Mcpadden v. Sidhu

964 A.2d 1262 (Del.Ch. 2008)

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Nature of the Case

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Facts

I2 acquired TSC and a related company for $100 million. Dubreville was CEO and president of TSC. Dubreville remained in charge of TSC. By late 2004 or early 2005, i2 decided to sell TSC after determining that TSC was a non-core business that should be divested. In 2002 VisionInfoSoft and its sister company, Material Express.com, were competitors of TSC, being sued by TSC for copyright infringement. Vision inquired about purchasing TSC, for the purpose of resolving the lawsuit. Vision had heard rumors that i2 was considering a sale and that Dubreville announced to employees that he was planning to purchase the company; he then filed what Vision believes to be a meritless lawsuit so that he could use the i2 resources to weaken a competitor and then purchase a stronger company. The e-mailed back stated that i2 was not interested in selling TSC at that time. Vision sent a letter to D and i2’s CFO stating that Vision would be willing to pay up to $25 million for TSC. TSC and Vision settled the copyright suit with Vison paying quarterly fees to TSC. P alleges a litany of actions to drive down the earnings of TSC: leasing twice the necessary office space, depressing TSC’s EBITDA through use of a printing company that Dubreville partially owned: and causing TSC to incur significant legal expenses in its copyright dispute with Vision though the new owners of TSC (once it was sold in June 2005) were permitted to retain the benefits of the settlement. In December 2004, the i2 board decided to sell TSC. One of these options was to sell TSC for $4.2 million to TSC employees. Dubreville was aware that Vision earlier had expressed interest in buying TSC for up to $25 million. Dubreville discussed with i2 the possibility of leading a management buyout of TSC. No business broker or investment banker was hired; the board charged Dubreville with finding a buyer for TSC. Dubreville did not solicit interest from any of TSC’s direct competitors. While the search for a buyer for TSC was ongoing, the board again discussed Dubreville’s proposal to lead a management buyout of TSC. Dubreville had produced three offers for TSC. HIS offered $12 million for the entire CDSD division, of which $4.3 million was allocated to TSC. A second offer was from Sunrise Ventures, the principal of which was Dubreville’s former boss at TSC and his partner in a printing company. Sunrise Ventures offered $1.8 million for TSC, which P alleges was a “lowball” offer designed to make the Dubreville-led group’s offer of $3 million appear generous. The third offer was from the Dubreville-led group, Trade Service Holdings, LLC (“TSH”), of which Dubreville was a principal owner. TSH offered to buy TSC for $2 million in cash and $1 million in software licensing agreements, with TSH keeping all outstanding receivables and repayments. The offer also contemplated that TSC would sublease half its existing office space, that i2 would pay for TSC’s relocation within its building, and that i2 would bear the costs of the office space that TSC would not use. The board authorized management to move forward with discussions to sell TSC to TSH (the company partially owned by Dubreville), even though the board knew that Dubreville had been responsible for conducting the sale of TSC and that TSC had not been offered to competitors. P alleges gross irregularities in the approval of the sale, including that the special committee of the board. In sum, the effect of these numerous alleged deficiencies is that the fairness opinion, because it was based on financial information, including projections and financial statements, provided or prepared by the buyers, favored the interests of Dubreville and TSH and produced a valuation that supported a sale at a price exceedingly favorable to the buyers. In December 2005, Vision offered $18.5 million. TSH, through Dubreville, rejected this offer as too low and later, in 2007, sold TSC for more than $25 million. P contends that no significant changes to TSC’s business occurred during that period of time to justify the price difference and instead attributes it to the use of accurate financial statements, which supported a higher valuation of TSC. Nominal defendant i2, a Delaware corporation headquartered in Dallas, Texas, sells supply chain management software and related consulting services. McPadden (P) utilized a section 220 books and records demand to investigate i2's TSC sale. P initiated this action on behalf of i2 to recover the losses it sustained as a result of the alleged bad faith conduct of the board. P alleges that demand is excused for futility because the board’s approval of the sale was not a proper exercise of business judgment. P asserts a breach of fiduciary duty claim against the directors who approved the sale of TSC and against Dubreville. P alleges unjust enrichment against Dubreville alone. Ds moved to dismiss.