Monday, November 23, 2015

Stockholder ‘Slept’ on Quasi-Appraisal Claim, Barred by Laches

By Lene Powell, J.D.

The Delaware Court of Chancery dismissed an action alleging that a company director breached his fiduciary duty in a merger, ruling that although the statute of limitations had not expired, the action was barred by laches as a matter of equity. The plaintiff’s decision to wait until after a related action failed in Minnesota before bringing suit in “a rather leisurely fashion” in Delaware was unreasonable and caused the defendants prejudice in defending the suit and pursuing indemnification rights (Houseman v. Sagerman, November 19, 2015, Glasscock, S.).

“It is in light of the foreseeable hardship…caused by Mrs. Houseman’s sleeping on her rights that I find that her 27-month delay in pursuing this action clearly unreasonable,” said Vice Chancellor Glasscock.

Background. In 2006, Nancy Houseman and her husband sold a company to Universata, Inc. for a seven-year stream of payments. Three years later, Universata had trouble making the payments and negotiated a new arrangement in which it converted part of the remaining payments to shares of Universata common stock and appointed Mr. Houseman to the board of directors. In addition, the Housemans entered into an agreement with then-Chairman Thomas Whittington that gave the Housemans a right to force Whittington personally to purchase up to all their Universata shares at a specified price (the Put Contract).

On May 10, 2011, Universata announced it had entered into a preliminary agreement to be acquired by HealthPort Technologies. Universata sent stockholders, including Mrs. Houseman, an information statement describing the stockholders’ right to seek appraisal. The preliminary merger agreement provided that Universata stockholders would receive $1.02 per share in cash and other consideration. In the following weeks, Universata CEO Eric Sagerman urged the Housemans to waive their appraisal rights because he feared that postponing the waiver would jeopardize the merger. Opposed to the merger and believing that it would not close if she did not waive her appraisal rights, Mrs. Houseman did not execute a waiver. The merger agreement was executed a few weeks later and stockholders received $1.02 per share in cash.

After the merger closed, the Housemans refused to tender their shares, instead seeking to “put” their shares to Whittington pursuant to the Put Contract. The Housemans filed suit in Minnesota state court for breach of the Put Contract, but the action was dismissed in February 2012. A year and a half later, they brought suit in Delaware for breach of fiduciary duty and other claims. In April 2014, the Court of Chancery dismissed all counts except one for “quasi-appraisal” against HealthPort and a demand for an accounting by Whittington regarding escrow distributions.

Quasi-appraisal. The court explained that quasi-appraisal is not itself a cause of action but a remedy that, where appropriate, awards stockholders damages based on the going-concern value of their previously owned stock upon a finding of a breach of fiduciary duty, such as the duty to disclose. Mrs. Houseman argued that she was unable to make an informed decision regarding her appraisal rights because the defendants breached their fiduciary duties by failing to give stockholders the final version of the merger agreement, failing to give stockholders the correct version of the appraisal statute, and incorrectly informing the Housemans that the merger would not proceed unless the Housemans waived their statutory appraisal rights. The defendants moved for summary judgment, arguing that even if this were all true, the action should be barred by the equitable doctrine of laches because Mrs. Houseman unjustifiably delayed bringing the action in Delaware.

Laches. Observing that “equity aids the vigilant, not those who slumber on their rights,” the court ruled that the defendants had met the three-factor test for laches. First, Mrs. Houseman had knowledge of a fiduciary duty claim when the merger closed on June 1, 2011. She knew she had appraisal rights, and after the merger was completed, knew that she had been deceived by Whittington into believing the merger could not be finalized without her waiver of her appraisal rights. Therefore, for purpose of a laches analysis, Mrs. Houseman was aware of her claims no later than June 1, 2011.

Second, Mrs. Houseman unjustifiably delayed bringing the action. She could have pursued a breach-of-duty action in Delaware at the same time she brought the breach-of-contract action in Minnesota, but held off until after she lost in Minnesota. Although the analogous statute of limitations was three years, this did not control a court sitting in equity. The court found unavailing Mrs. Houseman’s reasons for not bringing the two actions simultaneously. Litigation costs were part of the tactical decision but were not relevant for purposes of a laches analysis, and the foreseeable hardship to defendants rendered the 27-month delay unreasonable.

Finally, the delay caused prejudice to the defendants. The defendants lost the ability to use escrow funds to offset their litigation costs and could no longer file a D&O insurance claim, as the insurance had lapsed by the time the complaint was filed. In addition, the defendants no longer had access to the information necessary to defend a position as to the value of the company as a going concern, because valuation becomes progressively harder to do as the valuation date grows more remote.

Partial summary judgment granted. The court granted partial summary judgment to the defendants on the quasi-appraisal claim. The accounting action remained pending.

The case is No. 8897-VCG.