Professional Documents
Culture Documents
Page
A. INTRODUCTION .........................................................................................................3
1. Plaintiff has not, and indeed cannot, allege a lack of independence by the
Special Committee, which approved the Transaction...........................................9
CONCLUSION ..............................................................................................................................23
i
TABLE OF AUTHORITIES
Cases Page:
Aronson v. Lewis,
473 A.2d 805 (Del. 1984) ..........................................................................................8, 9, 12, 14
Beam v. Stewart,
845 A.2d 1040 (Del. 2004) ................................................................................................10, 12
Bishop v. Maurer,
33 A.D.3d 497, 498; 823 N.Y.S.2d 36 (1st Dept. 2006),
aff’d 9 N.Y.3d 910, 875 N.E.2d 883, 844 N.Y.S.2d 165 (2007) ...............................................6
Gantler v. Stephens,
965 A.2d 695 (Del. 2009) ...................................................................................14, 17, 17 n. 19
In Whose Interest: An Examination of the Duties of Directors and Officers in Control Contests,
26 Ariz. St. L.J. 91 (1994) .......................................................................................................11
Lewis v. Vogelstein,
699 A.2d 327 (Del. Ch. 1997)..................................................................................................20
Kohls v. Duthie,
765 A.2d 1274 (Del. Ch. 2000)................................................................................................10
ii
Michelson v. Duncan,
407 A.2d 211 (Del. 1979) ........................................................................................................22
Potter v. Arrington,
11 Misc. 3d 962, 810 N.Y.S.2d 312 (NY Sup. 2006) .....................................................6 n. 9, 7
Puma v. Marriott,
283 A.2d 693 (Del. Ch. 1971)..................................................................................................20
Rales v. Blasband,
634n A.2d 727 (Del. 1993) ........................................................................................................9
Unimarts v. Nirenberg,
1996 Del. Ch. LEXIS 95 (Del. Ch. Aug. 9, 1996) ...................................................................19
Winer v. Queen,
503F.3d 319 (3d Cir. 2007).................................................................................................6 n. 9
Statutes:
iii
Defendants, CARL C. ICAHN, CARL J. GRIVNER, VINCENT INTRIERI, KEITH
Motion to Dismiss Plaintiff’s Complaint, pursuant to NY CPLR §§ 3211 (a)(1) and (7) for failure
to state a cause of action on its face and based on documentary evidence. In support of this
Motion, Defendants submit this Memorandum of Law and the Affirmation of Herbert Beigel,
Esq., sworn to on the 7th day of July, 2009 (“Beigel Aff.”), attesting to Exhibits A through K.
I. PRELIMINARY STATEMENT
In a rambling complaint of fifty-six pages that is the antithesis of the requirement that a
complaint consist of “plain and concise statements” in paragraphs, each with a “single
July 25, 2008, XO Holdings, Inc. (“XO”), a publicly held national telecommunications company,
(a) issued and offered new preferred stock to shareholders (the “SPA”, also referred to from time
to time as the “Offering,” annexed to the Beigel Aff. as Exhibit D), and (b) entered into an
Amended Tax Allocation Agreement (“ATAA,” annexed to the Beigel Aff. as Exhibit B)1 with
(“Icahn”). (The SPA and the ATAA also are collectively referred to as the “Transaction.”)
Plaintiff by entering into the Transaction, because (a) the ATAA, which amended the pre-
existing Tax Allocation Agreement (“TAA,” annexed to the Beigel Aff. as Exhibit C) that
governed the allocation of XO’s net operating loss (“NOL”) for tax purposes, constituted the
1
A tax allocation agreement is commonly used to allocate income tax liabilities, including benefits from the use
of NOLs, between a parent corporation and a subsidiary, where the subsidiary and the parent are consolidated for
income tax purposes.
waste of a corporate asset, and (b) the Offering improperly diluted minority shareholders.
Further, Plaintiff alleges that the independent Special Committee of XO’s Board of Directors
wrongfully failed to pursue potential acquisitions of XO by third parties. See the Complaint
annexed to the Beigel Aff. as Exhibit A, ¶ 2.2 However, as shown below, the Complaint fails to
adequately allege any breach of fiduciary obligation or waste of a corporate asset because even if
the facts alleged in the Complaint are treated as true, the independent Special Committee
diligently negotiated and evaluated the Transaction with the assistance and advice of an
independent financial advisor and independent counsel before recommending and voting to
approve the Transaction. Moreover, the Special Committee obtained an increased financial
Plaintiff’s Complaint consists of five counts, the first three of which are denominated as
derivative claims on behalf of XO for breach of fiduciary duty, aiding and abetting breach of
fiduciary duty, and waste of corporate assets. The fourth claim is brought by Plaintiff as a direct
claim, alleging that Mr. Icahn and certain of his affiliates owed Plaintiff a direct fiduciary
obligation which they breached by entering into the Transaction. The fifth claim, not
denominated as a direct or derivative claim – although clearly derivative in nature – alleges that
the “Individual Defendants” caused XO to make an unlawful gift of the NOLs by entering into
the ATAA.
