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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TIMOTHY J. HARRIS, on behalf of )
himself and derivatively on behalf of )
Harris FRC Corporation and The Mary )
Ellen Harris 2011 Grantor Retained )
Annuity Trust, )
)
Petitioner/Plaintiff, )
)
and )
)
KRISTEN HARRIS and MEGAN )
LOEWENBERG, on behalf of themselves )
and derivatively on behalf of Harris FRC )
Corporation and The Mary Ellen Harris )
2011 Grantor Retained Annuity Trust, )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0736-JTL
)
MARY ELLEN HARRIS, JUDITH )
LOLLI, CHARLES GRINNELL, ROYCE )
MANAGEMENT, INC., MICHAEL )
SCHWAGER and PAUL PETIGROW, )
)
Defendants, )
)
and )
HARRIS FRC CORPORATION, a New )
Jersey Corporation, )
)
Respondent, )
)
and )
)
HARRIS FRC CORPORATION, a New )
Jersey Corporation and THE MARY )
ELLEN HARRIS 2011 GRANTOR )
RETAINED ANNUITY TRUST, )
)
Nominal Defendants. )
MEMORANDUM OPINION
Date Submitted: November 9, 2022
Date Decided: January 6, 2023
Joel Friedlander, Christopher M. Foulds, David Hahn, FRIEDLANDER & GORRIS, P.A.,
Wilmington, Delaware; Counsel for Petitioner/Plaintiff Timothy J. Harris.
S. Michael Sirkin, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP, Wilmington
Delaware; Gregory Lomax, LAULETTA BIRNBAUM, LLC, Sewell, New Jersey; Jill
Guldin, FISHER BROYLES, LLP, Princeton, New Jersey; Counsel for Kristen C. Harris
and Megan Loewenberg.
David A. Jenkins, Julie M. O’Dell, SMITH, KATZENSTEIN & JENKINS LLP,
Wilmington, Delaware; Counsel for Mary Ellen Harris.
Steven L. Caponi, Matthew B. Goeller, Megan E. O’Connor, K&L GATES LLP,
Wilmington, Delaware; Counsel for Mary Ellen Harris, Paul Petigrow, and Michael
Schwager.
Kurt M. Heyman, Patricia L. Enerio, Gillian L. Andrews, HEYMAN ENERIO GATTUSO
& HIRZEL LLP, Wilmington, Delaware; Counsel for Royce Management, Inc., Judith
Lolli, and Charles Grinnell.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP
(US), Wilmington, Delaware; Neal J. Levitsky, E. Chaney Hall, FOX ROTHSCHILD LLP,
Wilmington, Delaware; Emily A. Kaller, GREENBAUM, ROWE, SMITH & DAVIS LLP,
Woodbridge, New Jersey; Counsel for Harris FRC Corporation.
William M. Kelleher, Phillip A. Giordano, Madeline Silverman, GORDON, FOURNARIS
& MAMMARELLA, P.A., Wilmington, Delaware; Counsel for The Mary Ellen Harris
2011 Grantor Retained Annuity Trust.
LASTER, V.C.
Harris FRC Corporation (the “Company”) is a family-owned corporation. The
plaintiffs are three of the five children of Dr. Robert M. Harris, Sr., and Mary Ellen Harris.1
The plaintiffs allege that Mary Ellen and four of her close friends and advisors schemed to
seize control of the Company in 2015 as Dr. Harris’s health was failing. Mary Ellen and
her advisors then engaged in a series of self-dealing transactions that tunneled millions of
dollars out of the Company. They also used Company funds to perpetuate their control.
In 2019, after one of the plaintiffs started asking questions, the defendants caused
the Company to merge into a newly formed New Jersey shell corporation (the “Outbound
Merger”). The Outbound Merger deprived the plaintiffs of standing to seek books and
records under Delaware law, but it opened up another route to information. One of the
plaintiffs sought appraisal and used discovery in that action to access material previously
sought in a books-and-records demand. With the benefit of that information, the plaintiffs
have asserted plenary claims for breach of fiduciary duty against Mary Ellen, as well as
claims for breach of fiduciary duty and for aiding and abetting breaches of fiduciary duty
against the advisors. The amended complaint challenges the Outbound Merger, contending
that it too was a breach of fiduciary duty and that the minority stockholders were not
1
My standard practice is to identify individuals by their last name without
honorifics. When individuals share the same last name, my standard practice is to shift to
first names. Using first names is confusing because Dr. Robert M. Harris has a son with
the same name. This decision therefore refers to the father as “Dr. Harris.” That reference
is sadly confusing as well, because one of the plaintiffs is Dr. Timothy J. Harris. This
decision refers to him as “Tim Harris.” The English language lacks a fitting collective noun
for adult children; “children” remains technically accurate but implies minor status. This
decision refers to the five adult children collectively as the “Siblings.”
