                                                        EFiled: Jul 08 2015 02:10PM EDT
                                                        Transaction ID 57519087
                                                        Case No. 9809-VCN
                             COURT OF CHANCERY
                                   OF THE
                             STATE OF DELAWARE
 JOHN W. NOBLE                                                417 SOUTH STATE STREET
VICE CHANCELLOR                                               DOVER, DELAWARE 19901
                                                             TELEPHONE: (302) 739-4397
                                                             FACSIMILE: (302) 739-6179

                                     July 8, 2015


A. Thompson Bayliss, Esquire                  Johnna M. Darby, Esquire
Sarah E. Hickie, Esquire                      Hiller & Arban, LLC
Abrams & Bayliss LLP                          1500 North French Street, 2nd Floor
20 Montchanin Road, Suite 200                 Wilmington, DE 19801
Wilmington, DE 19807

      Re:    Capella Holdings, Inc. v. Anderson
             C.A. No. 9809-VCN
             Date Submitted: March 12, 2015

Dear Counsel:

      A company (and its operating subsidiary) and several of its fiduciaries have

moved to dismiss counterclaims and third-party claims brought against them by a

company founder who also is a former director and officer. The claims relate to a

2014 recapitalization that led the founder to file a public complaint in Tennessee

state court, and then to be terminated based on the disclosure of supposedly

confidential information. The founder has failed to plead that the recapitalization

was unfair, but there are factual issues that prevent dismissal of his contract claims.

The Court thus grants the motion to dismiss in part and denies the motion in part.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 2


                                       *****

      Counterclaim Defendants are Capella Holdings, Inc. (“Capella Holdings”)

and Capella Healthcare, Inc. (“Capella Healthcare,” and collectively, “Capella”), as

well as Capella directors Daniel S. Slipkovich (“Slipkovich”), Joseph P. Nolan

(“Nolan”), David A. Donnini (“Donnini”), Joshua M. Earl (“Earl”), and Robert Z.

Hensley (“Hensley,” and collectively, the “Director Defendants”). They have

moved to dismiss breach of fiduciary duty and contract claims made by

Counterclaim Plaintiff James Thomas Anderson (“Anderson”), a founder and

former director and officer of Capella.1

      Capella is a Delaware corporation that operates “acute care hospitals and

ancillary facilities.”2   Upon Capella’s formation, affiliates of GTCR Golder



1
  Technically, the counterclaims were brought against Capella Holdings, and
Capella Healthcare and the Director Defendants have been joined as Third-Party
Defendants. Capella Holdings owns 100% of Capella Healthcare’s stock, and the
dispute involves a transaction in Capella Holdings’s stock. For convenience, the
Court does not distinguish between the Capella entities and uses the term
“counterclaims” generally to refer to Anderson’s claims.
2
   Verified Answer, Countercls. and Third-Party Compl. of Def. and
Countercl./Third-Party Pl. James Thomas Anderson, Countercls. & Third-Party
Compl. (“Countercl.”) ¶ 15. Unless specified otherwise, the facts have been drawn
from the Counterclaim.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 3


Rauner II   L.L.C.   (“GTCR”)3    invested   approximately    $206   million   for

approximately 50 million common and 206,000 preferred shares of Capella.

Capella’s charter capped issuance of common stock at 75 million shares “to protect

the minority shareholders from dilution.”4 Furthermore, under the terms of the

Senior Management Agreement dated May 4, 2005, Capella was required to

“reserve 2,211,688 additional shares of Common Stock . . . for issuance . . . to

other executives and employees” of Capella and its subsidiaries.5 Capella and

Anderson were signatories to the Senior Management Agreement.


