyond those voting dynamics, BRF‘s sizable stake itself “is not particularly probative of whether the large shareholder exercises actual control” over National for purposes of the merger.166 BRF‘s stake shows only its “potential to control.”167 Plaintiff must still plead facts showing actual control.168
The closest Plaintiff comes is alleging BRF‘s refusal to sell deterred the special committee from pursuing the Management Consortium‘s bid or considering other buyers. This is the first instance where Plaintiff conflates BRF‘s arm‘s-length leverage with control over National. Delaware law maintains those as different
concepts.169 In Western National, the 46% blockholder who bought the shares it did not own indicated it was not willing to sell, and this Court was adamant that the blockholder was within its rights to do so and was not exercising actual control by doing so.170 In USG, a 10.6% blockholder who fought tooth-and-nail in a proxy contest against the board‘s nominees did not have actual control over the board.171 Had it “exercised control over [the] board, it inferably would have been able to control” the board‘s nominees.172
BRF‘s refusal to sell was certainly an obstacle the special committee had to address to get a deal done, and narrowed the options available.173 But Plaintiff alleges
independently and chose to engage with BRF.174
2. Significant Voting Support
Plaintiff argues BRF effectively wielded a majority of National‘s voting power by combining forces with Asher (aggregating to 65%) and management (aggregating to 55%).175 For Asher, Plaintiff points to two moments where it appeared “as if [BRF] were acting in concert” with Asher.176 For management, Plaintiff alleges BRF and management excluded the board and special committee from their talks on management compensation,177 and that once they were aligned, they “acted in concert” to push for a sale.178 Plaintiff offers no basis to combine BRF‘s holdings with any other National stockholder. Nor has Plaintiff shown how any such combined voting power amounted to actual control over National‘s board in the merger process.
To aggregate different stockholders’ power in a way that imposes fiduciary
duties, Delaware law requires more than an alignment of interests: it requires some indication of an actual agreement.179 And that agreement must be well-pled: this Court will not “pile up questionable inferences until [a control group] conclusion is reached.”180
Plaintiff does not allege any actual agreement to support coupling BRF‘s voting power with either Asher‘s or management‘s. As to Asher, Plaintiff pleads BRF and Asher took separate actions that appeared “as if they were acting in concert” “to pressure the [b]oard to accept [BRF‘s] proposal,”181 and that Asher boosted his holdings “as if” he was aligned with
management, and their shared disappointment in National‘s performance.183 Even viewed in Plaintiff‘s favor, those allegations suggest independent actions, not joint planning. Plaintiff alleges no preexisting coordination between BRF and Asher regarding a shared intent to sell their National stake.184
Other allegations reinforce that point: BRF merely “hoped” National would offer Asher the opportunity to sell his shares.185 Riley told the board‘s counsel he “was calling Asher” only after reaching a preliminary agreement with Mullen on management compensation.186 At best, Plaintiff pleads BRF and Asher held similar views about National‘s performance, and took similar independent actions.187 Those coinciding or parallel interests are not enough.188
There is even less reason to aggregate management‘s voting power with BRF‘s. At the start of merger negotiations, BRF and management were distinct
competing bidders for National.189 The special committee repeatedly instructed Mullen not to speak with BRF.190 Then the special committee granted management and BRF permission to negotiate management compensation, and they struggled for months to reach a deal.191 BRF negotiated with management only on management equity awards, and only after BRF and Mullen agreed on the preliminary terms.192 Plaintiff does not allege any actual agreement to effectuate the merger.
Perhaps recognizing his allegations fail to plead the necessary agreement or cooperation, Plaintiff was clear he is not alleging a control group: he seeks to aggregate BRF with Asher or management for “atmospherics.”193 Given Delaware law‘s insistence on an actual agreement to bind stockholders together, I have my doubts that Delaware law would recognize “atmospherics,” short of a control group, as a source of actual control.
Regardless, Plaintiff has pled no facts showing that any such “atmospherics” contributed to actual control over National‘s board for purposes of the merger.194
control of the board generally, or actual domination or control of the corporation, its board, or the deciding committee with respect to the challenged transaction“).