provided with all material information in connection with their decision to pursue or
eschew appraisal.
Two of the advisors contend that the Outbound Merger deprived the plaintiffs of
standing to assert any derivative claims relating to conduct that predated the effective time
of that transaction. As a matter of judicially created common law, the continuous ownership
rule requires that a plaintiff who asserts derivative claims maintain stockholder status
throughout the litigation. Under controlling precedent, a stock-for-stock merger in which a
stockholder’s shares in the acquired corporation are converted into shares in the surviving
corporation deprives the stockholder of the ongoing equity interest that is necessary to
satisfy the rule. Invoking this rule, the moving defendants contend that any derivative
claims that challenge matters that preceded the Outbound Merger must be dismissed. They
claim that the plaintiffs cannot litigate—and the court cannot consider—any issues
involving the dismissed claims.
The moving defendants are correct as to the plaintiffs’ lack of standing to litigate
derivative claims about pre-merger conduct, but not as to its implications for the case. The
plaintiffs have asserted a direct claim challenging the Outbound Merger. Delaware law
permits sell-side stockholders to challenge a merger directly for failing to afford value to
derivative claims. When the extinguishment of derivative standing confers a unique benefit
on the fiduciary that effectuated the merger, the fiduciary must prove that the merger was
entirely fair, including that itprovided stockholders with a fair share of the value of the
derivative claims. The plaintiffs can continue to litigate the derivative claims, not as
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derivative claims that can support relief in their own right, but as assets to be valued as part
of the plaintiffs’ challenge to the Outbound Merger.
The motion to dismiss the derivative claims about events pre-dating the Outbound
Merger is granted. The granting of that motion and the resulting focus on the Outbound
Merger has knock-on effects for other claims in the case. For present purposes, it warrants
staying the plaintiffs’ claims for breach of fiduciary duty and for aiding and abetting
breaches of fiduciary duty that are based on conduct that took place after the Outbound
Merger. If the plaintiffs prevail on their challenge to the Outbound Merger and are awarded
the remedy of quasi-appraisal, then they will receive full value for their shares as of the
effective date for the Outbound Merger (plus interest). The court would condition that relief
on the plaintiffs tendering their shares to the Company, as they would do if they had
pursued an appraisal for all of their shares. The effect of that relief would be that the
plaintiffs no longer would have an equity interest in the Company that could support claims
about post-merger conduct. The litigation as to post-merger claims is therefore stayed.
I. FACTUAL BACKGROUND
The facts are drawn from the plaintiffs’ Verified Supplemental and Third Amended
Complaint (the “Complaint”) and the documents that it incorporates by reference.2 At this
procedural stage, the plaintiffs are entitled to have the court credit their allegations and
2
Citations in the form “Ex. __” refer to documents attached to the Affidavit of
Christopher M. Foulds, which collects certain documents that are incorporated by reference
in the complaint. Dkt. 467.
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draw all reasonable inferences in their favor.
A. The Company
Before May 2016, the Company was a New Jersey corporation. From May 2016
until May 2019, the Company was a Delaware corporation. Since May 2019, the Company
has been a New Jersey corporation. It is and always has been a family-held entity.
Currently, its only stockholders are Mary Ellen, the five Siblings, and various trusts created
for their benefit. The plaintiffs in this action are three of the Siblings: Tim Harris, Kristen
Harris, and Megan Harris Loewenberg. As discussed below, another Sibling previously
sued Mary Ellen and the Company and reached a settlement.