As shown below, each of the five counts fails to state a cause of action upon which any
2
Plaintiff incorrectly and overbroadly refers to Mr. Icahn as identical to Defendant Starfire. Plaintiff has no basis
in fact to support this allegation, and the law does not excuse this sleight of hand.
3
Prior to this motion to dismiss, Defendants Adam Dell, Fredrik Gradin, and Robert Knauss (the “Special Committee
Defendants”), served their Answer. However, they have filed a joinder to this Motion to Dismiss.
2
II. STATEMENT OF RELEVANT FACTS4
A. INTRODUCTION
2003. Since that time, Mr. Icahn has been the majority shareholder. XO has continuously
operated, aided throughout by infusions of capital by Mr. Icahn and others. Yet, since 2005,
Plaintiff and its affiliates, apparently disappointed in their investment in XO, have sought to
obstruct XO’s efforts to improve its financial condition.5 Indeed, although Plaintiff was afforded
the opportunity to purchase shares in the Offering, it elected not to do so, choosing almost a year
later to instead file this spurious action, challenging the Transaction, despite the fact that it
resulted in a substantial infusion of cash and capital for XO and eliminated XO’s substantial
debt.6
clearly lack merit. Moreover, the Complaint, under the guise of providing the Court allegedly
previous Delaware Chancery action, uses the proceedings and settlement of that action to
Plaintiff knows well that the Stipulation forever prohibits it from using the settlement, its terms,
or any of the proceedings leading to the settlement “in any manner whatsoever.”7 Yet, not only
4
The recited facts are undisputed or conceded in Plaintiff’s Complaint, or otherwise supported and confirmed by
documentary evidence.
5
Although the Complaint does not reflect how much plaintiff paid for its XO shares, in January 2003, when
Plaintiff first invested in XO (see Beigel Aff., Ex. A at ¶ 19), XO stock traded at approximately $3.50-$5.00 per
share. Currently, the stock trades at approximately $ .30 per share.
6
Indeed, even before filing this suit, before the Transaction was entered into, an affiliate of plaintiff transmitted to
the Board of Directors of XO three malicious letters falsely claiming XO was insolvent and threatening
litigation. See Beigel Aff., Exhibit F. We discuss these letters below at pages 18-19, demonstrating the lack of
merit of the Complaint and Plaintiff’s bad faith.
7
See the Stipulation of Compromise, Agreement, and Release, annexed to the Beigel Aff. as Exhibit K at ¶ 10.
3
does Plaintiff continually refer to that case to support its core allegations that Mr. Icahn and the
other Defendants have engaged in a long-running scheme to breach their fiduciary obligations to
XO, Plaintiff also treats the settlement as a supposed admission of wrongdoing, which it is not.
Simply put, this Court should not consider or countenance such allegations, and the Complaint
On July 25, 2008, XO entered into the Transaction. The Transaction included the SPA
and ATAA. The terms of the SPA and the ATAA had been negotiated by the Special Committee
of independent directors (Defendants Gradin, Knauss, and Dell) and its independent counsel,
Dechert LLP. The Special Committee also had retained Cowen and Company (“Cowen”) as its
independent financial advisor. The SPA and ATAA were approved by the Special Committee;
indeed, the only members of the Board who voted on and approved the Transaction were the
members of the Special Committee and Carl Grivner, XO’s Chief Executive Officer. See
Minutes of the Board of Directors of July 17 and July 24, 2008 and the Minutes of the Special
Committee of July 24, 2008, annexed collectively to the Beigel Aff. as Exhibit I.8
Pursuant to the SPA, Mr. Icahn’s affiliated corporations (including Defendants ACF
Industries Holding Corporation, Arnos Corporation, and High River Limited Partnership)
obtained the right to purchase an aggregate of 555,000 shares of XO’s 7% Class B Convertible
Preferred Stock and an aggregate of 225,000 shares of the XO’s 9% Class C Perpetual Preferred
Stock (collectively, the “Offering”). The Offering’s $780 million purchase price was paid
through the retirement of approximately $450.758 million of XO’s senior indebtedness held by
the Icahn affiliates, and the balance of $329.242 million was paid in cash. In connection with the
8
The other defendants on the Board, Messrs. Icahn, Intrieri, Meister, and Shea did not vote.
4
Offering, XO and Starfire also entered into the ATAA, which governed how the Icahn affiliates
could use XO’s NOLs and the benefit accruing to XO in such circumstances. See Beigel Aff.,
Ex. B at ¶ 4(d).
