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Chancery Dismisses Derivative Suit Involving Wayfair and Challenging Debt Issuance to Private Equity Shareholders for Failure to Make Demand

Equity-League Pension Trust Fund v. Great Hill Partners, L.P., C.A. No. 2020-0992-SG (Del. Ch. Nov. 23, 2021)
A derivative suit brought on behalf of online home goods retailer, Wayfair, challenged the issuance of $535 million in convertible debt early in the COVID-19 pandemic to certain of Wayfair’s private equity investors and their affiliates. The transaction was recommended by a transaction committee and an audit committee, and was ultimately approved by the Wayfair board. The defendants moved to dismiss under Rule 23.1 arguing that the plaintiff was required but failed to make a pre-suit demand on the Wayfair board. Plaintiff argued that demand was futile because, in addition to the four directors who were on the buy-side of the transaction and thus interested, three directors sitting on the audit committee faced a substantial likelihood of liability. Plaintiff needed to sufficiently allege that at least one of the audit committee members was conflicted to arrive at a majority of the board for demand futility purposes. Finding that plaintiff had failed to adequately plead demand futility, the Court granted the defendants’ motion to dismiss.

At the end of February 2020, following a dramatic downturn in the stock market, Wayfair looked to raise $500 million through the issuance and sale of convertible notes. Several private equity firms expressed interest. The Wayfair board formed a transaction committee to consider the bids, which included a joint bid by two of Wayfair’s large private equity shareholders, Great Hill and Charles Bank. In recommending the Great Hill/Charles Bank proposal, the transaction committee allegedly did not hire independent advisors and simply ratified the work already done by Wayfair management in connection with the transaction. Wayfair’s three-member audit committee also approved the transaction, as did the full Wayfair board. In the months following closing, Wayfair’s stock price rose from $31.77 per share to over $300 per share.

While noting that the transaction was “far from a model of best practices,” the Court held that the complaint failed to plead with particularity that a pre-suit demand on the board was futile. Wayfair’s charter exculpated the directors from monetary damages for breaches of the duty of care. In the circumstances, the plaintiff was required to plead particularized facts establishing that at least one of the three otherwise disinterested and independent audit committee members acted in bad faith to arrive at a majority of conflicted directors. While the plaintiff contended that allegations relating to the audit committee’s failure to ask for more information about the conflicted directors constituted bad faith, the Court held that this alleged failure was not, on its own, enough. Rather, the plaintiff would need to allege that the audit committee members had “consciously and intentionally disregarded their responsibilities” in connection with approving the transaction. The Court also noted that the documents obtained through plaintiff’s Section 220 books and records demand, and incorporated by reference in the complaint, demonstrated that the audit committee did, in fact, consider certain directors’ potential conflicts of interest, as well as the terms of the bids submitted by arms-length bidders. Finding that plaintiff had failed to establish that demand on Wayfair’s board was futile, the Court accordingly dismissed the complaint. 

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