Dr. Harris founded the Company after securing the patent rights for
an epilepsy drug. He monetized the patent rights through a license agreement with a global
biopharmaceutical company and formed the Company to hold the rights and receive royalty
payments. That revenue stream historically amounted to approximately $100 million per
year. The Company’s only significant function was to collect and distribute the payments.
In 2020, the Company sold its patent rights for $342 million in cash. The Company
currently holds a pool of cash of around $120 million. It has no operating business.
The Company has issued 1,000 shares. Originally, Dr. Harris and Mary Ellen owned
the shares jointly as tenants by the entireties. In 2002, they transferred 38 shares to each of
the Siblings, resulting in each owning a 3.8% interest. In 2011, Dr. Harris and Mary Ellen
each created a grantor retained annuity trust (a “GRAT”) and funded each GRAT with 245
shares. The GRATs had terms of seven years and would expire on December 31, 2018. At
that point, the shares would be distributed to the Siblings, with each receiving an additional
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49 shares. Through the combination of the 190 shares they received directly and the 490
shares distributed from the GRATs, the Siblings would receive a total of 680 shares. In
total, the transactions would transfer a 68% interest in the Company from the parents to the
Siblings.
B. Dr. Harris’s Illness
In October 2013, Dr. Harris was diagnosed with an aggressive form of aphasia
consistent with Alzheimer’s disease. After an MRI, two distinguished specialists at
Columbia University confirmed the diagnosis.
As Dr. Harris’s health deteriorated, Judith Lolli insinuated herself into Mary Ellen’s
financial life. Lolli and Mary Ellen are next-door neighbors in Holmdel, New Jersey. They
also own adjacent beach houses in Point Pleasant, New Jersey. They are so close that Lolli
appears to have spliced Mary Ellen Harris’s cable connection and run a cable to her own
home. Phone logs show that Mary Ellen and Lolli text many times a day.
Lolli brought Mary Ellen into contact with her own friends and advisors. Paul
Petigrow is a New Jersey lawyer who served as Lolli’s personal counsel. Petigrow
promptly became Mary Ellen’s personal counsel as well.
Charles Grinnell is a New Jersey lawyer and career prosecutor who investigated and
prosecuted the gangland murder of Lolli’s brother, then became her close friend. Michael
Schwager is Lilli’s personal accountant and another close friend. Like the Complaint, this
decision refers to Lolli, Petigrow, Grinnell, and Schwager collectively as the “Advisors.”
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C. The Takeover
With Dr. Harris’s health declining, questions arose as to who would lead the
Company. Mary Ellen had no experience or qualifications for the role. The eldest Sibling,
Robert M. Harris, Jr., had worked at the Company since 2000, held the office of Vice
President, and managed the relationship that generated the Company’s royalty stream.
A power struggle ensued with Mary Ellen and the Advisors on the one side and
Robert on the other. In April 2015, eighteen months after his Alzheimer’s diagnosis, Dr.
Harris purportedly acted by written consent to remove Robert from his position as an
officer.3 The written consent added Mary Ellen to the board of directors (the “Board”),
where Dr. Harris had been the sole director. The plaintiffs assert that Dr. Harris did not
have the capacity to execute the written consent and that Lolli pulled the strings so that
Mary Ellen gained control over the Company.
Immediately after the first consent, Dr. Harris and Mary Ellen executed a second
consent that caused the Company to enter into “an agreement with Lolli in substantially
the form submitted hereto.” Compl. ¶ 32. The consent did not attach an agreement. In June
2015, Lolli and Mary Ellen executed an employment agreement which provided for Lolli’s
compensation to be determined at an unspecified future date. The Company began
providing Lolli with benefits and paying her $15,000 as an employee. The Company
retained Grinnell as a consultant at a rate of $110 per hour. Petigrow began doing legal
3
The Complaint alleges that Robert also signed a letter of resignation. In any event,
he was out.
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work for the Company. Schwager took over as the Company’s accountant. The Advisors
had gotten their noses inside the tent.
In the second half of 2015, Lolli and Grinnell formed Royce Management, Inc.