3
   The Court does not distinguish between GTCR and the funds or entities
(excluding the Director Defendants) alleged to be affiliated with it. GTCR has not
been named a party to this action.
4
  Id. ¶ 17. Anderson was promised that his share of common stock would not fall
below 5%. He held 3,711,511 shares as of April 2014.
5
  Verified Compl. (“Compl.”) Ex. C (“SMA”) § 1(k). The full provision is as
follows:
       (k) [Capella] shall reserve 2,211,688 additional shares of Common
       Stock (the “Additional Common Stock”) for issuance (whether
       through restricted stock, upon exercise of options or otherwise) to
       other executives and employees of [Capella] and its Subsidiaries after
       the date hereof (including executives and employees of acquired
       companies); provided that in the event that any portion of such
       Additional Common Stock are not issued prior to the earliest to occur
       of (x) the redemption of all issued and outstanding Preferred Stock,
       (y) a Sale of the Company or (z) an initial Public Offering, the Board
       in its sole discretion may issue any or all of the remaining shares of
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 4


      In 2013, GTCR began a sales process that resulted in a bid from Apollo

Global Management, LLC (“Apollo”) of $200 million for preferred securities

convertible into at least 51% of Capella’s common stock. According to Anderson,

the bid thus valued the common at between $200 million and $400 million, or “at

least $3.17 per share.”6 Counterclaim Defendants offer an October 30, 2013, bid

letter from Apollo, which, however, makes clear that part of the investment was to

be used to deleverage Capella.7 Nevertheless, GTCR subsequently terminated the


       Additional Common Stock to the executives of [Capella] or its
       Subsidiaries (including [Anderson]) in the amounts determined by the
       Board. Any shares of Additional Common Stock not allocated by the
       Board to executives and employees of [Capella] and its Subsidiaries
       pursuant to the immediately preceding sentence shall remain unissued.
Id. (emphases omitted). The Senior Management Agreement is discussed in and is
integral to the Counterclaim.
6
  Countercl. ¶¶ 26-27. Without belaboring the obvious, the Court notes that $200
million divided by 63 million shares equals approximately $3.17, which would not
seem to account for preferred stock or other balance sheet items.
7
  Reply Br. in Supp. of Countercl. Defs.’ Mot. to Dismiss (“Capella Reply Br.”)
Ex. B. Counterclaim Defendants assert that the Court can consider the letter
because of Anderson’s repeated references to the bid in the Counterclaim. Capella
Reply Br. 15-16 & n.11. Anderson opposes consideration of the letter, contending
during oral argument that his “allegations were not just based upon that
document.” Pl.’s Mot. to Dismiss Tr. (“Oral Arg. Tr.”) 36-38.
  The $200 million bid is the basis for Anderson’s theory of damages. See, e.g.,
Countercl. ¶¶ 23-27, 46; Def. and Countercl./Third-Party Pl. James Thomas
Anderson’s Answering Br. in Opp’n to Countercl. and Third-Party Defs.’ Mot. to
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 5


process. GTCR then began changing management, including hiring new chief

executive officer Mike Wiechart (“Wiechart”). Anderson was given, but did not

execute, “‘voluntary termination’ papers” on December 20, 2013.8

      The counterclaims relate to an April 17, 2014, recapitalization (the

“Recapitalization”). Wiechart proposed the Recapitalization in February 2014,

citing a need to avoid a potential debt rating downgrade and to “‘incentivize’”

employees.9 Legal counsel was present and answered Anderson’s questions at that

February board meeting. As of then, Capella was able to issue approximately

12 million more shares of common stock, and Chief Financial Officer Denise

Warren represented that “no downgrade was threatened or imminent.”10 She also

“stated that no debt issuance was currently under consideration.”11


Dismiss (“Anderson Answering Br.”) 13. The Court acknowledges that the bid
letter might present only part of the picture, but will nonetheless consider it. It
would be unfair to Counterclaim Defendants to ignore this integral document
completely, and Anderson should have known about its content and existence. See
In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2-3 (Del. Ch.
Feb. 21, 2014). Anderson, after all, was a director and officer at the time of the
Apollo bid.
8
  Countercl. ¶ 29.
9
  Id. ¶ 37.
10
   Id. ¶ 38.
11
   Id.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 6


      The board members were provided with details of the Recapitalization less

than 48 hours before their ultimate vote. In the Recapitalization, Capella would be

authorized to issue over 1.2 billion shares of common stock. GTCR’s preferred

shares12 would be converted into common shares based on a $0.175 per common

share valuation, reportedly determined by “the amount of money that various

investors had paid for their shares”—not fair market value.13 Generally speaking,

GTCR’s ownership percentage would increase from 79.1% of Capella’s common

stock to 88%; Anderson’s share would decrease from 6% to 0.308%; and the

minority shareholders’ share would decrease from 20% to less than 2%. GTCR

also requested exclusive Delaware jurisdiction.