While the NOLs certainly had significant value to Mr. Icahn, they are currently valueless
to XO (since it generates losses). Yet, Starfire agreed to pay XO 30% of his tax savings
immediately upon using $900 million of the NOLs (or any part thereof). This was a more
favorable allocation than previously provided for in the original Tax Allocation Agreement,
which did not require any payment at all from Starfire unless and until XO earned a profit. Thus,
the ATAA provided XO with an increased benefit over the original Tax Allocation Agreement,
which had been formally approved by the Bankruptcy court on January 15, 2003. See Beigel
Aff., Ex. J.
Following the execution of the SPA, XO offered certain of its large minority
2008, XO sent to Plaintiff and other minority shareholders an information statement for the
offering of additional shares of Convertible Preferred Stock and Perpetual Preferred Stock. See
the “Information Statement” annexed to the Beigel Aff. as Exhibit E. The Information Statement
outlined the terms of the Offering and provided instructions on how to participate. In addition,
August 14, 2008, with representatives of XO management. The Offering expired at 5:00 P.M.
EST on August 18, 2008. Id. at p. 3. Plaintiff elected not to purchase a single share.
5
III. ARGUMENT
Although, as shown below, Plaintiff’s claims are insufficient on their face, and as a
matter of law, this Court may consider documentary evidence, where such evidence plainly
contradicts the factual allegations of the Complaint. In Bishop v. Maurer, 33 A.D.3d 497, 498,
823 N.Y.S.2d 36 (1st Dep’t 2006), aff’d, 9 N.Y.3d 910, 875 N.E.2d 883, 844 N.Y.S.2d 165
Generally, on a motion to dismiss brought pursuant to CPLR 3211, the court must
‘accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of
every possible favorable inference, and determine only whether the facts as
alleged fit into any cognizable legal theory' " (Morgenthow & Latham v Bank of
N.Y. Co., 305 AD2d 74, 78, 760 NYS2d 438 [2003], lv denied 100 NY2d 512,
798 NE2d 350, 766 NYS2d 166 [2003], quoting Leon v Martinez, 84 NY2d 83,
87-88, 638 NE2d 511, 614 NYS2d 972 [1994]). The court, however, is not
required to accept factual allegations, or accord favorable inferences, where the
factual assertions are plainly contradicted by documentary evidence (Robinson v
Robinson, 303 AD2d 234, 235, 757 NYS2d 13 [2003]; Biondi v Beekman Hill
House Apt. Corp., 257 AD2d 76, 81, 692 NYS2d 304 [1999], affd 94 NY2d 659,
731 NE2d 577, 709 NYS2d 861 [2000]).
We demonstrate below that based solely on the Complaint and accepting the facts as
alleged as true, the Complaint fails to state any cognizable cause of action. We also submit
As an initial matter, we note that Counts One and Two treat the Amended Tax Allocation
Agreement and the Offering as a single transaction, which Plaintiff pleads as a derivative claim.
As such, the counts suffer from two defects, which alone require dismissal: (a) the challenge to
9
As to the application of substantive law to the allegations of the Complaint, which exclusively deal with the
duties of directors of corporations, because XO is a Delaware corporation, Delaware law applies. See e.g., Winer
v. Queen, 503 F.3d 319, 338 (3d Cir. 2007); Potter v. Arrington, 11 Misc. 3d 962, 965-66, 810 N.Y.S.2d 312
(NY Sup. 2006).
6
the Offering may not be brought as a derivative claim; and (b) Plaintiff improperly failed to
The law is clear that Plaintiff cannot derivatively challenge that part of the Transaction
whereby XO issued and offered preferred shares to its shareholders. As a New York court,
The Delaware Supreme Court recently held that whether a claim is direct or
derivative turns solely on the following questions: who suffered the alleged harm,
the corporation or the plaintiff stockholders individually; and who would receive
the benefit of any recovery, the corporation or the stockholders individually.
(Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 [Del 2004].)
Further, in order to establish that the injury was a direct injury rather than a
derivative one, a stockholder must demonstrate that the duty breached was owed
to him or her and that he or she can prevail without showing an injury to the
corporation. (Tooley v Donaldson, Lufkin & Jenrette, Inc., 845 A.2d at 1039; In re
J.P. Morgan Chase & Co., 906 A.2d 808, 2005 WL 1076069, 2005 Del Ch LEXIS
51 [2005].)
Potter v. Arrington, 11 Misc. 3d 962, 810 N.Y.S.2d 312, 317 (NY Sup. 2006).
Plaintiff complains that the Offering diluted its shares – in other words, reducing its
already preexisting minority position in XO. See Beigel Aff., Ex. A at ¶ 2. However, a claim of
dilution emphasizing the diminishment of voting power has been consistently categorized as a
direct claim. See, e.g., Oliver v. Boston Univ., No. 16570, 2000 WL 1091480 at *6 (Del. Ch.
