Luzak v. Coastal Forest Resources Company, No. 1:2015cv00501 - Document 474 (E.D. Va. 2016)
Court Description: MEMORANDUM OPINION. Signed by District Judge Anthony J Trenga on 7/7/2016. (dvanm, )
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Luzak v. Coastal Forest Resources Company Doc. 474 IN THE NITED STATES DISTRICT COURT FOR THE EASTEN DISTRICT OF VIRGINIA Alexandria Division HAMPTON B. LUZAK, Plaintif, v. MERILL B. LIGHT, et al. Defendants. ) ) ) ) ) ) ) ) ) Civil Action No. 1:15-cv-501 (AJT/IDD) MEMOANDUM OPINION On October 24, 2013, defendant Coastal Forest Resources Company ("CFRC" or the "Compny"), acting through its Board of Directors (the "Bord"), approved a compensation package to Travis B. Bryant ("Bryant"), the Company's newly appointed Chief Executive Oicer and member of the Board (the "Transaction"). The Transaction package included certain stock transers and option rants. Plaintif Hampton B. Luzak ("Ms. Luzak") is n approximately 33% shareholder n the Company, a private, closely held corporation. In this action, Ms. Luzak deriviatively challenges the Transaction as a breach of iduciry duty on the part of those directors who approved he Transaction and also on the pt of Bryant, who is not related by blood or marriage to either of the two fmilies who own CFRC stock. In response to Ms. Luzak's derivative action, CFRC omed a special litigation commitee (he "SLC" or the "Committee") to evaluate her claims pursuant to Virginia Code § 13.1-672.4. On September 30, 2015, ater extensive investigation and consideration of Ms. Luzak's derivative allegations and with the assistance of various legal and other proessional advisors and consultants, the Committee concluded, as relected in its written report (the Dockets.Justia.com "Report"), that it was not in the best interests of the Company or its shareholders to prsue the breach of iduciary duty claims asserted by Ms. Lzak on behalf of the Company. Upon consideration of the record in this case, the Cout concludes as a matter of law that the Compny and the Committee have complied with the applicable statutory requirementsboth procedural and substntive- petaining to he investigation of a shreholder's derivative claim through a special litigation commitee; nd Ms. Luzak's derivative claims, which, as pleaded, include Count IX of her Second Amended Veied Shareholder Derivative Complaint [Doc. No. 240] (the "Complaint" or "Comp I."), must be dismissed pursuant to Virginia Code § 13.1-672.4 govening he dismissal of derivative claims. CFRC's Motion or Smmary Judgment [Doc. No. 177] (the "Motion") will thereore be granted nd this action dismissed. I. BACKGROND Unless otherwise indicated, the Court inds the ollowing acts to be undisputed: CFRC is a closely held Virginia coporation engaged in the business of manuacturing timber products. The Company is headqrtered in Havana, Florida. The Company's corporate predecessor was ounded by Victor Bainger, the rndather of Ms. Luzak and co-deendant Merrill B. Light ("Ms. Light"), Ms. Luzak's sister. n the 1950s, Victor Baringer sold the Company to, mong others, his son Paul B. Barringer, II ("Brringer"); the aher of Ms. Luzak nd Ms. Liht. Baringer; Ms. Light; J. Randolph Light, Ms. Light's husband ("Mr. Light"); and Bryant were at all material times members of CFRC's Board of Directors.1 The Transaction occurred in October 2013 when the Company sold 2.5% of its nonvoting stock to Bryant, then its CEO, at a value of $4.92 per share, together with n option to purchase 1 Other directors included, at vrious times, Robert Conger, Michael Hagler, and Stephen A. Wannall. 2 n additional 2.5% at book value at the time of exercise. 2 The substantive core of Ms. Luzak's allegations is that the Company undervalued he stock price ofered to Bryant to the deriment of he Company. See generally id 1-23. The Company promoted Bryant to CEO rom his earlier position of Cief Financial Oicer ater Ms. Luzak's husband, Kevin Luzak, was terminated as CEO and removed rom the Bord: and the Trnsaction constituted prt of Bryant's compensation package as Chief Executive Oicer. The Company did not disclose the Transaction to Ms. Luzak at the time it was consmmated; Ms. Luzk irst lened of the Trnsaction in Janury 2015 ater reviewing the Company's annual inancial statements, which described the Transaction in a oonote. Subsequently, in erly 2015, Ms. Luzak made vrious records requests and other shreholder demands seeing inormation related to the Transaction. On April 15, 2015, in response to Ms. Luzak's shareholder demands, the Company iled a declaratory judgment action against Ms. Luzak seeking a declaration, inter alia, that the Transaction was valid and binding and to "remove the cloud of conroversy" surrounding the Compny's stock ownership. [Doc. No. 1 at 1, 6]. On May 11, 2015, Ms. Luzk iled a counterclaim [Doc. No. 7] seeking to void the Transaction, which the Court deemed to be a derivative claim by Order dated August 14, 2015. 3 See [Doc. No. 89]. 