      At an April 17, 2014, meeting, after receiving legal advice, Capella’s board

of directors approved the Recapitalization. Minutes from February presented at the

April meeting noted “an imminent threat of a bond-ratings downgrade” and a lack

of questions to legal counsel.14 Anderson voted against the Recapitalization, while

five directors—who were either GTCR “affiliates” or had “a direct pecuniary

12
   By April 2014, GTCR’s preferred shares had accumulated in-kind interest of
approximately 143,000 preferred shares.
13
   Id. ¶¶ 48-49.
14
   Id. ¶ 100-01.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 7


interest through GTCR in maximizing the value of GTCR’s investment”—voted in

favor.15 In Anderson’s words, Donnini and Earl are “direct affiliates of GTCR”;16

Nolan is “a former direct affiliate in GRCR” who serves to benefit from “GTCR-

affiliated investments”;17 Hensley is “a board member for multiple GTCR-

affiliated companies”;18 and Slipkovich is a beneficiary of “employment

agreements linked to the outcome of GTCR’s investment in [Capella].”19 GTCR

had nominated Donnini, Earl, Nolan, and Hensley to the board.

      Anderson filed an action in Tennessee state court on April 23, 2014, alleging

breaches of contract and fiduciary duty and seeking rescission of the

Recapitalization (the “Tennessee Complaint”).20         Included in the Tennessee

Complaint was information about the Apollo bid, the Recapitalization, and alleged

concerns about a debt-rating downgrade. Capella responded by purporting to

terminate Anderson “for cause” under the Senior Management Agreement on

15
   Id. ¶ 60.
16
   Id. At oral argument, Anderson clarified that he uses “affiliate” as a term defined
in the securities law context. Oral Arg. Tr. 50.
17
   Countercl. ¶ 60. Nolan had been an employee of GTCR before January 1, 2014.
18
   Id.
19
   Id. Slipkovich had served as chief executive officer before Wiechart.
20
   Compl. Ex. H. This document is not part of the Counterclaim, but its accuracy is
not disputed and it is publicly available.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 8


May 19, 2014, and filing this Delaware action.21 Anderson’s “breach of his duty of

loyalty and breach of his confidentiality obligations” were cited as justifying the

termination.22 Capella has refused to pay Anderson severance.23 In September

2014, Anderson “voluntarily dismissed his Tennessee case, without prejudice” and

filed “mirror[ing]” claims through his Delaware counterclaims.24




21
   As relevant, cause means “a breach of [Anderson’s] duty of loyalty to [Capella]”
or “any material breach of [the Senior Management Agreement] . . . which is not
cured within 15 days after written notice thereof.” SMA § 9.
22
   Countercl. ¶ 126 (internal quotation marks omitted). Section 7(a) of the Senior
Management Agreement restricts Anderson’s ability to disclose confidential
information, defined (in relevant part) as “any trade secrets or other information,
observations and data obtained by [Anderson] during the course of his performance
under this agreement . . . concerning the business or affairs” of Capella.
SMA § 7(a). There is an exception for information “required to be disclosed
pursuant to any applicable law or court order, provided that [Anderson] uses all
reasonable efforts to obtain confidential treatment of such information.”
SMA § 7(a).
23
   Under the Senior Management Agreement, generally speaking, Anderson is
entitled to his base salary for a one-year period beginning on the date of
termination without cause—and absent violation of confidentiality and non-
compete provisions. SMA § 6(e).
24
   Anderson Answering Br. 1.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 9