The
As for BRF and management, they did not dominate the special committee. The special committee hired independent advisors.200 It treated BRF and management as “competing bidders” and barred Mullen from communicating with BRF.201 It determined the Management Consortium‘s proposal “was not in the best interest of stockholders,” and chose to pursue a deal with BRF.202 It ordered management and its advisors to prepare updated projections to prepare responses to
BRF‘s bid.203 It instructed its advisors to facilitate compensation negotiations between BRF and management.204
Plaintiff offers nothing to support the inference that BRF and Asher, or BRF and management, agreed to work together to exert actual control over National in its transaction with BRF.
3. No Control Over The Board
Next, Plaintiff swings for the fences and claims BRF controlled the board. He points to three assertions: (i) NGSP‘s 2012 investment in National, which Plaintiff attributes to BRF solely based on Riley‘s involvement; (ii) BRF‘s high-water mark of 56.1%, which had dropped to 46.4% by the time of the merger; and (iii) Riley‘s “business relationship” with Fagenson, a National director.205
It takes a great deal to plead that a tough negotiator across the table actually controlled the other side‘s board, such that it must be deemed a fiduciary and subsume its own interests to those of the other side and its stockholders.206 Control over a corporation‘s board may exist if the stockholder holds or controls “high-status
roles . . . [or] key executive or managerial roles,” “interfere[s] with or kibosh[es] management decisions,” or “has substantial influence [in decisions to] replace management.”207 Plaintiff‘s allegations do not meet the mark.
Second, Plaintiff points to Riley‘s past dealings with Fagenson. Fagenson is one of six directors on the merger board209 -- far from a majority controlled by BRF. And Plaintiff‘s allegations as to Fagenson fall short as well. His connection with Riley dates back to 2012, when both were NSGP principals during its National transaction.210 But being co-directors and having a single past related business relationship does not undermine a director‘s independence or disinterestedness.211
Plaintiff offers no facts explaining how Riley, a nonvoting board observer, could have “dominated” Fagenson, at all or in connection with the merger.212
Fundamentally, Plaintiff does not allege any director “w[as] employed by or directly under” BRF‘s control.213 No one from BRF “played an active role” on the board, before or during the merger.214 BRF‘s observer, Riley, attended only two board meetings.215 Plaintiff alleges nothing about “what [Riley] did or said at those
meetings.”216
4. No Control Over The Merger Process
Plaintiff alleges BRF exerted “outsized influence, threats, and intimidation” over the merger process.218 Process inquiries are fact-intensive.219 Evaluating process integrity for the purpose of determining actual control considers all “possible sources of influence” and “[b]roader indicia of effective control.”220
Arm‘s-length, hard-fought negotiations to which the board independently accedes are not tantamount to control over that board. Two cases illustrate the difference. In Western National, the plaintiff failed to plead a passive 46%
stockholder was a controller.221 The stockholder nominated two of eight directors, did not employ or control any director, was not involved in daily operations, bargained at “arm‘s length,” and “never improperly forced a merger.”222 The plaintiff alleged the stockholder had vetoed an earlier transaction, pointing to that as evidence of domination and control; the court rejected that inference.223
In Kahn v. Lynch Communication Systems, by contrast, the court found a 43% stockholder was a controller.224 The stockholder held five of eleven board seats; threatened to employ a tender offer if no “negotiated” deal was reached; “vetoed” the acquisition target the independent committee supported; and, through its board designee, warned the other directors, “[w]e are a forty-three percent owner. You have to do what we tell you . . . you are pushing us very much to take control of the company.”225 That designee “scared [the other directors] to death.”226 The Delaware Supreme Court agreed the record was clear: the directors deferred to the blockholder “because of its position as a significant stockholder” -- not because they “decided in
the exercise of their own business judgment that [the stockholder]‘s position was correct.”227
Next, the merger‘s process and terms. Plaintiff asserts BRF dictated the deal by announcing a low offer and the standstill waiver, refusing to sell to a third-party bidder, and setting the merger price.230 But Plaintiff has not pled BRF controlled National‘s board or special committee. The complaint tells a story of a board and special committee acting with demonstrated independence. The special committee insisted on MFW procedural safeguards, which BRF accepted -- not once, but thrice.231 When both the Management Consortium and BRF were in play, it instructed Mullen not to discuss the bid with BRF.232 It made room to deliberate, and BRF responded by raising its offer.233 The special committee directed its