2 Bryant also received a single shre of voting stock, also challeneged by Ms. Luzak and considered by he SLC. 3 Also included in Ms. Luzk's counterclaim were non-derivative breach of contract claims based on certain shareholder agreements entered into by Ms. Luzak, the Company, and the other shreholders. Thereater, this litigation divided beween (i) Ms. Luzak's individual (direct) claims or breach of conract based on those shreholder agreements; and (ii) her derivative claims or breach of iduciry duty. By Order dated Auust 14, 2015 [Doc. No. 89], the parties were realigned, with Ms. Luzak's counterclaim deemed a Complaint and Ms. Luzk as the plaintif. Thereater, Ms. Luzak, with leave of Court, iled two amended derivative complaints 3 In response to Ms. Luzak's shareholder demnds and derivative claims, he Company ormed the SLC on May 5, 2015 to invesigate those claims and detemine based on hat investigation whether pursuit of the derivative claims was in the best interests of the Company and its shareholders. At the time the SLC ws appointed on May 5, 2015, the Board consisted of Ms. Light, r. Light, Bryant, and Robert Conger ("Conger"). The Committee, as nitially constituted, included Conger nd r. Light. In Jne 2015, he Company additionally appointed Stephen A. Wnnall ("Wnn ll") to boh the Board nd the Committee. In late July 2015, a r. Light resined rom the Committee citing Ms. Luzak's challenges to his independence, leaving Conger nd Wannall as the Commitee's only members. Once appointed, the SLC conducted an investigation, aided by vrious law nd inancial accounting ims, as detailed in the Report. On September 30, 2015, he SLC issued the Report [Doc. No. 439, Ex. A] which concluded that "it is not in the best interests of the Compny to pursue any of the derivative claims against any of the Company's directors who have been identiied in the demand leters" and hat "the Transaction was authorized and valid . . . ." On he basis of he SLC's determinations, deendants moved to dismiss Ms. Luzak's derivative complaint pursunt to Virginia Code § 13.1-672.4. [Doc. No. 177]. On November 18, 2015, he Court held a hearing on defendnts' motion to dismiss during which it converted the motion into one or smmary judgment and allowed the prties to pursue additional discovery. [Doc. No. 221]. Following completion of that discovery, he parties iled supplemental brieing on the Motion. The Court held a hearing on he Motion on April 21, 2016, ollowing which it took the matter under advisement. [Doc. Nos. 180, 240]. On March 17, 2016, the Cort dismissed Ms. Luzak's individual breach of contract claims with prejudice. [Doc. No. 435]. 4 II. STANDARD OF EIEW Pursuant to Federal Rule of Civil Procedure 56, smmary judment is appropriate only if the record shows that "here is no genuine issue as to any material act and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Anderson v. Libery Lobby, Inc., 477 U.S. 242, 247-48 (1986); Evans v. Techs. Apps. & Serv. Co., 80 F.3d 954, 958- 59 (4th Cir. 1996). The pty seeking smmary judgment has the initial burden to show the absence of a genuine issue of material act. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). A genuine issue of material act exists ''if the evidence is such that a reasonable jury could retn a verdict or he nonmoving party." Anderson, 477 U.S. at 248. Whether a act is considered "material" is determined by the substantive law, and " [o]nly disputes over acts that might afect the outcome of the suit under the govening law will properly preclude the entry of summary judment." Id. To deeat a properly supported motion or smmry judment, he non-moving party "must set orth speciic acts showing that there is a genuine issue or rial." Fed. R. Civ. P. 56(e); Anderson, 477 U.S. at 248; Matsushita Elec. Indus. Co., Ltd v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). " Speciic acts" must be more thn mere speculation or inerences. Celotex, 477 U.S. at 327; Runnebaum v. NationsBankof Md., .A., 123 F.3d 156, 164 (4th Cir. 1997) (en bane). The defending party must present evidence hat is "signiicantly probative." Celotex, 477 U.S. at 327. In sum, "the burden on the moving party may be dischrged by showing . . . that there is an absence of evidence to support he nomoving pty's case." Id. at 325. The acts shall be viewed, nd all reasonable inferences drawn, in the light most avorable to the non-moving party. Anderson, 477 U.S. at 255; see also Lettieri v. Equant Inc., 478 F.3d 640, 642 (4th Cir. 2007). 5 III. ANALYSIS The dispositive issues in his case re whether the Compny validly exercised its statutory right to orm the Committee to investigate Ms. Luzak's claims or breach of iduciary duty and whether he Commitee acted properly in concluding that litigating those derivative claims was not in the best interests of the Company. If so, the Company is entitled to have the Complaint dismissed under Virginia's Stock Corporation Act, Va. Code Ann.§§ 13.1-601 et seq.; if not, Ms. Luzak is entitled to assert those claims derivatively on behalf of the Company.4 Section 13.1-672.4 of the Virginia Stock Coporation Act provides, in pertinent part: A) A derivative proceeding shall be dismissed by the court on motion by the corporation if one of the roups speciied in subsection B . . has: . 