                                       *****

      In this action, Anderson brings five counts, the first four focused on

rescission of the Recapitalization25 and the last focused on securing benefits under

his employment agreement through an order for declaratory judgment and specific

performance. In his first three counts, Anderson asserts duty of loyalty, duty of

care, and duty of good faith claims against the Director Defendants and Capella

Holdings for the directors’ role in approving the Recapitalization.26 Anderson

alleges that the Recapitalization was conducted to benefit GTCR and management,

without sufficient time and information, and for stated reasons that were false. He

contends that entire fairness review is appropriate. Count IV accuses Capella of

breaching the Senior Management Agreement “by authorizing the issuance of”

more than the shares reserved for executives and employees (and more than the

75 million cap in its charter).27 Anderson’s final count faults Capella for failing to

uphold severance pay and other obligations required for termination without



25
   More precisely, Anderson asks for “a permanent mandatory injunction voiding
the recapitalization plan.” Countercl. ¶¶ 76, 89, 106, 118.
26
   Count III is only brought against the Director Defendants.
27
   Id. ¶¶ 114-15.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 10


cause.28 From these violations, Anderson claims to have suffered damages in an

amount “unascertainable” at this stage.29

      Counterclaim Defendants urge the Court to dismiss the counterclaims on the

grounds of laches (or the impracticality of rescission), failure to comply with

requirements for derivative claims, and failure to state a claim. On the merits of

the fiduciary duty claims, Counterclaim Defendants argue that Anderson has not

rebutted the presumption that the Director Defendants acted loyally, that the

Section 102(b)(7) provision in Capella’s charter30 shields them from liability, and

that Capella cannot breach a duty to itself. They contend that the contract claims

fail because “the clear and unambiguous language”31 of the Senior Management

Agreement supports their reading that the reserved share amount was a “floor,”32

and Anderson has not identified an actual harm suffered.              Counterclaim


28
   He later suggests that his count for specific performance includes other benefits
beyond severance pay, such as his title and position. Anderson Answering Br.
at 31.
29
   Countercl. ¶¶ 75, 88, 105, 117, 132.
30
   Compl. Ex. A, at A-6. Anderson seems to contend that the rescission claims are
not subject to the Section 102(b)(7) provision. Anderson Answering Br. 27 n.7.
31
   Opening Br. in Supp. of Countercl. Defs.’ Mot. to Dismiss (“Capella Opening
Br.”) 41-42.
32
   Id. at 43 (emphasis omitted).
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 11


Defendants add details of the Apollo bid in their reply to debunk Anderson’s

theory of damages. They also argue that “[t]he public existence of Anderson’s

Tennessee Complaint”33 is enough to establish that Capella terminated him for

good cause, which both triggered the repurchase of his shares and rendered him

ineligible for severance payments. Finally, they observe a number of flaws in the

request for specific performance of the Senior Management Agreement, including

that the counterclaims substantively ask for money damages.

      Anderson answers Counterclaim Defendants’ contentions in turn, beginning

with arguments that the pleadings do not support a laches defense and that he is

bringing his claims directly, based on the dilution he suffered and the rescission he

seeks.34 With respect to his fiduciary duty claims, Anderson asserts that he states a

claim because the Director Defendants needlessly approved a plan to increase

ownership of controller GTCR at the expense of the minority shareholders. He

claims that the Director Defendants were conflicted “thanks to their myriad ties to




33
  Id. at 45.
34
  He explains that even if rescission is not available, he is still entitled to other
equitable remedies, such as rescissory damages. Anderson Answering Br. 11 n.1.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 12


GTCR.”35 He further cautions that resolving the contract claims on a motion to

dismiss would require inappropriate factual determinations, “abstract” contract

interpretation, and a balancing of the equities.36 For example, he observes that the

facts surrounding his filing of the Tennessee Complaint have not been developed.