(“Royce”) as a vehicle for providing management services to the Company. In October,
the Company began paying Royce $208,000 a month or $2,496,000 per year. The Company
and Royce subsequently entered into a management services agreement that paid Royce
$208,334 per month, or $2,500,128 per year. The agreement renewed automatically every
year and provided for an annual fee escalator of 3.5%. The Company and Royce have
amended the management services agreement twice, each time making it more favorable
to Royce. In addition to the monthly fee, Mary Ellen has approved large end of year
bonuses for Royce. In total, Royce received over $20 million from the Company between
October 2015 and December 2020.
Royce is a shell. It has no employees other than Lolli and Grinnell, and it has no
other clients. It has no assets other than its contract with the Company. It operates out of
the Company’s offices. It exists solely to channel money to Lolli and Grinnell. It has no
expenses other than their salaries, pension contributions, distributions, and two $1,000 per
month luxury car leases.
D. Dr. Harris’s GRAT
To maintain control over the Company, Mary Ellen and the Advisors had to deal
with the GRATs. If the GRATs distributed 480 shares to the Siblings, then control over the
Company would pass to them.
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Around the same time that the Company began paying Royce, Lolli served as a
witness when Dr. Harris purportedly amended his GRAT and executed a codicil to his will.
Petigrow oversaw the drafting of the documents. The principal consequence of the
amendments was to redirect the 290 shares in Dr. Harris’s GRAT from the Siblings to Dr.
Harris’s marital trust. That trust benefits Mary Ellen, and she has a power of appointment
over its corpus, enabling her to determine where the assets go when the GRAT terminates.
The transaction reduced the number of Shares that the Siblings would receive from 680 to
435, below majority control. The amendments to Dr. Harris’s GRAT and the codicil to his
will are not at issue in this litigation, but they provide important context.
The Advisors wanted a cooperative trustee to oversee Dr. Harris’s GRAT and the
marital trust, so Lolli and Grinnell turned to Dan Selcow, a wealth manager at First
Republic Bank who was also a friend of Petigrow and Schwager. After they brought some
of the Harris’s personal accounts to Selcow to manage, Selcow arranged for First Republic
Trust Company of Delaware LLC (“First Republic Delaware”) to take over as trustee.
E. The Idea For The Inbound Merger
It was readily apparent that Robert might bring litigation over his removal and the
events at the Company. New Jersey recognizes a claim for minority stockholder
oppression, and available remedies include orders dissolving the corporation or appointing
a custodian or provisional directors. A stockholder oppression lawsuit thus threatened to
deprive Mary Ellen and the Advisors of control.
Mary Ellen and the Advisors believed that Delaware law would be more protective
of their activities, so they started working on a merger that would move the Company to
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Delaware (the “Inbound Merger”). As Mary Ellen colorfully put it, “I have to work out a
billion things at the office to get things ready for Delaware. They have better laws regarding
shit like bob is pulling and we have connections there.” Ex. 1.
In November 2015, Petigrow drafted Dr. Harris’s letter of resignation from the
Board. Dr. Harris purportedly signed it on November 16, two years after his Alzheimer’s
diagnosis. His resignation left Mary Ellen as the sole director. Petigrow drafted a power of
attorney in which Dr. Harris empowered Mary Ellen to act on his behalf. Dr. Harris
purportedly signed it, and Lolli witnessed it. Petigrow also drafted two proxies that Mary
Ellen could use to vote Dr. Harris’s shares, one for Dr. Harris to sign and one for Mary
Ellen to sign using her power of attorney.
In December 2015, Mary Ellen provided an initial set of approvals for the Inbound
Merger. She also appointed herself President and began paying herself $5 million per year
for serving in that role. She continued the payments until 2019, when she resigned after the
filing of this litigation. She appointed a lawyer to succeed her and paid him 11.5% of what
she paid herself.
On December 7, 2015, Petigrow and Mary Ellen formed a Delaware corporation to
use in the Inbound Merger. Two weeks later, Robert had his attorney send a letter to the
Company that formally threatened litigation.
F. Value Extraction On A Larger Scale
In 2016, Mary Ellen and the Advisors stepped up their extraction of value from the
Company. In February 2016, Mary Ellen signed a written consent approving an
employment agreement with Petigrow. It paid him $600,000 per year to serve as Vice
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President and General Counsel for the Company. Petigrow continued to run a solo law
practice out of the Company’s offices, using the Company’s personnel and resources, and
without paying rent. Given his full-time law practice, Petigrow worked only part-time and
sporadically as General Counsel.