1. Conducted a review and evaluation, adequately informed in the circumstances, of he allegations made in the demand or complaint; 2. Determined in good aih on the basis of that review and evaluation that the maintenance of the derivative proceeding is not in the best interests of the corporation; and 3. Submitted in support of the motion a short nd concise statement of the reasons or its detemination. B) . . . he detemination in subsection A shall be made by: 2. A majority vote of a committee consisting of two or more disinterested directors appointed by a majority vote of disinterested directors present at a meeting of the board of directors, whether or not such disinterested directors constituted a quorum. 4 For this reason, the dispositive issue is not wheher he Trnsaction was valid nd in compliance with all corporate law requirements, although the SLC's consideration of those issues is centrally relevant in determining whether it acted as required or the pposes of obtaining a dismissal of Ms. Luzak's derivative claims pursuant to Virginia's derivative dismissal statute, Va. Code. Ann.§ 13.1-672.4. 6 Under Section l 3. l-672.4(D), "the plaintif shall have the burden of proving that the requirements of subsection A have not been met . . . . " Thereore, in order or the Company to be entitled to dismissal of the derivative action, the ollowing six elements must be present: ( 1) a majority of "disinterested" directors appointed the SLC members; (2) the SLC members themselves were "disinterested"; (3) the SLC conducted a review and evaluation, "adequately infomed in the circumstances, of the allegations made in the complint"; (4) the SLC determined that maintenance of the devivative claims was not in he best interests of the Compny; (5) the SLC's determination was made in good faith; nd (6) the SLC has submitted a "short nd concise" statement in suppot of its decision. The Court will consider Ms.Luzk's contentions as to each of these elements. A. Formation of the SLC and the "disinterestedness" of its members At the time the SLC was ormed, the Company's Bord consisted of directors Conger, Brynt, Ms. Light, nd Mr. Light. Each of hose directorsexcept Bryant-voted to appoint he SLC members. The Court has previously considered nd rejected Ms. Luzak's challenge to the SLC on the grounds that the directors who appointed the SLC and the SLC members themselves were not "disinterested." See Trans. of Nov. 18, 20 15 Hr'g [Doc. No. 233] at 55. Speciically, the Cout concluded that Ms. Luzk's actual allegations were insuficient as a matter of law to establish hat the voting directors or the SLC members were not "disinterested" under Virginia Code § 13. 1-672. In that regard, Ms. Luzak failed to present any evidence, or even allege, that 4. any member of the Board who voted or the SLC or the members appointed to the SLC were a py to the Transaction, received ny inncial beneits under the tems of the Trnsaction, or had any prohibited relationship wih Brynt. See Va. Code. Ann. § 13. 1-603 (deining "disinterested director"). 7 Based on discovery obtained since the Court's November 20 15 ruling, Ms. Luzak has raised additional challenges to the Committee members' "disinterestedness" and "independence."5 Speciically, Ms. Luzak claims that Conger, Ms. Light and r. Light were not "disinterested" or "independent" because hose individuals ( 1) engaged in transers of Compny stock to a trust as part of their estate planning and thereore had a inncial interest in the SLC's determination that the stock transered via the Transaction had a low value, or at least a value only marginally higher than what those individuals claimed in connection wih heir estate plnnng stock trnsers; (2) authorized as directors the iling of the declaratory judgment action i gainst Ms. Luzak; and (3) aced personal liabiliy or their role in approving the Transaction. Ms. Luzak also claims that the Lihts had n interest in the Committee's inding that Barringer, one of the directors that approved the Transaction and who ranered his voting stock to Ms. Light,6 was not mentally competent in 20 12 nd that Conger was "beholden" to Ms. Light "or liquidity of his CFRC holdings and his Board position." See [Doc. No. 46 1 at 9- 13]. First, it is undisputed that none of hese individuals directly beneitted inncially rom he Transaction. Nevertheless, Ms. Luzak claims that Conger and the Lights were not disinterested because a low stock valuation by the SLC would beneit them in connection with the x rmiications of their ranserring Company stock to rusts as part of their estate plnn ng. i How the SLC's determination would beneit Conger nd he Lights is not at all clear, as Ms. Luzak does not claim that ny such evaluation would be binding on or even considered by any 5 The Court has previously considered nd rejected Ms. Luzk's contentions that there is a seprate obligation of "independence" separate and apt rom "disinterestedness." See Trans. of Nov. 18, 20 15 Hr'g [Doc. No. 233] at 53. 