financial advisor to prepare National‘s projections to guide its response.234 It also set its own schedule to counter BRF‘s offer.235 Each step shows independent decisionmaking.236 BRF did not attend any special committee meetings or try to influence its process and deliberation.237 That BRF withdrew its initial bid -- not forcing a deal -- shows even on a plaintiff-friendly reading that the special committee
Plaintiff‘s cases involve stronger control factors. Pl. Ans. Br. at 34-38. In Voigt, a 34.8% blockholder was found a controlling stockholder when it (i) filled one-third of the board seats with individuals it controlled, (ii) had another third of the directors beholden to it, (iii) had broad blocking rights, (iv) possessed additional sources of board-level influence, and (v) maintained relationships with key executives and advisors. 2020 WL 614999, at *15-22. In Tornetta, a 21.9% stockholder was found to have actual control when he had maximum managerial authority, controlled half of the board, and dictated the transaction‘s timing, process, and terms. 310 A.3d 430. In Basho Technologies, a significant minority stockholder was found to be a controlling stockholder based on an avalanche of factors, including its contractual blocking rights, dominance over management, and actual threat to withhold critical funding the company needed. 2018 WL 3326693, at *24.
“had a genuine choice as to the ultimate fate of
Plaintiff argues BRF controlled the process through “unauthorized conversations” with Mullen-led management and a supposed conspiracy to hide facts about the Palantir fees.239 Neither amounts to actual control.
BRF‘s talks with Mullen amidst a bidding war may reflect an imperfect process, but not control over National. In May 2020, presented with BRF‘s and management‘s competing bids, the special committee barred management from discussing its bid with BRF.240 The complaint does not allege the ban applied to BRF or that BRF even knew of it. Almost a month later, Riley called Mullen and learned he was helping with the Management Consortium‘s bid.241 Plaintiff does not allege they discussed the merger terms or plotted against the special committee. BRF did not negotiate compensation with management until it had the special committee‘s approval.242 In September, after BRF renewed its bid, it discussed management compensation with Mullen -- before the special committee was
reconstituted and before any new restriction on their communications was imposed.243 Mullen allegedly “steered” the special committee toward BRF‘s deal by resubmitting a management proposal the special committee had already rejected.244 Once reconstituted, the special committee “prohibit[ed BRF and management] from engaging in unauthorized discussions”245 and required its representatives to attend any negotiations.246 BRF and Mullen allegedly disobeyed those directives and negotiated management compensation without the special committee‘s oversight.247
Those talks may have strayed from the ideal. But they do not support an inference that BRF controlled National, or overrode the special committee. BRF and management were negotiating counterparties as to management compensation, and remained competitors as to the merger, with rival offers before the special committee. The complaint does not allege BRF and management negotiated the merger terms248 or infiltrated the special committee. Nor does it allege the committee lacked the power to reject or revise any compensation deal.
Plaintiff‘s claim of a BRF-management conspiracy to hide the Palantir fees is not well-pled.249 The complaint does not allege BRF even knew about the fees before December 2020, when management disclosed them to the board.250 That meeting
Next, BRF‘s alleged threats. “A pattern of threats aimed at intimidating [the board]” could support an inference of domination over the board.253 Plaintiff asserts BRF repeatedly threatened a change of control and that National caved in
response.254 In late July, having heard nothing from the special committee, Riley “stated that if the proposed transaction did not proceed, he intended to affect a change-of-control transaction after the standstill expired.”255 In August, after talks about management‘s equity awards fell apart, BRF told National its options were seeking control after the standstill expired, or selling to somebody willing to pay more.256
BRF‘s statements manifest a bidder pointing out it has alternatives down the road, leaving the directors free to respond in their independent business judgment.257 They did not exert control over the special committee. Compare the bidder in Kahn. There, one of the blockholder‘s five directors told the other six, “You have to do what we tell you.”258 The blockholder then threatened a tender offer unless a deal was struck.259 That is an example of a bidder using the threat of a tender offer together with its board presence to cow other directors. No such coercion is alleged here.