                                       *****

      On a motion to dismiss, the Court “accept[s] even vague allegations in the

Complaint as ‘well-pleaded’ if they provide the defendant notice of the claim.”37

Well-pleaded factual allegations are taken as true, reasonable inferences are drawn

in favor of the complainant, and the Court grants the motion only if the

complainant cannot prevail under any reasonably conceivable set of circumstances

that can be proved.38 Although use of extrinsic evidence can convert a motion to

dismiss into one for summary judgment,39 the Court can consider, for limited

purposes, documents that are “integral to a plaintiff’s claim and incorporated in the



35
   Id. at 24.
36
   Id. at 27-28.
37
   Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531,
536 (Del. 2011).
38
   Id.
39
   See Ct. Ch. R. 12(b).
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 13


complaint.”40 Delaware Rule of Evidence Rule 201(b) further allows the Court to

take judicial notice of facts that are “‘capable of accurate and ready determination

by resort to sources whose accuracy cannot reasonably be questioned.’”41

                                      *****

      Before the Court proceeds to the heart of its analysis, a brief explanation of

why it does not resolve part of this motion on Counterclaim Defendants’ laches (or

impracticality) and derivative claim contentions is warranted. First, Counterclaim

Defendants argue for dismissal because Anderson waited too long to ask for

rescission.   “Laches bars an action in equity if[] [t]he plaintiff waited an

unreasonable length of time before bringing the suit and . . . the delay unfairly

prejudices the defendant.”42 Impracticality of undoing a transaction weighs against

rescission.43 While Counterclaim Defendants make compelling arguments, the




40
   In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del. 1995).
41
   In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 n.28 (Del. 2006)
(quoting D.R.E. 201(b)).
42
   Whittington v. Dragon Gp., L.L.C., 991 A.2d 1, 8 (Del. 2009) (second alteration
and omission in original) (internal quotation marks omitted).
43
   See Winston v. Mandor, 710 A.2d 831, 833-35 (Del. Ch. 1996) (granting a
motion to dismiss a rescission claim).
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 14


Court hesitates to decide the motion on these grounds when there is a factual

dispute about what has happened since the Recapitalization closed.

      Next, perhaps the first step of the analysis should be whether Anderson

states direct or derivative fiduciary duty claims,44 a point the parties vigorously

debate. To maintain derivative claims, Anderson would need to comply with

“Rule 23.1’s pleading requirements . . . [and] the continuous ownership

requirement.”45 For the purpose of judicial economy, however, the Court assumes

that Anderson states direct claims. Anderson’s fiduciary duty counterclaims do not

expressly plead that he has suffered from exclusionary dilution of his voting rights

by a controller as in Gentile v. Rossette,46 but the Court will make the inference, for

this decision, that Anderson brings those claims directly.47




44
   To the extent that Counterclaim Defendants argue that Anderson’s contract
claim for rescission is derivative, the Court accepts, for present purposes, that it is
direct. Anderson asserts personal rights pursuant to his Senior Management
Agreement with Capella.
45
   See Capella Opening Br. 3, 24-26 (citing cases).
46
   906 A.2d 91 (Del. 2006).
47
   See Oral Arg. Tr. 35, 44-46.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 15


                                       *****

      Moving to the merits of the claims, Anderson asserts breaches of the duties

of care, good faith, and loyalty, as well as breaches of contract. As remedies, he

asks for rescission, declaratory judgment, and specific performance. A breach of

the duty of care rests on gross negligence.48 A classic duty of loyalty claim

involves self-interested conduct, and a good faith claim (also under the loyalty

umbrella) arises “where corporate directors have no conflicting self-interest in a

decision, yet engage in misconduct that is more culpable than simple inattention or

failure to be informed.”49 As a general matter, directors are presumed to make

business decisions “on an informed basis, in good faith and in the honest belief that

the action taken [i]s in the best interests of the company.” 50 Even when entire

fairness scrutiny would otherwise seem to apply, a plaintiff must first “make




48
   E.g., In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 64 (Del. 2006).
49
   Id. at 66.
50
   Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by
Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 16


factual allegations in its complaint that, if proved, would establish that the

challenged transactions are not entirely fair” to state a claim.51

      The critical dispute for Counts I through III (the fiduciary duty claims) is

whether Anderson has made factual allegations that the Recapitalization was unfair

to him. Anderson’s claims of unfairness and of an entitlement to relief (through an

entire fairness review, blending care, loyalty, and good faith issues) fundamentally

are tied to the $3.17 per share stock price based on the Apollo proposal.