6 Ms. Luzak previously challenged the propriety of this ranser under the terms of the relevant shareholder agreements, which the Court dismissed. See supra n.3. 8 taxing authority. Ms. Luzak's theory of disqualiication appears to be one of irst impression under Virginia law, and the Court has not ound, nor have the parties cited, a case in any other jurisdiction that has considered a similr claim. In any event, based on he statutory language and legislative pupose evidenced in the structure and text of the Virginia Stock Corporation Act, the Court concludes that any such indirect inancial "beneits" are simply too tangential, attenuated, speculative and ncertain or the Court to hold that hey constitute "a inancial interest in a matter that is the subject of such [Committee] action" or he purposes of Section 13.1-672.4. Second, Ms. Luzak claims that Conger nd the Lights are not disinterested due to their membership on the Board that approved the Transaction and authorized he iling of the declaratory judgment action against her. The Court concludes, however, that this claim is oreclosed by Virginia Code § 13.1-603, which speciically states that neiher approving a ransaction being challenged nor being nmed a deendant in he underlying action ''shall [ ] by itself prevent a person rom being a disinterested director." As to these directors, Ms. Luzak argues hat there are acts and considerations beyond the directors' mere approval of the Transaction or status as named deendants that make them not disinterested, but the Court concludes as a matter of law that Ms. Luk has not presented any acts beyond the challenged directors' votes that would cause those votes to lose the protection conferred under Section 13.1603. For the same reasons, the Court inds insuicient as a matter of law Ms. Luk's claim that the SLC members and those who appointed them were not disinterested because as a result of their votes approving the Transaction, they all aced personal liabiliy or the conduct to be evaluated by the SLC. 9 The Court must also reject Ms. Luzak's claim that the SLC could not, as constituted, validly consider her derivative claims because an issue beore the SLC was the mental competency of Barringer, who approved he Trnsaction. Ms. Luzk's contention n this regard is that, because Barringer had made a stock transer to Ms. Light around the same time as the Transaction (which Ms. Luzak had challenged in her breach of conract claims), the Lights had a inancial interest in an issue-the mental competency of Ms. Light's aher-that disqualiied the Lights rom voting or the SLC members. But even if the Lights were disqualiied rom voting or the SLC members, Conger remained quliied to vote or the SLC members, nd he SLC would nevertheless have been appointed by the required "majority vote of disinterested directors present at a meeting of the board of directors, whether or not such disinterested directors constitute[s] a quorum," even though that "majority" consisted only of Conger. See Va. Code Ann.§ 13.l -672.4(B)(2). Finally, the Court rejects Ms. Luzak's claim that Conger was not disinterested because he was "beholden" to the Lights. Even were such a claim a valid basis upon which to challenge he disinterestedness of a director, Ms. Luzk has not presented acts suficient or the Court to conclude that the relationship between Conger and the Lights, whether proessional or personal, precluded Conger rom acting as a disinterested director. For these reasons, the Court inds and concludes that the ormation nd composition of he Committee were valid under Virginia law. B. Whether the SLC was "adequately inormed" Ms. Luzak additionally claims hat the SLC was not "adequately inormed" or the puposes of Virginia's derivative dismissal statute because it failed to obtain "all relevant acts and sources of inormation" as a part of its investigation, including speciically Bri ger's n medical records and the proessional opinions of his reating physician in connection wih its 10 consideration of his mental competency during the period surounding the Transaction. Ms. Luzak also claims that the SLC did not properly consider ( 1) the fair market value of he Company's stock transerred to Bryant; (2) an e-mail authored by Brynt which Ms. Luzak claims evidenced Bryant's willingness to accept a compensation package more avorable to the Company than that ultimately approved in the Transaction; or (3) the procedural validity of the Transaction. See [Doc. No. 46 1 at 16-28]. With respect to the scope of inquiry required of the SLC, the Court has on two occasions considered and rejected Ms. Luzak's intepretation of the obligation to be "adequately infomed" under Virginia Code § 13.1-672.4(A)(l): irst, during the November 18, 2015 hearing on deendants' motion to dismiss, see [Doc. No. 233 at 58]; and again in overuling Ms. Luzak's objections to Magistrate Judge Davis' March 1 1, 2016 discovery order [Doc. No. 454]. Briely smmarized, the Court concluded that the Virginia Code's requirement that the Committee be "adequately inormed in the circumstances, of the allegations made in the demnd or Complaint," as imposed in Section 13.1-672.4(A)(l), is a staturoy mandate to understand he speciic nature of nd alleged actual basis or a shreholder's allegations, rather than, as Ms. Lzak contends, to conduct a particular level of substantive inquiry or analysis into the merits of those allegations. Rather, the Court inds that the Committee's obligation to investigate, consider and analyze the merits of the derivative claims is embodied in and deined by the "good faith" requirement set orth in Section 13.1-672.4(A)(2), although the obligation to understand the nature of the allegations is prt and parcel of a "good aith" consideration of the merits of those allegations. The overiding statutory purpose or the SLC's appoinment of he Committee was to detemine whether litigating certain derivative claims was in he best interests of he corporation. 11 The merits of a shareholder's allegations are undoubtedly a cenral consideration, but that determination is also driven by a wide range of other considerations, such as the extent of conlicting or competing evidence, the cost of litigation and other inancial consequences that litigation may impose on the company, the retention of valuable employees, oicers or directors who may decide to leave the compny were litigation instituted, the recruitment of qualiied employees while litigation is pending, and the disruption to ongoing operations. Ms. Luzak's construction of subsection (A)(l) would impose on a specil committee n inlexible obligation to exhaust all possible sources of relevant acts beore reaching a conclusion as to the central issue it aces-whether to pursue derivative claims. As the Court previously concluded, such a requirement would necessarily resrict a special commitee's abiliy to exercise its best judgment conceing how to assess what inormation is necessary or it to make a good aith detemination concening the ultimate issue beore it: he best interests of the corporation. It would also require a scope of judicial review inconsistent with the deerential scope of review by which a committee's determination is to be judged. In any event, no mater how he SLC's obligation to understand, investigate and analyze Ms. Luzak's derivative clims is allocated as between the "adequately informed" obligation of subsection (A)(l) and the "good aih" requirement of subection (A)(2), the SLC's decision to obtain or not obtain any paticulr evidence is only one actor to be considered by the Cot in determining whether he SLC's decision not to pursue derivative claims is objectively reasonable under all the circumstances. See WLR Foods, Inc. v. Tyson Foods, Inc., 65 F.3d 1172 (4th Cir. 1995); Abella v. Universal Leaf Tobacco Co., 546 F. Supp. 795, 80 I (E.D. Va. 1982). Here, as he Court previously observed, Ms. Luzk does not claim that the SLC did not understand her allegations, claims, or what she alleged as he actual basis or those allegations 12 nd claims. See [Doc. No. 454 at 5] ("plaintif does not claim hat he Committee did not understnd the actual contentions pertaining to the allegations in plaintifs demand or complaint . . . [r ]ather, plaintif claims hat the Committee did not nalyze suficiently the merits of plaintifs actual contentions . . . ."). Rather, Ms. Luzak claims that the SLC failed to become "adequately informed" because it failed to mrshall, consider, and properly analyze all the available evidence hat pertained to certain considerations gemane to those allegations.7 As discussed in more detail below, the SLC Repot makes clear that he SLC engaged in an objectively reasonable investigation or the purposes of determing whether to pursue breach of iduciary duty claims raised by Ms. Luzak, and within that context, adequately understood, investigated, and considered Barringer's mental capacity, the fair market value of the the Company's stock, the e-mail authored by Bryant, and the legal adequacy of the written consents to the Trnsaction upon which the the Company relied or its approval. 7 Ms. Luzk urges this Court to adopt the standrd of review ticulated in London v. Tyrell, 20 10 WL 877528, at *17 (Del. Ch. 2010) ("[t]o conduct a good faih investigation of reasonable scope, the SLC must investigate all theories of recovey asserted in the plaintifs complaint . . . . ") (emphasis added). The London decision is based on the stndrd or derivative dismissal nnounced by he Delaware Supreme Court in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 198 1). Under Zapata, there is a two-step inquiy to apply when reviewing a SLC's recommendation of dismissal of a shreholder action: The irst step of the analysis is mandatory. The Cout reviews the independence of SLC members and considers whether the SLC conducted a good aith investigation of reasonable scope that yielded reasonable bases supporting its conclusions. The second step of the analysis is discretionary. The Court applies its own business judgment to the acts to determine whether the corporation's best interests would be seved by dismissing the suit. The second step is designed or situations in which the technical requirements of step one are met but the result does not appear to satisy the spirit of the requirements. 