In March 2016, Lolli had a physician friend declare Dr. Harris incapacitated. That
same month, Mary Ellen adopted a resolution in her capacity as sole director that paid Dr.
Harris a bonus in the amount of $15 million. In light of Dr. Harris’s incapacitation, the $15
million bonus was a disguised distribution to Mary Ellen.
Schwager cashed in too. Because of the Company’s minimal operations, the services
it required for its accounting and taxes should have cost $20,000 to $30,000 per year. The
Company paid Schwager simultaneously on two parallel schedules: (i) $12,500 a month
for a total of $150,000 per year, and (ii) $25,000 quarterly for another $100,000 per year.
He also received annual “Merry Christmas” bonuses of $35,000. Schwager thus raked in
$285,000 per year, ten times what the Company should have been paying.
On May 1, 2016, the Inbound Merger became effective, and the Company emerged
as a Delaware corporation. Robert exercised dissenters’ rights and pursued an appraisal
proceeding in New Jersey state court. He also filed plenary litigation. He later settled for a
payment of $20 million from the Company.
Now firmly in control, and believing they had greater protection under Delaware
law, Mary Ellen and the Advisors used Company funds to pay for an array of personal
expenses. On the Company’s taxes, Schwager deducted the expenses as if they were
business related.
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In April 2017, Dr. Harris died. The shares in his GRAT that would have gone to the
Siblings passed to the marital trust.
G. Tim Harris Hires Counsel And Asks Questions.
The Siblings had become concerned about what Mary Ellen and the Advisors were
doing. In March 2019, the Company informed the Siblings that its majority stockholder
had acted by written consent in lieu of an annual meeting, so no annual meeting would be
held. Tim Harris objected and told Grinnell that an annual meeting was required under
Delaware law. The Company reversed course and noticed an annual meeting.
On April 10, 2019, Tim Harris’s counsel in this action attended the annual meeting
as his proxy. Petigrow and Grinnell attended for the Company. Mary Ellen did not attend.
Petigrow chaired the meeting. Grinnell refused to identify himself. Petigrow called for a
vote for the election of Mary Ellen as the Company’s sole director and exercised proxies
from Mary Ellen and First Republic Delaware in favor of her election. The proxies
represented a majority of the Company’s voting power. After tallying the vote, he called
the meeting to a close.
Before the meeting was adjourned, Tim Harris’s counsel asked for a report on the
business of the Company, then followed up with a series of specific questions. Petigrow
and Grinnell failed to provide substantive answers on numerous topics. Grinnell repeatedly
asserted that all stockholder questions needed to be put in writing.
H. The Outbound Merger
With Tim Harris having retained a Delaware lawyer who had started asking
questions, it did not take a Tiresias to foresee that a books-and-records demand could be
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coming soon, or that litigation might follow. Within a week after the annual meeting, the
Advisors started working on a plan to move the Company out of Delaware and back into
New Jersey (the “Outbound Merger”). Grinnell circulated a New Jersey Supreme Court
decision which indicated that under New Jersey law, inspection rights could be limited to
formal documents like financial statements, minutes, and a list of stockholders. The
Company did not keep meetings, and Schwager prepared the Company’s financial
statements so that they did not reveal the many self-interested transactions or the payments
to Royce. The Outbound Merger thus could be used to prevent Tim Harris from obtaining
information about what was going on at the Company. The Advisors also thought that the
Outbound Merger would cut off the Siblings’ standing to assert derivative claims regarding
events predating the merger, as they have argued in this case. It therefore seemed that they
could move the Company back to New Jersey without walking into the type of lawsuit for
stockholder oppression that they originally moved to Delaware to evade. And if someone
eventually threatened such a lawsuit, they could always move the Company again.
On May 6, 2019, Tim Harris sent the Company a written demand for documents
under Section 220. On May 13, the Company refused to produce any documents, claiming
the demand constituted “harassment.” Compl. ¶ 127.
The Outbound Merger became effective on May 17, 2019. Mary Ellen approved the
Outbound Merger as a director, and Mary Ellen and First Republic Delaware executed
written consents approving it as stockholders.
