Hawkins v. Medapproach Holdings, Inc.

Background

Sharon Hawkins was a limited partner in MedApproach, L.P. The opinion states that she held 88.18% of its shares and sued both individually and on MedApproach’s behalf. MedApproach Holdings, Inc. was MedApproach’s general partner and was owned and controlled by W. Bradley Daniel. MedApproach owned 75% of N.D. Management, Inc., an entity involved in the project to develop, produce, and sell mifepristone. A 1997 proxy gave Daniel and Dr. Jeffrey Rush voting control over N.D. Management.

Hawkins’s remaining claims concerned four subjects. Count IV challenged defendants’ alleged failure to change N.D. Management’s tax structure from a taxable corporation to a pass-through corporation. Count V challenged the 2010 transfer of a roughly 10% interest in Danco-related entities. Counts VI and VII concerned the withholding of Hawkins’s distributions while defendants pursued claims against the Hawkinses in an earlier lawsuit in Tennessee. Count VIII challenged 2016 and 2017 payments to Angelia Van Vranken and Daniel.

Rule 23.1 Representative-Adequacy Ruling

Federal Rule of Civil Procedure 23.1 requires a person bringing a shareholder derivative action to fairly and adequately represent similarly situated shareholders or members. Defendants argued that Hawkins was an inadequate representative because of her limited knowledge, alleged antagonism, and conflicts with other partners.

The court rejected the arguments that Hawkins’s reliance on her husband or her combination of individual and derivative claims automatically made her inadequate. It nevertheless found a disqualifying conflict concerning Count IV. The court concluded that Hawkins’s longstanding effort to remove the proxy was closely tied to the tax-restructuring dispute, and that removing the proxy would give the Hawkinses control of the project. The court therefore dismissed Count IV. It concluded that Hawkins could continue to represent MedApproach on Counts V and VIII because those claims were not intertwined with the proxy dispute.

Summary-Judgment Rulings

Count V—10% Interest Distribution. The court granted defendants’ motion for summary judgment. Applying Delaware’s three-year limitations period, the court concluded that the claim accrued when the interest was transferred on July 1, 2010, well before Hawkins added the claim on February 20, 2015. The court rejected Hawkins’s arguments for fraudulent concealment and equitable tolling. It found that the record showed notice of the planned transfer before 2010, distributions after the transfer, a financial report showing a new Danco interest by March 2011, and, at the latest, awareness of a dispute by December 2011. The court did not reach the merits of whether the transfer breached fiduciary duties.

Counts VI and VII—Withheld Distributions. The conclusion states that defendants’ motion for summary judgment was granted on both the contract claim and the fiduciary-duty claim. In discussing the claims, the court reasoned that the fiduciary-duty claim was duplicative of the contract claim because both arose from the same alleged withholding, depended on the same facts, and sought the same remedies. The court also held that the withholding claim was a compulsory counterclaim in the Tennessee lawsuit because it had a logical relationship to that lawsuit and involved overlapping evidence. Hawkins had not asserted it as a counterclaim there.

Count VIII—Van Vranken’s Compensation. The court granted defendants’ summary-judgment motion as to the claim concerning Van Vranken’s 2016 and 2017 compensation. The court applied the business-judgment rule, which generally protects business decisions absent evidence of disloyalty, bad faith, or another basis for overcoming the presumption. It found no evidence that the payments were self-dealing, fraudulent, unreasonable, grossly negligent, or made with willful disregard of duties. Hawkins also had not shown that the payments amounted to corporate waste.

Count VIII—Daniel’s Compensation. The court denied both sides’ motions for summary judgment concerning Daniel’s 2016 and 2017 compensation. Because Daniel participated in decisions about his own compensation, the court held that the compensation was subject to the more demanding entire-fairness standard, which requires showing that the arrangement was fair to the company. The court found that the agreements cited by defendants did not unambiguously establish Daniel’s entitlement to the challenged fees. Hawkins likewise had not shown that the agreements unambiguously barred all compensation beyond Daniel’s annual pay. The court therefore left this part of Count VIII unresolved.

Disposition

The court dismissed Count IV. It granted defendants’ motion for summary judgment on Counts V, VI, and VII and on Count VIII as it concerned Van Vranken’s compensation. It denied Hawkins’s motion for summary judgment on those claims. It denied both parties’ motions for summary judgment on Count VIII as it concerned Daniel’s compensation.