2010 WL 877528, at *11 (emphasis added). Whatever the wisdom of the cout-created London/Zapata standards, they adopt a level of judicial inquiry more intrusive than that embodied in Virginia's derivative claim dismissal statute, Va. Code nn. § 13.1-672.4, nd Virginia's business judgment rule, codiied at Va. Code nn.§ 13.1-690. 13 1. Mr. Barringer's mental capacity Ms. Luzak asserts that her derivative claims may not be properly dismissed based on the SLC decision not to pursue her claims because its consideration of Barringer's mental competency was inadequate. Speciically, Ms. Lzak claims hat the Comittee failed to interview or obtain the records of Brringer's treating physicin. The SLC's investigation into Barringer's mental competency at the time he approved the Transaction included inteviews wih certain individuals who observed his mental condition, as they perceived it, at the time he approved the Transaction. These individuals included r. Barringer's lawyer and others who winessed his participation in the Transaction's approval process, including at vrious board meetings nd in telephone conversations. Based on this information, the Committee concluded that Barringer was competent at the time he approved the Transaction. Given the views of hose who observed him, the Cot cnnot conclude that the SLC's determination hat Barringer was competent was not objectively reasonable. See [Doc. No. 439, Ex. A at 26] ("the Committee is sruck by the consistency in the [winesses]' recollection [hat] Barringer was completely competent at he time of the October 24, 20 13 meeting and his opinions were exremely inluential to he board"). More impornt or the Court's purposes, however, is that the inomation obtained by the SLC established that any claim that Barringer was incompetent when he approved the Trnsaction would be challenged with substantial evidence to the conrary. See Kiddell v. Labowitz, 284 Va. 6 1 1, 629 (Va. 20 12) (" [t]he testimony of witnesses present at the time of execution is entitled to 'he greatest consideration' on the issue of a testator's mental capaciy") (quoting Thomason v. Carlton, 221 Va. 845, 853 (Va. 198 1)). Regardless of whether the opinions and medical records of his treating physicin would have been obtained as part of any reasonable scope of discovery-were 14 the issue of Barringer's mental capacity litigated-the issue beore the Committee was quite diferent than whether a act inder would ultimately have concluded that Barringer lacked mental capacity to pass judgment on the Transaction. Rather, the ultimate issue beore the Committee was whether it was in the best interests of the Company to bring iduciary breach claims against those who approved the Trnsaction and Bryant who beneited rom it. While Brringer's mental competency, as well as the extent to which the other approving directors thought he was competent, were relevant considerations in deciding hat overarching issue, many other considerations beyond how a act inder would view Barringer's competency were also cenrally relevant. In act, the resolution of this issue did not depend solely or even principally on Barringer's competency, or the legal suficiency of he process that resulted in the approval of the Trnsaction, but rather on a whole range of other issues, including the efect ny such litigation would have on the Company's proitable, ongoing business operations, and the Company's abiliy to retain Brynt's leadership and mnagerial skills. Indeed, the Committee detemined that Bryant's managerial skills were even more critical to the Company in light of Mr. Baringer's deteriorated mental status at the time he Report was issued. Based on the entire record, the Court must conclude hat in making a determination as to Paul B. Barringer, H's mental competency, the SLC was "adequately inormed in the circumstances, of the allegations" and acted in good aih. 2. Fair market value of CFRC's shres Ms. Luzak also argues that her derivative claims should not be dismissed based on the SLC's decision not pursue those claims because he SLC ailed to obtain expert opinions hat evaluated the air market value of the Company's stock based on the current air mrket value of its extensive timber holdings. 15 The Report explicitly considered various mehods or valuing the Compny's stock or the purpose of assessing the value of the Transaction. The Committee thereater decided which mehodology to use and explained in detail its decision to use book value.8 In reaching that decision, the SLC was aware of Ms. Luzak's views conceing which method of valuation was appropriate and the value of the stock under the air market value mehod Ms. Luzak proposed. It also consulted with and was advised by x, accounting, and other inancial experts in conection with determining how to assess the stock or he prposes of valuing the Transaction.9 Based on the acts and circumstnces, the Court inds as a matter of law that the SLC conducted an objectively resonable investigation into the the value of the stock and reached a good aith determination as to how the stock should be valued or the purposes of assessing the value of the Transaction nd whether, based on that valuation, Ms. Luzak's derivative breach of iduciary claims should be pursued. 