The notice disseminated in connection with the Outbound Merger provided scant
information. It offered only the following justification:
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The Delaware Reincorporation was effected with the intent of capturing
certain efficiencies that were deemed at the time to be in the best interest of
the predecessor company and its stockholders. The board of directors of
Harris Delaware has determined that the circumstances giving rise to such
potential efficiencies are no longer present. . . . Harris Delaware’s board of
directors has determined that itis advisable for Harris Delaware’s internal
affairs to be governed by New Jersey law.
Id. ¶ 131. The notice did not discuss the effect on stockholder inspection rights or derivative
claims. It did not include any information about the large payments going to Royce and to
Schwager, the plentitude of personal expenses being paid for by the Company, or the
numerous entities being run out of the Company’s offices. The financial statements
attached to the notice obscured those payments.
After the Outbound Merger, Mary Ellen and the Advisors caused the Company to
break with a decade-long practice of making quarterly distributions, even though the
Company was an S Corporation and so the stockholders had to pay taxes on imputed
income. Mary Ellen has admitted that the change was made so that the Siblings would not
have funds to pay their attorneys. The change did not affect Mary Ellen, who was having
the Company pay for her counsel while paying herself $5 million per year.
I. This Litigation
The Outbound Merger stymied Tim Harris’s attempt to use Section 220, but it
opened up another informational avenue. Tim Harris sought appraisal for one share of
Company common stock. In discovery, he sought the information that a books-and-records
inspection would have generated. Discovery did not go smoothly, and the court has
expended significant judicial resources addressing various discovery motions. After
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considerable effort, Tim Harris and his counsel were able to obtain some of the information
they had requested.
In September 2021, Tim Harris filed an amended petition and complaint that added
plenary claims for breach of fiduciary duty against Mary Ellen and claims for breach of
fiduciary duty and aiding and abetting against the Advisors.
In October 2021, Kristen Harris and Megan Harris Loewenberg joined the case as
additional plaintiffs. That same month, Mary Ellen and the Advisors recruited Robert
Pincus, a respected Delaware lawyer, to join the Board and serve as a one-person special
litigation committee (the “SLC”). The plaintiffs stood down to permit the SLC to
investigate. The plaintiffs also agreed to mediate with the SLC.
On December 29, 2021, while the SLC’s counsel was on vacation, the Company
filed an answer. The answer included numerous denials of factual allegations; claimed that
demand was required, even though the SLC had already been formed; and alleged that Tim
Harris brought the Delaware action in bad faith. The decision whether to file an answer fell
within the SLC’s authority, yet the Company filed the answer without informing the SLC
or seeking the SLC’s approval.
On January 21, 2022, Pincus resigned from the Board, disbanded the SLC, and
expressly took no position on the plaintiffs’ claims.
J. The Currently Operative Complaint
In March 2022, the plaintiffs filed the Complaint. From a big picture standpoint, the
Complaint asserts derivative claims for breach of fiduciary duty and for aiding and abetting
breaches of fiduciary duty based on acts of self-dealing by Mary Ellen, payments to the
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Advisors, and misuse of Company resources. The Complaint also asserts direct claims for
breach of fiduciary duty and aiding and abetting breaches of fiduciary duty based on the
Outbound Merger, and Tim Harris seeks appraisal.
Count I of the Complaint asserts that Mary Ellen has breached her fiduciary duties
as President, sole director, and controlling stockholder of the Company. The Complaint
groups the breaches into six broad categories:
• approving self-interested and unfair compensation and other personal payments to
herself;
• using Company resources for personal gain, including by supporting her personal
ventures and engaging in transactions to maintain her control;
• colluding with the Advisors by providing them with exorbitant compensation and
benefits to pay them off for helping her engage in and cover up wrongdoing at the
Company;
• sequestering distributions to oppress stockholders;
• engaging in the Outbound Merger; and
• verifying knowingly incomplete and misleading discovery responses.
Skipping for the moment over Count II, Count III asserts claims for breach of
fiduciary duty against the Advisors in their capacity as officers and agents. The Complaint
alleges that Petigrow is a de jure officer, having agreed to serve as General Counsel. The
Complaint alleges that Grinnell, Lolli, and Schwager acted as de facto officers. The
Complaint alleges in the alternative that all were senior managers and agents of the
Company who owed fiduciary duties in those capacities. The substance of the claims
against the Advisors generally tracks the claims against Mary Ellen.