July 18, 2000). Here, a successful challenge of the Offering, where Plaintiff seeks its rescission,
would not only exclusively benefit the minority shareholders by restoring some measure of
minority voting power, but it would, in fact, harm XO by depriving it of the substantial cash
infusion and elimination of its debt that the Offering provided. In other words, the Complaint
does not allege, nor can it allege, that the Offering harmed XO or that a recovery under Counts
7
Consequently, Plaintiff’s derivative challenge to the Offering must fail. Moreover,
because Counts One and Two derivatively attack the Offering and the ATAA as a single
Even assuming that Plaintiff’s claims in Counts One and Two properly state derivative
claims, they must be dismissed because Plaintiff did not make a pre-lawsuit demand and has no
legal excuse for failing to do so.11 Thus, the case law makes perfectly clear that pre-suit demand
is only to be excused in cases where “facts are alleged with particularity which create a
reasonable doubt that the directors’ action was entitled to the protections of the business
judgment rule.” Aronson v. Lewis, 473 A.2d 805, 808 (Del. 1984).12
For the reasons set forth below, Plaintiff has not, and cannot, allege with particularity any
facts that create a reasonable doubt that the business judgment rule does not apply. See infra, at
p. 13. This requirement is far from a mere “technicality.” Rather, it goes to the very heart of
corporate governance. The “demand requirement embraces the policy that directors, rather than
stockholders, manage the affairs of the corporation.” Aronson, 473A.2d at 810. The Aronson
By its very nature the derivative action impinges on the managerial freedom of
directors. Hence, the demand requirement…exists at the threshold, first to insure
that a stockholder exhausts his intracorporate remedies, and then to provide a
safeguard against strike suits. Thus, by promoting this form of alternate dispute
resolution, rather than by immediate recourse to litigation, the demand
requirement is a recognition of the fundamental precept that directors manage the
business and affairs of corporations.
Id. at 811-12.
10
Plaintiff appears to recognize this defect, because it separately and derivatively challenges the ATAA in Count
Three.
11
This argument also applies to Counts Three and Five, which are styled as derivative claims.
12
As discussed below (at pages 13 et. seq. ), the business judgment rule provides the Special Committee with a
favorable presumption that precludes liability for alleged breaches of fiduciary obligation where the Special
Committee, as here, is comprised of independent members.
8
1. Plaintiff has not, and indeed cannot, allege a lack of independence by the
Special Committee, which approved the Transaction.
dismiss – and, indeed, as referenced above, whether pre-suit demand is excused – is whether
Plaintiff has adequately pled that the members of the Special Committee lacked independence.
Here, Plaintiff has not pled, or cannot plead, facts sufficient to call into question the
Under Delaware law, a plaintiff bears a heavy burden, and must allege a great deal in
Here, Plaintiff alleges that a relationship existed between the Special Committee directors
and Mr. Icahn, the controlling shareholder. However, such allegations are insufficient to
establish a lack of independence, where the only fact allegations are that the Special Committee
directors owed their positions on the Board to the controlling shareholder. Thus, in Aronson, the
court held that the fact that a 47% stockholder personally selected each member of the board was
insufficient to find lack of independence. 473 A.2d at 805. The Aronson court succinctly noted
that “it is not enough to charge that a director was nominated or elected at the behest of those
controlling the outcome of a corporate election. That is the usual way a person becomes a
corporate director.” Id. at 816. Moreover, the court noted that “proof of majority ownership of a
company does not strip directors of the presumptions of independence, and that their acts have
9
been taken in good faith and in the best interests of the corporation.” Id. at 815. Simply put, it is
not the law that a director lacks independence simply because the corporation is controlled by a
majority shareholder.
Similarly, personal friendship, without more, does not cast sufficient doubt on a
directors’ independence:
Beam v. Stewart, 845 A.2d 1040, 1052 (Del. 2004); Cal. Pub. Emples Ret. Sys. v. Coulter, C.A.
No. 19191, 2002 Del. Ch. LEXIS 144, at *28-29 (Del. Ch. Dec. 18, 2002) (observing that an
allegation of a lifelong friendship with an interested party alone is not sufficient to raise a
reasonable doubt of a director's disinterest or independence); Kohls v. Duthie, 765 A.2d 1274,
1284 (Del. Ch. 2000) (holding that a personal friendship between a member of a special
committee of the board and an interested party to the challenged transaction, as well as the fact
that the interested party had once given the director a summer job, were insufficient to challenge
the director's ability to exercise his independent judgment with respect to the transaction);
Benefore v. Jung Woong Cha, C.A. No. 14614, 1998 Del. Ch. LEXIS 28, at *9 (Del. Ch. Feb. 20,
1998) (stating that an allegation of a longtime friendship was not sufficient to raise a reasonable
doubt about a director's ability to exercise his judgment independently of his friend); The
Defining Tension in Corporate Governance in America, 52 Bus. Law. 393, 406 (1997)
10
(“Friendship, golf companionship, and social relationships are not factors that necessarily negate
independence. . .There is nothing to suggest that, on an issue of questioning the loyalty of the
CEO, the bridge partner of the CEO cannot act independently as a director. To make a blanket
argument otherwise would create a dubious presumption that the director would sell his or her
soul for friendship.”); In Whose Interest: An Examination of the Duties of Directors and Officers
in Control Contests, 26 Ariz. St. L.J. 91, 127 (1994) (recognizing that many factors – including
personal integrity, honesty, concern about their business reputations, and the threat of liability to
executives).