Plaintiff next raises the September 11 Email as a “threat.” In it, Riley voiced frustration with National‘s performance and management.260 He opened by saying he would be “better served staying quiet and not ‘threatening’ the board,” and closed with, “I won‘t stop holding you, management, and the board accountable.”261 That email made no demands, contained no ultimatums, and conveyed no consequences. Crucially, it came after BRF had withdrawn its bid -- and before
Plaintiff alleges no fact to suggest the email -- on its own or with other indicia of control -- caused the board to bend to BRF‘s will.264 Plaintiff argues he has “probative evidence” that the board gave in to BRF‘s “threat.”265 First, that National
questioned Mullen about executive pay.266 When BRF challenged management‘s above-market pay, the board considered the issue seriously, and independently, then let Mullen negotiate revised terms.267 These actions do not reflect control. They reflect an engaged board making independent, informed decisions in response to a bidder‘s concerns.
Plaintiff also asserts National pushed away potential bidders in response to BRF‘s “threats.”268 The special committee‘s decision not to explore third-party transactions is at the core of Plaintiff‘s control theory.269 But the special committee recognized it would lose leverage once the standstill expired before Riley brought it up.270 And it concluded it would not consider any third-party proposal or pursue management‘s bid before any alleged “threat.”271 The special committee had decided against third-party bidders and to focus on BRF weeks before Riley‘s July 28 email.272 Riley‘s email only prompted the special committee to tell Mullen about
that decision.273 The complaint does not plead BRF controlled those decisions or the board.
And in any event, BRF did not block alternatives: the special committee, exercising its independent business judgment, concluded that a third-party transaction was not feasible. It evaluated the Management Consortium‘s competing proposal, “acknowledged” any alternative transaction likely required BRF‘s support, recognized BRF‘s stated intention not to sell could deter rival bidders, and ultimately “determined not to reach to any third parties.”274 It recognized BRF‘s substantial
5. Internal Correspondence
Finally, Plaintiff argues BRF is a controller because National said it was. Management claimed National‘s “controlling ownership” suppressed the stock
price.277 And the special committee recognized BRF “could potentially be viewed as a controlling stockholder.”278 And in the Section 220 Action, National pled that “[National] admits that [BRF] was a majority shareholder of the Company.”279
But as Plaintiff‘s counsel conceded during oral argument, National‘s internal characterizations and Section 220 Action filing are not dispositive on actual control.280 They are “indication[s]” to support control allegations.281 They do not supplant Plaintiff‘s pleading burden to allege actual control.282
At bottom, the complaint fails to allege BRF exercised transaction-specific control over the merger process. While BRF held a significant stake, it had no agreement or arrangement with Asher or management to wield more voting power than its own. It did not control the board or dictate decisions belonging to the board. It participated in the merger process at arm‘s length from the board and special committee. And perception of its (potential) controlling stockholder status does not equate to actual control. Plaintiff has not shown the combination of BRF‘s historic interest in National, its historic and current holdings, National‘s recognition of those
holdings, and negotiation leverage rose to the level of actual control over National‘s board. There is no well-pled allegation BRF dictated terms, directed decisions, or compelled outcomes. The board functioned independently. The special committee led the merger negotiations and reached its conclusions based on its own judgment. BRF‘s motion to dismiss is granted.
III. CONCLUSION
BRF‘s motion to dismiss is GRANTED. Count II of Plaintiff‘s complaint is dismissed with prejudice.