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Count IV alleges in the alternative that to the extent the Advisors are not accountable
for breaching their own duties as fiduciaries of the Company, both they and Royce have
aided and abetted the breaches of fiduciary duty by Mary Ellen, Petigrow, and any other
Advisor that is found to have owed fiduciary duties.
Counts II and V challenge a transaction between Mary Ellen and her GRAT. Count
VI is the claim for an appraisal. Those counts are not at issue in this decision.
Mary Ellen has not moved to dismiss the Complaint on any grounds. Petigrow does
not argue that Count III fails to state claims against him, nor does he maintain that this
court cannot exercise personal jurisdiction over him for purposes of that claim. Otherwise,
the Advisors have advanced a multitude of arguments.
• Petigrow and Schwager maintain that the plaintiffs cannot assert derivative claims
on behalf of the Company because the Outbound Merger deprived them of standing.
That argument, if correct, would require the dismissal without prejudice of Counts
I, III, and IV to the extent those counts assert derivative claims, as they
predominantly do.
• Petigrow, Schwager, Lolli, Grinnell, and Royce ask the court to rely on forum non
conveniens to dismiss this action in deference to actions pending in New Jersey.
That argument, if correct, would require the dismissal without prejudice of the entire
action.
• Lolli, Grinnell, Royce, and Schwager insist that this court cannot exercise personal
jurisdiction over them. That argument, if correct, would require the dismissal
without prejudice of all claims against those defendants.
• Petigrow argues that this court cannot exercise personal jurisdiction over him for
purposes of Count V. That argument, if correct, would require the dismissal without
prejudice of that count as to him.
• Lolli, Grinnell, and Royce argue that this court is an improper venue because the
management services agreement between the Company and Royce contains a forum
selection clause specifying the courts of New Jersey. That argument, if correct,
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would require the dismissal without prejudice of a subset of the claims asserted in
Counts III and IV.
• Schwager insists that he was never a fiduciary of the Company and that Count III
does not state a claim against him. That argument, if correct, would require the
dismissal with prejudice of Count III as to him.
• Petigrow and Schwager argue that Count IV does not state a claim against them.
That argument, if correct, would require the dismissal with prejudice of that count
as to them.
• Lolli, Grinnell, Petigrow, and Schwager contend that Count V does not state a claim
against them. That argument, if correct, would require the dismissal with prejudice
of Count V.
That is a barrage of arguments.
II. LEGAL ANALYSIS
Petigrow and Schwager contend that as a result of the Outbound Merger, the
plaintiffs lost standing to assert any derivative claims based on conduct pre-dating the
effective time. They conclude that the court must dismiss the derivative claims that the
plaintiffs have asserted in this action. They contend that if the plaintiffs wish to assert any
derivative claims, they must do so on behalf of the Company in its current manifestation
as a New Jersey corporation. As they envision it, all of the issues raised in Counts I, III,
and IV vanish from the case.
The moving defendants are correct that the plaintiffs lost standing to litigate
derivative claims based on conduct pre-dating the effective time, but they are incorrect
about the effect on the case. The plaintiffs have asserted a direct claim challenging the
Outbound Merger, which they maintain was the product of breaches of fiduciary duty by
Mary Ellen and the Advisors and, as to any Advisors who were not fiduciaries, conduct
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constituting aiding and abetting breaches of fiduciary duty. As part of that direct claim.,
they contend that the Outbound Merger failed to afford them fair value for the derivative
claims. The parties will continue to litigate that claim. This decision stays any claims based
on conduct post-dating the Outbound Merger.
A. The Continuous Ownership Rule And The Implications Of A Loss Of Standing
To Assert Derivative Claims
In Lewis v. Anderson, the Delaware Supreme Court created the continuous
ownership rule by stating expansively that “a derivative shareholder must not only be a
stockholder at the time of the alleged wrong and at [the] time of commencement of suit but
that he must also maintain shareholder status throughout the litigation.” 477 A.2d 1040,
1046 (Del. 1984). Later in the decision, the high court restated the rule as follows: “A
plaintiff who ceases to be a shareholder, whether by r