Here, Plaintiff’s Complaint alleges nothing other than the conclusory statement that the
Special Committee Defendants owed their positions as directors to Mr. Icahn. See Beigel Aff.,
Ex. A at ¶¶ 25-31. Furthermore, while Plaintiff has sued each and every board member, it is
beyond dispute that it was only the three members of the Special Committee who recommended
approval of the Transaction and then voted to approve the Transaction along with XO’s Chief
Executive Officer, Carl Grivner.13 Thus, even assuming the truth of the allegation that the
Special Committee members owed their seats to Mr. Icahn, XO’s majority stockholder, this
allegation falls far short of what is necessary in order to create a reasonable doubt as to the
relationships that the Special Committee members had with Mr. Icahn.
a. Robert Knauss
The allegations regarding Mr. Knauss are found in ¶ 29 of the Complaint. See Beigel
Aff., Ex. A. Plaintiff alleges Mr. Knauss has a “long history with Defendant Icahn and considers
13
The Complaint contains no material allegations whatsoever against Defendant board members Intrieri, Meister,
and Shea, as well as Mr. Grivner, and therefore, the Complaint must be dismissed against these Defendants on
this basis alone.
11
Icahn to be a ‘friend,’” has been “involved with Icahn in connection with WestPoint
International, Inc., Phillip Services Corporation and VISX Technologies;” and summarily states
that because of Mr. Knauss’ “long -standing relationship with Icahn, and because Icahn controls
the majority of XO’s outstanding commons stock, Defendant Knauss is beholden to Icahn and
owes his position as a director of XO to Icahn.” Id. The Complaint does not, and indeed cannot,
allege any other facts in support of its claim that Knauss is somehow tainted. These allegations,
as the courts consistently have held, are insufficient as a matter of law to establish a lack of
independence.14
Noticeably absent is any allegation that Mr. Knauss would financially benefit from the
challenged transaction. Similarly, there is no allegation that Knauss’ “relationship” with Icahn is
such that it would lead to a reasonable doubt as to Knauss’ independence. In fact, there is no
allegation about anything, other than the fact that Knauss has served on the boards of three
companies associated with Mr. Icahn (XO, WestPoint and PSC) and was on a slate of proposed
directors for a fourth (VISX). The case law resoundingly concludes that these facts are
‘dominated and controlled directors’ is insufficient.” Aronson, 473 A.2d at 816; see Beam v.
Stewart, 845 A.2d at 1050 (“Allegations of mere personal friendship or a mere outside business
relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s
b. Adam Dell
Plaintiff’s allegations as to Mr. Dell are equally ineffective to defeat the presumption of
independence. Plaintiff merely states that Mr. Dell has been a member of XO’s Board of
14
See pp. 8-10, supra.
12
Directors since May 2003 and notes that “Icahn included Dell in [his] slate of proposed directors
of Yahoo! Inc.” See Beigel Aff., Ex. A at ¶ 26. It also repeats the same legally useless
incantation that “because Icahn controls the majority of XO’s outstanding common stock, Mr.
As with Mr. Knauss, the allegations against Mr. Dell are wholly insufficient to raise a
reasonable doubt about his independence. They amount to nothing more than the innocuous fact
that Mr. Dell is on the XO board, of which Icahn is the controlling shareholder, and that
Mr. Icahn included Mr. Dell on a slate of directors for Yahoo!. These thinly pled facts fall short
of the necessary showing, as the case law repeatedly and unequivocally establishes.
c. Fredrik Gradin
alleges unremarkably that Mr. Gradin has been a member of the XO board since August 2004
and notes that he was a member of the Wireline Special Committee.15 See Beigel Aff., Ex. A at
¶ 27. The only additional allegation is, once more, the all too familiar and legally insufficient
claim that “because Icahn controls the majority of XO’s outstanding common stock, Defendant
Because of the clear insufficiency of the Complaint’s allegations against the Special
Committee, it is entitled to the benefit of the business judgment rule, which, as shown below,
provides the Special Committee with the presumption that entering into the Transaction did not
breach any fiduciary duty owed to XO. Thus, with the business judgment rule in place, Plaintiff’s
15
The Wireline Special Committee was the committee of Board members established in connection with the
proposed sale of a part of XO’s assets in 2005, which was never consummated. This withdrawn sale was the
focus of plaintiff’s previous Delaware derivative suit, which, as we previously noted is wholly irrelevant to this
action.
