In re The Ltd., Inc. S'holders Litig. - C.A. No. 17148-NC (Consolidated), 2002 Del. Ch. LEXIS 28 (Ch. Mar. 27, 2002)

Rule:

For a plaintiff's corporate waste claim to survive, a complaint, under the liberal pleading standards of Del. Ch. Ct. R. 12(b)(6), must show that the transactions were effected on terms that no person of ordinary, sound business judgment could conclude represent a fair exchange. A plaintiff's burden has also been described as requiring a showing that the transactions in question either served no corporate purpose or were so completely bereft of consideration that they effectively constituted a gift.

Facts:

The Limited, a Delaware corporation based in Columbus, Ohio, is a specialty retailer operating more than 3,000 stores nationwide. In addition to being the Company's top executive, Mr. Wexner, one of the individual defendant-directors, is also its largest shareholder, owning or controlling approximately twenty-five percent of The Limited's outstanding stock at the time of the challenged transactions. On May 3, 1999, The Limited announced that the Board had authorized the repurchase of up to 15 million shares of the Company's outstanding common stock through a Dutch auction tender offer. Under the terms of the tender offer, the Company agreed to repurchase those shares at a premium over their pre-announcement closing price. Mr. Wexner agreed that neither he nor any of his affiliates would participate in the tender. When it made public its decision to conduct a self-tender offer, The Limited also announced that it had agreed to rescind the Redemption Agreement, an agreement it had entered into in 1996 with Mr. Wexner in both his individual capacity and as trustee of The Wexner Children's Trust. Under the Redemption Agreement, the Children's Trust acquired the right, through January 30, 2006, to require the Company to redeem all or a portion of the 18.75 million shares of common stock it held at $ 18.75 per share, a put option. The Redemption Agreement also provided the Company with a six-month window, commencing on July 31, 2006, to redeem all or part of the remaining shares still held by the Children's Trust at $ 25.07 per share, a call option. During the term of the Redemption Agreement, The Limited was required to retain $ 350 million in a restricted cash account in order to satisfy its obligations under the agreement should either of the options be triggered. In other words, the $ 350 million was to remain in this restricted account until the year 2006 to cover The Limited's potential obligations under the Redemption Agreement. Common stockholder plaintiffs Rochelle Phillips, Miriam Shapiro and Peter Sullivan thus brought this derivative action on behalf of The Limited, against the Company and each of its directors. Defendants moved to dismiss the case.

Issue:

Do the questioned transactions constitute corporate waste?

Answer:

No.

Conclusion:

Re: rescission of the Redemption Agreement — By its terms, the Redemption Agreement required The Limited to maintain, untouched, a cash account of $ 350 million until 2006 to cover its potential obligations under the agreement. Because the price of the stock had risen appreciably since the creation of the Redemption Agreement, the plaintiffs allege that the rescission "destroyed a valuable option worth hundreds of millions of dollars to the Company. . . . without a corresponding benefit to the Company, . . . the only benefit accruing to [Mr.] Wexner and the [Children's] Trust, which no longer faced the prospect of being forced to sell shares below market value."  It is true that had the terms of the Redemption Agreement empowered the Company to trigger its call on May 3, 1999, the date of the Company's announcement, then Mr. Wexner, as trustee, would have been obligated to sell the Trust's 18,750,000 shares at approximately $ 15 below the shares' trading price at that time. The Company's call option, however, could not have been exercised until 2006, almost seven years after the date of The Limited's announcement. By that time, it is anyone's guess as to whether The Limited's stock would have continued to climb in value, whether it would have fallen below its May 1999 trading levels, or whether it would have fallen below either the put option price or the call option price. Any future benefit that the Company might have enjoyed had rescission not been effectuated, therefore, is speculation and conjecture.  It is well-settled that "'courts are ill-fitted to attempt to weigh the 'adequacy' of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk.'" Thus, the plaintiffs have failed to allege facts supporting a claim that rescission of the Redemption Agreement "served no corporate purpose or was so completely bereft of consideration that it effectively constituted a gift."

Re: Self-Tender Offer — The Board's purported justification for the self-tender was that "'a significant share repurchase would be the most desirable use for [the Company's] excess cash' and 'it would demonstrate to the Company stockholders the Company's confidence in its business.'" Plaintiffs assert that the Board's stated goals for this transaction could have been achieved by alternative means less costly to the Company. That the Complaint identifies viable alternatives to the Board's decision here is not enough--it is precisely this kind of judicial after-the-fact evaluation that the business judgment rule seeks to prevent. Even the plaintiffs cannot dispute that the vehicle of a self-tender offer is a well-accepted option for corporate boards wanting to manage mounting cash reserves. Thus, because "reasonable, informed minds might disagree on the question, . . . a reviewing court will not attempt to itself evaluate the wisdom of the bargain or the adequacy of the consideration." Accordingly, the plaintiffs have also failed to allege that the Self-Tender is the basis for a viable corporate waste claim.

Re: Redemption Agreement and Self-Tender Offer taken together — It is the plaintiffs' position that "the two transactions taken together served no business purpose other than to benefit [Mr.] Wexner." The plaintiffs have failed to demonstrate that the Company received no benefit in exchange from these two transactions or that these transactions, taken together, served no corporate purpose. For one, Mr. Wexner promised not to participate in the Company's self-tender. Having done this, Mr. Wexner forfeited his ability to partake in the more than 15% premium offered by the Company for its shares. Moreover, rescinding the Redemption Agreement allowed the Company to manage the otherwise untouchable $ 350 million that would have been locked up by the terms of that agreement for another six to seven years. While the plaintiffs point out that The Limited only needed an additional $ 90 million in cash to cover its self-tender offer, nothing changes the fact that $ 260 million in liquid funds is a valuable asset for any company. As discussed in more detail above, the rescission of the Redemption Agreement protected the Company from a potentially costly liability that might have befallen it had the shares declined in value in the future. Considering that these transactions conferred upon all of The Limited's shareholders, excluding Mr. Wexner and his affiliates, an opportunity to reap the benefits of a more than 15% premium for their shares, while at the same time demonstrating to the market and those individuals declining to tender their shares the Board's confidence in the Company's stock, the court was unwilling to find that the two transactions, viewed together, "served no corporate purpose." As such, even after accepting all of the plaintiffs' well-pled factual allegations and according them the benefit of all reasonable inferences, the Complaint does not state a claim for corporate waste.