      The facts in the Counterclaim are that, by summer 2013, GTCR held

approximately 206,000 preferred shares from its initial investment and 143,000

preferred shares as accumulated in-kind interest.52 Altogether, this interest was

“redeemable” for approximately $349 million.53 The Counterclaim also asserts

that Capella’s common stock was worth $3.17 per share.               This allegation is

speculative (and the proposal letter54 does not fill in the unknowns). For example,


51
   Monroe Cnty. Empls.’ Ret. Sys. v. Carlson, 2010 WL 2376890, at *2 (Del. Ch.
June 7, 2010) (observing a lack of factual allegations about unfair price and
granting a motion to dismiss).
52
   Countercl. ¶¶ 18-19.
53
   See id. ¶ 19.
54
   Obviously, a bid letter is not a final proposal. The letter itself notes a need for
further due diligence and discussions on the specific details of the arrangement.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 17


Apollo was considering the investment of $200 million and anticipated that it

would end up with a controlling equity position. That could support the $400

million upper range posited by Anderson for the common stock. Unfortunately,

one cannot discern how much of Apollo’s proposed investment would end up

being converted into common stock or how much of what Apollo would pay to the

Company would be kept as company funds (and not paid to pre-transaction equity

holders)? Thus, the numbers which Anderson uses do not support the $3.17 per

share price that is critical to his effort to demonstrate unfairness. Furthermore,

since the Recapitalization gave GTCR approximately 9% more common shares,

using Anderson’s numbers would mean that GTCR traded its $349 million worth

of preferred shares (and priority position) for at most an additional $35.6 million of

common shares (or for the purpose of taking $22.6 million from Anderson).55


E.g., Capella Reply Br. Ex. B, at 4. Whether a general and contingent proposal is a
good starting point for a price analysis is a question the Court need not decide.
55
   See Anderson Answering Br. 13. Assuming (in the light most favorable to
Anderson) that the Apollo bid valued Capella’s common stock at $400 million,
GTCR’s 88% interest would be worth $352 million. A 79.1% interest would be
worth $316.4 million.
   At oral argument, Anderson explained that GTCR could increase its ownership
to 98%. Oral Arg. Tr. 41. This would indicate a trade of $349 million in preferred
stock for an additional $75.6 million in common stock.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 18


      The bid letter, if admissible at this stage, is evidence that $3.17 is not a

reasonable valuation on which to rely—particularly for one who was an insider at

the time the bid was made. Nonetheless, Anderson’s valuation theory is tenuous

even if the Court does not look at the letter. GTCR’s initial ownership position is

not in dispute. The Counterclaim also states that Apollo was making an offer for

preferred securities, although convertible to a controlling interest in common stock.

The Court cannot engage in speculation that Apollo saw some advantage to

owning Capella common stock that somehow cancelled out Capella’s preferred

stock obligations (not to mention its debt).56        Moreover, while there is an

allegation that the $0.175 per share price was unfair itself, the factual basis given

to infer unfairness is that $0.175 is “at least $3.00 per share less than the value of




   Anderson estimates a personal loss of approximately $11.3 million, but a
generous calculation using $400 million would roughly double that loss. To reach
$11.3 million, he takes the difference in share price ($3.17-$0.175) and multiplies
by the number of shares he holds.
56
   Counterclaim Defendants explain, “[I]t would be irrational for a company in
Apollo’s position to give a $200 million cash infusion to a company and then stand
in line, if there were a liquidation, behind GTCR and the banks to the tune of at
least $350 million.” Oral Arg. Tr. 17.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 19


the Apollo bid.”57 Without well-pleaded allegations about the unfairness of the

transaction, Anderson fails to plead his entire fairness case against the Director