13
2. The Special Committee’s actions approving the Transaction are immune to
challenge under the business judgment rule.
Delaware directors. Aronson, 473 A. 2d at 812. Moreover, the rule is a “presumption that in
making a business decision the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the company.” Id.
“Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on
the party challenging the decision to establish facts rebutting the presumption.” Id. Therefore,
because the Special Committee, which recommended and voted for the Transaction, was
comprised of independent directors, the business judgment rule applies. See also, generally,
Gantler v. Stephens, 2008 Del. Ch. LEXIS 20, *25 (Del. Ch. Nov. 5, 2008), rev’d on other
Here, Plaintiff’s Complaint fails to allege facts, which, even if proved, would rebut the
business judgment’s rule favorable presumption. As Delaware courts have repeatedly held, a
court will not substitute its own judgment for that of the board’s, where the approval process was
controlled by a Special Committee of independent directors. See generally, Brehm v. Eisner (In
The approval by XO’s Special Committee of the Transaction is beyond reproach. Yet,
Plaintiff, demonstrating its bad faith even before the Transaction was entered into, put XO on
notice of its intent to sue. Thus, on January 24, 2008, an R2 affiliate sent a letter to the members
of the Special Committee threatening to sue if they agreed to any deal that Plaintiff considered
unfair. That letter stated, “[R2] will challenge any proposed transaction that it perceives to be
unfair to XO’s minority shareholders or is otherwise disadvantageous to XO.” See Beigel Aff.,
Ex. F. The letter also made it very clear that any litigation would be scorched earth and
14
threatened to inflict on the Special Committee members personal financial harm: “It is R2’s
intent to act immediately, and with every resource available, to challenge the offending
transaction and to seek recovery from the company, from Icahn and his associates, and if
appropriate from you personally – to the fullest extent possible under Delaware law. Given that
you do not have Mr. Icahn’s deep pocketbook to fall back on if the company’s D&O insurance
policy does not fully protect you, you should carefully consider your fiduciary duties and legal
obligations.” Id.
In the exercise of prudence, the Special Committee, as would be expected, sought counsel
from its attorneys, the highly regarded law firm of Dechert LLP. Dechert promptly responded to
Plaintiff’s threats:
The purpose of this communication is to assure you that the members of the
Special Committee are well aware of, and take with the utmost seriousness, their
fiduciary obligations as independent directors of the company and members of the
Special Committee. Since the events that prompted your lawsuit in the Delaware
Court of Chancery, the Special Committee has engaged this firm [Dechert] as its
independent counsel and Cowen and Company as its independent financial
advisor to, among other things, assist the Special Committee in evaluating any
refinancing, obtaining of new Capital or other transaction that may involve Icahn
or his affiliates.16
Besides what can only be characterized as Plaintiff’s bad faith in its conduct, not the
least of which is the frivolousness of its current Complaint, the law is squarely on the side of
Defendants as to any allegation that XO’s Board of Directors acted in bad faith. In Brehm v.
Eisner, the Delaware Supreme Court evaluated three types of behavior that might warrant the
“bad faith” label, and found that two of them did and one did not. First, the Court found that
“subjective bad faith,” that is, fiduciary conduct motivated by an actual intent to do harm,”
16
Plaintiff followed up with two additional threatening, malicious letters,. repeating similar false and threatening
statements with additional scurrilous flourishes. See Beigel Aff., Ex. F.
15
would constitute bad faith. 906 A.2d at 64.17 The Complaint here does not contain any
allegation that the Board was motivated by an actual intent to harm XO or its shareholders.
Second, the Court addressed whether gross negligence, without more, can constitute bad faith
and held “[t]he answer is clearly no.” Id. at 65. Likewise, the third basis, which may support a
finding of bad faith, namely, intentional dereliction of duty and a conscious disregard for one's
fiduciary obligation based on lack of good faith (or any other basis), because, first, it fails to
allege a lack of independence of the Special Committee Defendants, as a matter of law, and,
second, it does not allege that the Board intended to harm XO.
Not only is Plaintiff’s Complaint woefully insufficient, as a matter of law, for all the
benefits from the Transaction. XO stood to receive a prompt payment of additional cash
pursuant to the ATAA as soon as Starfire received any benefit from the NOLs, without having to
wait until XO earned a profit and could use the NOLs, as it would have had to do under the
original TAA. Compare Beigel Aff., Ex. B at ¶ 4, with Beigel Aff., Ex. C at ¶ 4. Indeed,
Plaintiff effectively concedes this point, having alleged that the original Tax Allocation
Agreement “did not require Icahn or Starfire to compensate XO for the use of the net operating
losses consumed by them unless XO could have used those losses in future tax years.” See
Beigel Aff., Ex. A at ¶ 36. Consequently, it cannot be disputed that XO stands to receive a
17
An allegation of bad faith is a legal conclusion, not entitled to a presumption of truth on a motion to dismiss.