3. Coroorate pp ovals r The SLC also explicitly considered Ms. Luzak's claims with respect to the written consents that the Company relied upon in conection wih the Transaction. The Committee 8 The SLC stated inter alia that "[i]t is common knowledge that the concept of book value is not he same as the concept of air market value. This is well understood by all those involved in the Company . . . [t]he Company considered book value to be the central valuation metric or ny possible transactions." [Doc. No. 439, Ex. A at 11-12]. It also reasoned that during the events at issue leading up to the Transaction, "he Company did nothing to solicit a sale of assets nd engaged in very ew sales of timberlands, so the price that timberlands could bring in a sale had litle efect on the Company's operations" and thereore air market value was a less reliable indicia of the true value of the relevnt shares. [Id.]. 9 The SLC Report relects that the Committee did in act consider a air mrket value-based approach. See [Doc. No. 439 Ex. A at 28] ("The board discussed the price at which the stock should be purchased. Although the board was aware of the 2013 valuation peromed by [valuation advisor] Equival, the board paid more attention to the book value of the stock, which is the valuation metric that the Company had historically relied upon."). 16 ound that there were substantial issues conceing those consents, but nevertheless concluded, based on a range of considerations, including evidence concening he good aith of those who prticipated in the approval process, that ny such issues did not wrrnt pursuing breach of iduciary duty claims. Based on all the acts and circumstances, he Court inds as a matter of law that the SLC conducted an objectively reasonable investigation and based on that investigation, adequately considered Ms. Luzk's demands perining to the corporate approvals in detemining not to pursue her derivative breach of iduciary duty claims. In sum, the Cot inds based on the undisputed acts and as a matter of law that Ms. Luzak has failed to present acts suicient to establish that the SLC did not ''conduct[] a review and evaluation, adequately inormed in the circumstances, of the allegations made in the demand or complaint." C. The SLC's "good faith" requirement Virginia Code § 13. 1-672.4(A)(2) requires that the SLC's decision be made in "good faith." The Report demonstrates as a matter of law that the members of the SLC acted in "good aih" in reaching its ultimate determination hat litigation of Ms. Luzak's breach of iduciary claims was not in the best interests of he Company. The overrching obligation of a coporate director is to "discharge his duties . . . including his duties as a member of a coittee, in accordance with his good aith business judgment of the best interests of the coporation. " Va. Code An. § 13.l-690(A). "[I]n Virginia, a director's discharge of duties is not measured by what a reasonable person would do in similar circumsnces or by the rationality of that ultimate decision. Instead, a director must act in accordance with his/her good aith business judgment of what is in he best interests of the corporation. " Willard ex rel. Moneta Bldg. Supply, Inc. 17 v. Moneta Bldg. Supply, Inc., 258 Va. 140, 151 (Va. 1999). "Thus, a director may use an inormed decision-making process in discharging the duties of he oice as long as the director does so in good aith." Id at 152 (citing WLR Foods, Inc. v. Tyson, Inc., 65 F.3d 1172, 1185 (4th Cir. 1995)). Here , the Court inds as a matter of law that Ms. Lzak has not presented evidence suicient to establish that the SLC members did not "[d]etermine[] in good aith on the basis of hat review nd evaluation that the maintenance of the derivative proceeding is not in the best interests of the corporation."10 D. "Short and concise" statement in support of the SLC's decision The SLC has provided a 46-page Report in support of its decision not to proceed with derivative claims against he Company. See [Doc. No. 439. Ex. A]. In that Report, it addresses each of Lzak's claims. The Repot clearly satisies 13.l-672.4(A)(3)'s requirement that he Committee submit "a shot and concise statement of the reasons or its determination." E. Plaintif's Count Nine for Declaratoy Judgment Finally, Ms. Lzak contends that her Ninth Cause of Action or declaratory judgment should svive smmary judgment because it is a direct claim nd thereore is not subject to dismissal pursuant to Virginia's derivative claim dismissal statute, Va. Code Ann. § 13.1672.4.11 10 In support of her contentions that the Board and SLC did not act in good aith, Ms. Lzak has essentially reiterated her previous claims that the members of the SLC were not "disinterested" or "adequately inormed," including that the Board (i) had already "prejudged" the merits of her derivative clim through its iling of a declaratory judgment action against her; (ii) had a inancial and familial interest in the Transaction; (iii) failed to consider "a number of key issues . . . including CFRC's stock and fair market value in October 2013"; (iv) ailed to consult medical proessionals in consideration of Baringer's alleged lack of mental capacity Trnsaction; and (v) failed to rely on cetain documeny evidence. See [Doc. No. 461 at 28-29]. 