Defendants,58 as well as against Capella.59

                                       *****

      Given the above analysis, Anderson’s remaining claims are for breach of

contract. Count IV alleges breach of the Senior Management Agreement “by

authorizing the issuance of greater than 2,211,688 shares of common stock for




57
   See Anderson Answering Br. 4, 22 (quoting Countercl. ¶¶ 45, 46); see also Oral
Arg. Tr. 38-39 (“[O]ur expert is going to rip that [historical price] methodology
apart . . . . [W]hat we’ve alleged . . . is that they used a price of 17 cents a share
which . . . is at least $3 a share less than the actual value of the common
shares . . . .”).
   Perhaps the $0.175 per share is tied to cost basis, a number that bears no
necessary relationship to current value many years later, but it is not an allegation
that the price was not reasonable in 2014. A reasonable value and cost basis
sometimes align. In addition, Anderson may disagree with the decision to convert
preferred shares to common, but, unless there is a valuation issue, the mere
conversion from preferred to common does not form a basis for a claim.
58
   Anderson alleged in his Counterclaim that the Director Defendants had
insufficient time to consider the Recapitalization plan but otherwise did not
develop process (or duty of care) allegations in briefing or oral argument.
59
   See Anderson Answering Br. 19 n.4 (“The companies are included as defendants
so that the rescission of the transaction can be imposed against the companies for
the Director Defendants’ unlawful conduct.”).
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 20


issuance to other executives and employees”60 and “greater than 75 million

common shares.”61 Counterclaim Defendants argue that the Senior Management

Agreement unambiguously set a minimum of shares to reserve “as a means to

compensate . . . executives and management in a potential change-of-control

context” but “by no means dictate[d] a ceiling” on future issuances.62           The

elements of a breach of contract claim are a contract, a breach of that contract, and

resulting damages.63 When interpreting a contract, the Court gives effect to the

plain meaning of the language adopted by the parties.64 “Dismissal is proper only

if the defendants’ interpretation is the only reasonable construction as a matter of

law.”65


60
   Countercl. ¶ 114.
61
   Id. ¶ 115.
62
   Capella Opening Br. 43.
63
   E.g., In re Mobilactive Media, LLC, 2013 WL 297950, at *14 (Del. Ch. Jan. 25,
2013). The parties do not dispute that the Senior Management Agreement governs
the contract claims.
64
    E.g., Palese v. Del. State Lottery Office, 2006 WL 1875915, at *4 (Del. Ch.
June 29, 2006) (“It is the duty of the court to construe agreements as they are made
by the parties and to give to language that is clear, simple and unambiguous the
force and effect which the language clearly demands.” (internal quotation marks
omitted)), aff’d, 913 A.2d 570 (Del. 2006) (TABLE).
65
   Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691
A.2d 609, 613 (Del. 1996).
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 21


      Section 1(k) of the Senior Management Agreement simply requires Capella

to reserve approximately 2.2 million common shares for executives and

employees; these shares can be issued to executives at the board’s discretion if a

triggering event occurs.66 There is no language about a floor or a ceiling, and the

parties do not direct the Court to other sections of the contract that show a clear

intent to choose between the interpretations. Counterclaim Defendants’ reading

appears more promising, but Anderson’s allegations about the 75 million share cap

in Capella’s charter and the promise to protect his ownership percentage indicate

that his interpretation is at least reasonable at this stage. Anderson has failed to

state a claim that the Recapitalization unfairly extracted monetary value from him.

However, it is reasonably conceivable that Anderson suffered from a violation of

his contract rights and rights associated with stock ownership, such as voting

power.67 Because the claim survives, limiting the possible remedies, if eventually

necessary, should await further developments.




66
  See supra note 5.
67
   For reasons explained infra, the Court cannot yet conclude that Capella has
properly repurchased Anderson’s stock, following a termination for cause.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 22


      In his fifth count, Anderson alleges that Capella breached the Senior

Management Agreement by terminating him without cause (and accruing

additional violations for treating his termination as one for cause). Anderson

argues that the Court must limit itself to the pleadings and that the motion to

dismiss stage is inappropriate to resolve factual disputes. Defendants maintain that

the critical facts are subject to judicial notice and indicate that Anderson was

properly terminated for cause.