Disney, 906 A.2d at 68.
16
Therefore, the documentary evidence clearly contradicts Plaintiff’s claim that the ATAA
was of no benefit to XO. Because the original TAA conferred a benefit on XO and was
approved by the bankruptcy court, it can hardly claim now that XO received no benefit from the
ATAA, which conferred on XO the opportunity for an increased financial benefit over the
The final salvo of the first two counts of Plaintiff’s Complaint is the allegation that the
solicitations by third parties to purchase all or some of the assets of XO. Quite apart from the
fact that this claim also fails because Plaintiff does not sufficiently allege lack of independence
and therefore the Board is entitled to the benefit of the business judgment rule, Delaware law is
clear that Board members do not have a duty to sell the corporation or its assets, except in
extremely limited circumstances, not alleged or present here. Unless the Board’s refusal to sell
Thus, in the absence of any allegation that the Board was faced with a hostile takeover attempt,
the refusal to pursue a sale to a third party is not a defensive action and a breach of the Board’s
duty. See generally, Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 958 (1985); e.g.,
Gantler v. Stephens, 2008 Del. Ch. LEXIS 20, *25.19 As one Delaware Court has summarized
17
(holding that a shareholder is under no duty to sell its holdings in corporation
even if it is a majority shareholder, merely because the sale would profit the
minority). Similarly, directors of the corporation have no obligation to approve a
sale of the company's assets, even if such a sale would be advantageous, where
the directors rightfully hold a veto of such a sale as shareholders. Thorpe v.
CERBCO, Inc., Del. Supr., 676 A.2d 436, 437 (1996) (discussing Thorpe v.
CERBCO, Inc., Del. Ch., C.A. No. 11713, Allen, C. (Oct. 29, 1993), Mem. Op. at
10-11, where Chancellor Allen held that a majority stockholder's ownership of its
stock includes the property right to cast the controlling vote and to veto a sale of
the business, even if a sale would be in the best interests of minority
stockholders).
Cincinnati Bell v. Ameritech, 1996 Del. Ch. LEXIS 116, *36 (Del. Ch. Sept. 3, 1996).
Plainly, Plaintiff’s attack on the Special Committee’s alleged failure to pursue third party
limit the liability of their directors as provided in the Certificate. In fact, XO’s Certificate of
Incorporation insulates XO’s directors from liability except for any breach of the director's duty
of loyalty to the corporation or its stockholders or for any act or omission not in good faith or
which involves intentional misconduct or a knowing violation of law. See Beigel Aff., Ex. H at ¶
9.
As a consequence, “[a] defense under § 102(b) (7) may be considered in the context of a
Elkins, 2004 Del. Ch. LEXIS 122, *37 (Del. Ch. Aug. 24, 2004). Thus, for example, the court in
IT Litig. Trust Inc. v. D'Aniello (IT Group Inc.), 2005 U.S. Dist. LEXIS 27869, *41 (D. Del.
Nov. 15, 2005), held that the duty of care claims must be dismissed because the corporate
gross negligence are barred by the exculpatory provision. “Actions taken that are even grossly
18
negligent. . .will be shielded by a § 102 (b)(7) provision.” Official Comm. of Unsecured
Creditors of Integrated Health Servs., 2004 Del. Ch. LEXIS 122, *37.20 Therefore, because
XO’s Certificate of Incorporation contains an exculpatory provision, Counts One and Two must
be dismissed.
In Count Three, Plaintiff has extracted the ATAA from the Transaction and attacked its
legal propriety as a waste of corporate assets. However, since it is beyond question that XO
received a benefit from the ATAA, to wit, the opportunity for immediate payment upon
Starfire’s use of NOLs,21 it is absurd, to say the least, to claim that XO’s Board was guilty of
wasting a corporate asset, especially where the terms of the ATAA were an improvement over
Therefore, it comes as no surprise that the hurdles a plaintiff must negotiate to challenge
such a transaction are even higher than conventional attacks on the performance of duties by
corporate directors. In a leading Delaware case dealing with what a plaintiff must establish to
The most quoted formulation [of the standard applicable to a claim of corporate
waste] is “Where waste of corporate assets is alleged, the court, notwithstanding
independent stockholder ratification, must examine the facts of the situation. Its
examination, however, is limited solely to discovering whether what the
corporation has received is so inadequate in value that no person of ordinary,
sound business judgment would deem it worth what the corporation has paid. If it
can be said that ordinary businessmen might differ on the sufficiency of the terms,
then the court must validate the transaction.”