11 The Court has already determined that the substance of the Ninth Cause of Action-as considered in connection with CFRC's declaratory judgment action [Doc. No. l] nd plaintiffs counterclaim [Doc. No. 7]-is derivative in nature. See [Doc. No. 52]. 18 As alleged, the Ninth Cause of Action is a derivative claim, subject to dismissal under Virginia Code § 13.1-672.4.12 It is set orth in Ms. Luzak's Second Amended Veriied Shreholder Derivative Complaint. That Complaint is explicitly and wihout qualiication alleged to be a "shareholder derivative action on behalf of Coastal Forest Resources Compny . . . against CFRC's CEO Travis Bryant and certain members of CFRC's bord of directors . . . or breaches of iduciary duties, violations of the the Virginia Corporate Code, unjust enrichment, declaratory relief and rescission." Id. 1 (emphasis added); see also Plaintifs [First] Amended Veriied Shareholder Derivative Complaint [Doc. No. 180] 183-186. In her Second Amended Complaint, Ms. Luzak does not seek any relief wih respect to her own injuries as a shareholder, but only "on behalf of CFRC."13 Compl., Prayer or Relief A. Whatever stnding Ms. Luzak 12 The Ninh Cause of Action alleges that "the Bord actions at the alleged October 24, 2013 board meeting and through (both versions o) the Written Consent did not constitute valid Board approval or he issuance of shares under Virginia law." Compl. 208. The Complaint ther seeks a "judicial declaration that both versions of the Written Consent re legally invalid and/or that the shares consented to be issued thereby were not validly issued under Virginia Code§ 13.1-643." Id. 210. 13 More speciiclly, Ms. Luzak seeks the ollowing relief: A. Against Mr. Bryant nd in avor of CFRC awarding equitable and/or injunctive relief voiding, cancelling, and/or rescinding the illegal and wrongul Stock Sale and Option Grant, nd disgorging, attaching, impounding, and imposing a constructive trust on all dividends r. Bryant has wrongully received as a result of the Stock Sale and Option Grant, and restoring the pties to their respective positions prior to December 2013, including restoring all dividends paid to Mr. Bryant back to CFRC, wih interest; B. Against all Deendants and in avor of the Company or the amount of damages sustained by the Company as a result of Deendnts' breaches of iduciy duties , violations of law, wste of corporate assets and unjust enrichment, including all costs of investigation and remediation of the wrongs alleged herein, punitive and exemplary damages as appropriate, plus pre judgment interest, modeled in a fashion to ensure Deendants do not participate therein or beneit thereby; 19 may have to ile direct actions based on the acts alleged, she has not alleged any such direct claims in this action. As discussed above, it is also clear that the SLC speciically considered the substnce of Ms. Luzak's Ninth Cause of Action and detemined that even were the disputed consents obtained wihout ull compliance with coporate law requirements, breach of iduciry duty litigation against Bryant and the other Board members was not in the best interests of the Company or he shareholders or the speciic reasons set orth in the Report. [Doc. No. 439, Ex. A at 36-42]. The Court inds as a matter of law that Ms. Luzak has not presented any acts suicient to establish that this determination was not objectively reasonable, adequately inormed, and in good aith, in compliance with the requirements of Section 13. 1-672.4. Accordingly Count Nine must also be dismissed. IV. CONCLUSION For the above reasons, the Cout inds and concludes there is no genuine issue of material act conceing whether the special litigation committee complied wih Virginia Code § 13.1- C. Restating he Company's audited inancial statements or iscal years 20 14 and 20 15 to relect the voiding, cancellation and/or rescission of these transactions; D. Awarding to Plaintif the costs nd disbursements of the action, including reasonable attoneys' ees, accountnts' and experts' ees, costs nd expenses; and E. Granting such other and ther relief as the Court deems just nd proper. Compl., Prayer or Relief A-E. 20 672.4 and that pursuant to that section, plaintif Hampton B. Luzak's Second Amended Veriied Shareholder Derivative Complaint must be dismissed. An appropriate Order will issue. The Clerk is directed to forward a copy of this Memorandum Opinion to all counsel of record. Alexandria, Virginia July 7, 2016 21
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