## Facts

- Health Management, Inc. (HMI) entered interrelated stock-purchase, debt, and merger agreements with Transworld Healthcare, Inc. in November 1996.
- Transworld agreed to purchase 49% of HMI’s voting stock, obtained an option to acquire an additional 2%, and acquired approximately $49 million of HMI debt.
- HMI’s board approved a cash-out merger with a Transworld subsidiary initially priced at $2.00 per share.
- After adverse financial developments and disclosures of accounting errors, the merger price was renegotiated downward from $2.00 to $1.00, and then to $0.30 per share.
- Counsel Corp. expressed interest in acquiring HMI, but HMI did not pursue Counsel as an alternative transaction partner.
- HMI issued a proxy statement seeking stockholder approval of the $0.30 per-share cash-out merger.
- The plaintiff alleged the proxy falsely described Transworld’s purpose for the merger and characterized negotiations as arm’s length despite Transworld’s leverage and alleged plan to resell HMI’s assets.
- Stockholders approved the merger; after closing, Transworld sold HMI’s assets to Counsel Corp. at a profit.
- A former public stockholder sued Transworld (as alleged controller) and former HMI directors in an individual and class action; defendants moved to dismiss under Court of Chancery Rule 12(b)(6).

## Issues

1. Whether the complaint adequately alleged that Transworld was a controlling stockholder owing fiduciary duties despite owning less than a majority of voting power.
2. Whether the complaint stated a non-exculpated fiduciary-duty claim against directors notwithstanding a charter provision tracking 8 Del. C. § 102(b)(7).
3. Whether the proxy statement allegedly contained materially false or misleading statements about Transworld’s purpose and the arm’s-length character of negotiations.
4. Whether the plaintiff adequately pleaded causation and damages for disclosure-based claims, including when seeking price-based (“real”) damages.

## Decision

- The court granted the motion to dismiss in part and denied it in part.
- The court held the complaint sufficiently pleaded that Transworld functioned as a controlling stockholder based on its 49% stake, option to exceed 50%, and substantial debt leverage over a financially distressed company.
- The court held the complaint adequately alleged merger-process and price unfairness sufficient to proceed at the pleading stage under controller-transaction scrutiny.
- The court held the complaint adequately pleaded that the merger proxy may have been materially misleading regarding Transworld’s purpose and the purportedly arm’s-length nature of negotiations.
- The court held certain disclosure theories were inadequately pleaded as to causation or damages and were dismissed.

## Legal Principles

- A stockholder owning less than a majority may be treated as a controlling stockholder if it exercises actual domination and control over corporate decision-making.
- A controller that stands on both sides of a transaction or uses control to obtain non-ratable benefits may face entire-fairness scrutiny at the pleading stage when unfairness is reasonably alleged.
- A § 102(b)(7) exculpation provision bars monetary liability for duty-of-care breaches but not for loyalty breaches, bad faith, or intentional misconduct; a complaint survives dismissal if it pleads facts supporting a reasonable inference of non-exculpated conduct.
- In a request for stockholder action (such as a merger vote), directors and fiduciaries must provide full and truthful disclosure of material facts in the proxy.
- For proxy-related disclosure claims tied to a transaction affecting stockholder property rights, a plaintiff may seek price-based damages if the complaint adequately pleads a causal link between the alleged misstatements and economic harm; other disclosure claims require pleaded, quantifiable injury and causation to support more than nominal relief.

## Conclusion

The court allowed core fiduciary-duty and proxy-disclosure claims to proceed where the complaint plausibly alleged Transworld’s controller status, unfairness in a cash-out merger, and materially misleading proxy statements, while dismissing narrower disclosure theories that insufficiently pleaded causation or damages.


O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902 (Del. Ch. 1999)