Unimarts v. Nirenberg, 1996 Del. Ch. LEXIS 95, *17-18 (Del. Ch. Aug. 9, 1996) (quoting Saxe
v. Brady, 40 Del. Ch. 474, 184 A.2d 602, 610 (Del.Ch. 1962). “A claim of waste will arise only
20
Obviously, if Count One fails, then so does Count Two for aiding and abetting.
21
The proceeds from the Offering also allowed XO to satisfy its debt.
19
in the rare, ‘unconscionable case where directors irrationally squander or give away corporate
assets.’ This onerous standard for waste is a corollary of the proposition that where business
judgment presumptions are applicable, the board's decision will be upheld unless it cannot be
‘attributed to any rational business purpose’.” Brehm v. Eisner, 906 A.2d at 74 (citations
In sum, as we have already noted in the context of Counts One and Two, where Plaintiff
challenges the Transaction as a whole, the allegations that the XO Board wasted a corporate asset
in entering into the ATAA represent nothing more than quibbling with the amount of
consideration, which clearly was substantial. Thus, Count Three must be dismissed.
Aside from the obvious, that Count Four redundantly attempts to create a separate duty
owed by Mr. Icahn as majority shareholder to minority shareholders including Plaintiff, distinct
from his fiduciary obligations as a member of the XO’s Board of Directors, Delaware law simply
does not sanction such a claim, where the transaction at issue is approved by independent Board
members, as was the case here with the Special Committee. See, e.g., Puma v. Marriott, 283
20
A.2d 693, 694 (Del. Ch. 1971) (“I conclude that since the transaction complained of was
independent directors whose sole interest was the furtherance of the corporate enterprise, the
court is precluded from substituting its uninformed opinion for that of the experienced,
only overcome the presumption of the business judgment rule but also allege facts sufficient to
establish both unfair dealing and unfair price. Here, in the absence of alleging sufficient facts to
show a lack of independence by the Special Committee Defendants, Plaintiff cannot overcome
the presumption of the business judgment rule with respect to the Special Committee’s approval
of the Transaction. As to unfair price, Plaintiff has relied entirely on its allegations of corporate
waste, which, as has already been discussed, are insufficient as a matter of law. Moreover, once
Plaintiff’s claim of lack of independence fails against the Special Committee Defendants, its
direct claim against Mr. Icahn also fails. In short, Plaintiff’s attempt at a direct claim in Count
Four does nothing more than reconstitute in a different form the inadequate allegations made in
Finally, Plaintiff has failed to allege that the terms of the Transaction were non-
negotiable. In fact, Plaintiff’s Complaint recounts in detail the intensive negotiations engaged in
by the Special Committee, with the assistance of independent advisors. Therefore, the mere fact
that Mr. Icahn was a majority shareholder does not, by itself, demonstrate that he dictated the
terms of the Transaction. Moreover, there are simply no allegations, other than the generalized
flawed allegation that the Special Committee Defendants owed their Board seats to Mr. Icahn,
22
Even in the context of a merger, not present here, a plaintiff must demonstrate “unfair price.” See, e.g., Gabelli
v. Liggett, Group, 1983 Del. Ch. Lexis 418 (Del Ch. 1983). In this case, however, there was no merger and no
price, but simply, a reasonable method of allocating XO’s losses for tax purposes, to the benefit of XO.
21
which defeat the business judgment rule or justify imposing on Mr. Icahn separate liability
because of his majority shareholder status. See, e.g., Gilbert v. El Paso Corp., 1988 Del. Ch.
LEXIS 150, *30 (Del. Ch. Nov. 21, 1988) (“the directors may take whatever action that, in their
proper exercise of business judgment, will best serve the interests of the corporation or the entire
body of shareholders. That such action may adversely affect the interests of a particular
will have occurred if the directors are able to justify the result as furthering a paramount or
In other words, in the absence of allegations that Mr. Icahn or his affiliates disabled the
independence of the Special Committee or forced a result on XO and its minority shareholders,
no claim is stated. Plaintiff, already a minority shareholder before the Transaction, has not
alleged any loss in equity because of the Offering, in which it could have participated, but did
not. In short, Count Four adds nothing of value to the previous defective counts.
Once it becomes clear, as we believe it has, that Plaintiff has no claim for waste of
corporate assets, its tag-along claim for an illegal corporate gift may be summarily disposed of.
Clearly, there was consideration for the ATAA, to wit, the adjustment to the original TAA,
favorable to XO. Nowhere in the factual allegations is there any basis whatsoever in calling the
ATAA a “gift.”
The Delaware courts have made it abundantly clear that an unlawful gift is a transfer for
no consideration. See, e.g., Michelson v. Duncan, 407 A.2d 211, 216 (Del. 1979) (“The essence
of a claim of gift is lack of consideration.”) Thus, having first challenged the ATAA as waste
because of inadequate consideration, it claims in Count Five that there was no consideration at
22