      Again, the Court begins by looking to the language of the Senior

Management Agreement. Confidential information includes information Anderson

received as a director “concerning the business or affairs” of Capella.68

Information about a recent bid, the Recapitalization, and credit-rating concerns

qualify.   The Senior Management Agreement has a limited exception for

information “required to be disclosed pursuant to any applicable law,”69 but

Tennessee law did not dictate that Anderson’s complaint be filed publicly. 70 The


68
   SMA § 7(a).
69
   SMA § 7(a).
70
   The rules in Tennessee simply require a court order or statutory authority to file
a document under seal and require one seeking such an order to offer “sufficient
facts to overcome the presumption in favor of disclosure.” See Davidson Cnty.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 23


Senior Management Agreement emphasizes the harm of breaching the

confidentiality provision and takes away rights to severance pay for such a

breach.71 The difficulty with granting the motion to dismiss, however, is that

termination for cause requires a breach of the duty of loyalty or a material breach

of the Senior Management Agreement.72           Those conclusions require factual

determinations that cannot readily be made at this stage, in spite of the persuasive


Local Rs. Pract. § 7.02. Case law referenced in the rules elaborates that the party
seeking the order must show good cause for protection—namely “that disclosure
will result in a clearly defined injury to the party seeking closure.” Ballard v.
Herzke, 924 S.W.2d 652, 658 (Tenn. 1996). The analysis for good cause involves
a balancing of a number of factors, including whether “the information . . . relates
to a matter of public concern” and whether “the litigation involves private
litigants.” Id. at 658-59. This is, presumably, consistent with the Tennessee
Constitution.
71
    See SMA § 6(e) (“[Anderson] shall be entitled to receive such severance
payments only so long as [he] has not breached the provisions of Sections 7 or 8
hereof.” (emphases omitted)); id. § 8(d) (“[Anderson] agrees and acknowledges
that the restrictions contained in Section 7 and this Section 8 . . . are necessary to
protect [Capella’s] interest in [its] Confidential Information and other intellectual
property . . . .” (emphases omitted)); id. (“[Anderson] agrees and acknowledges
that the potential harm to [Capella] of the non-enforcement of Section 7 and this
Section 8 outweighs any potential harm to [Anderson] of its enforcement by
injunction or otherwise.” (emphases omitted)).
72
   See supra notes 21-22. One can conceive of confidential information that, when
disclosed to the public, would not result in material breach of an employment
contract.     Ascertaining materiality, with the burden on the Counterclaim
Defendants, is a daunting task for a case in this procedural posture.
Capella Holdings, Inc. v. Anderson
C.A. No. 9809-VCN
July 8, 2015
Page 24


facts noted above. In short, however skeptical one may be about Anderson’s future

success on the merits, the limitations of Rule 12(b)(6) preclude dismissal of his

final count.73

                                     *****

      For the reasons above, Counterclaim Defendants’ motion to dismiss is

granted with respect to the fiduciary duty claims and denied with respect to the

breach of contract claims.

      IT IS SO ORDERED.

                                             Very truly yours,

                                             /s/ John W. Noble

JWN/cap
cc: Register in Chancery-K




73
  Again, remedies can be addressed at a later time. For the time being, the Court
observes that specific performance is not awarded if damages provide an adequate
remedy, Williams v. White Oak Builders, Inc., 2006 WL 1668348, at *4 (Del. Ch.
June 6, 2006), aff’d 913 A.2d 571 (Del. 2006) (TABLE), and restoring Anderson’s
“position” and other aspects of employment seems inappropriate now that
“disputes have arisen and confidence and loyalty are gone.” See Brown v. Bd. of
Educ. of New Castle Cnty. Vocational Technical Sch. Dist., 1989 WL 72786, at *3
(Del. Ch. June 27, 1989).
