## Facts

- VMware, Inc. was a publicly traded corporation whose controlling stockholder, EMC Corporation, owned approximately 81% of VMware and held governance rights associated with that stake.
- EMC entered into a merger agreement with Denali Holding Inc.; the transaction closed in September 2016, resulting in Denali acquiring EMC and EMC’s controlling interest in VMware.
- EMC stockholders received cash and Denali “Class V” tracking stock designed to track a portion of the economic performance of Denali’s indirectly held VMware shares.
- VMware was not a party to the EMC–Denali merger agreement and did not issue stock or directly exchange assets as part of that merger.
- A VMware minority stockholder filed both class and derivative claims alleging that the transaction and related steps harmed VMware and its minority stockholders, citing market and business developments that coincided with a decline in VMware’s trading price.
- The complaint alleged, among other theories, that EMC improperly sold control to a “known looter,” that the tracking stock wrongfully exploited VMware’s value, and that certain pre-merger actions improperly constrained VMware.
- Defendants moved to dismiss under Court of Chancery Rule 12(b)(6).

## Issues

1. Whether a controller of a subsidiary breaches fiduciary duties to the subsidiary’s minority stockholders by approving a parent-level merger that indirectly transfers control of the subsidiary.
2. Whether the complaint adequately pleaded a “sale to a looter” claim based on allegations that the acquirer intended to extract value from the subsidiary to service acquisition debt or for affiliated dealings.
3. Whether issuance of parent-level tracking stock tied to the subsidiary’s performance can constitute misappropriation of the subsidiary’s value or wrongful dilution of the subsidiary’s minority stockholders.
4. Whether challenges to pre-merger restructurings and related board actions stated a non-exculpated fiduciary-duty claim sufficient to overcome business judgment deference.

## Decision

- The Court of Chancery (Vice Chancellor Laster) granted the motion to dismiss in full under Rule 12(b)(6).
- The court held the complaint did not plead facts showing that the merger parties breached fiduciary duties to VMware stockholders or bound VMware to unfair terms.
- The court held the pre-merger restructuring and related internal decisions were subject to the business judgment rule and were not challenged with well-pleaded facts sufficient to rebut it.
- The court held the tracking stock issuance was not adequately pleaded as misappropriation of VMware’s property or as wrongful dilution of VMware’s minority stockholders.
- All class and derivative claims were dismissed for failure to state a claim.

## Legal Principles

- A decline in a public company’s stock price following a controller-related transaction is not, without a well-pleaded fiduciary wrong tied to a concrete act, sufficient to state a claim.
- A “sale to a looter” theory requires particularized allegations supporting an actual plan to strip or misappropriate the controlled company’s assets; generalized assertions about servicing acquisition debt from subsidiary cash flows or business integration plans are insufficient without more.
- When a subsidiary is not a party to a parent-level merger and does not transfer assets or become contractually bound to adverse terms, derivative claims premised on that merger face significant pleading obstacles.
- Board-level restructurings and ordinary-course corporate actions are reviewed under the business judgment rule absent well-pleaded facts indicating self-dealing, lack of independence, bad faith, or irrationality.
- Parent-issued tracking stock referencing a subsidiary’s value does not, without an issuance by the subsidiary or an alteration of the subsidiary’s capital structure, inherently constitute misappropriation of the subsidiary’s property or dilution of the subsidiary’s stockholders.

## Conclusion

The court dismissed fiduciary-duty and related claims challenging a controller’s parent-level merger and its indirect effects on a controlled subsidiary, holding that alleged market losses and speculative extraction theories did not plead actionable wrongdoing, and that the challenged restructuring decisions and tracking stock features did not state a claim for misappropriation or dilution.


Ford v. VMware, Inc., 2017 WL 1684089 (Del. Ch. 2017)