In 2010, Brendan Kennedy, Christian Groh, and Michael Blue (the Founders) formed Privateer, a private equity firm focused on investing in the cannabis industry. Together, the Founders held 70 percent of Privateer’s voting power. In 2013, they formed Tilray as a subsidiary of Privateer to conduct cannabis research, cultivation, process, and distribution, rather than invest in others’ established businesses in the industry. Privateer’s first investment in Tilray was approximately US$31.7 million for 75 million shares, or approximately US$0.42 per share.
On July 19, 2018, Privateer took Tilray public at US$17 per share, skyrocketing the value of Privateer’s 75 million shares to US$1.275 billion. With two classes of stock in place, Privateer held a 75 percent economic interest and 90 percent voting interest in Tilray.
While the Founders had significant wealth tied up in Privateer, they had difficulty accessing that wealth for several reasons, including tax issues and a fear of driving down Tilray’s stock price through large block sales. To solve these issues, the Founders contemplated a two-step reorganization (the Reorganization). The first step was to spin off the non-Tilray portfolio companies Privateer held. The second was to conduct a downstream merger, canceling Privateer’s Tilray stock and issuing Tilray stock to Privateer’s shareholders. This would allow the Founders to retain control over Tilray while enjoying their newfound wealth, tax-free.
The plaintiffs, holders of Tilray Class 2 stock, challenged the Reorganization, alleging (1) a direct breach of fiduciary duty claims against the Founders and Privateer and (2) a derivative breach of fiduciary duty claim against Tilray and Tilray directors. The defendants moved to dismiss both counts, and the court denied the motion in its entirety for several reasons.
First, the court rejected the defendants’ argument that the Founders did not constitute a control group and that the Reorganization was not self-dealing. On the issue of a control group, the court applied the “legally significant connection” standard from Sheldon v. Pinto Technology Ventures, L.P., which requires a showing of an agreement to work towards a shared goal.
The court concluded that the plaintiffs adequately alleged a series of historical and transaction-specific ties among the Founders, including: (1) a long-time friendship; (2) co-founding and running Privateer and other companies; (3) holding each other out as partners and founders; (4) joint retention of advisors; and (5) acting as a voting block of Founders in connection with the Reorganization. The court found these actions were in pursuit of the Founders’ shared goal of cashing out on their wealth and avoiding tax consequences, which was a goal unique to the Founders.
On the issue of a self-dealing transaction, the court rejected the defendants’ argument that the minority shareholders suffered no detriment because the benefit was neither extracted from, nor available to, the minority shareholders. The defendants extracted a unique or non-ratable benefit. To the extent it was necessary to show a detriment to the minority stockholders, the detriment, the court determined, was the Tilray board’s failure to exert leverage over the defendants during the Reorganization negotiations.
Second, the plaintiffs brought a derivative claim against Tilray and Tilray directors Kennedy, Maryscott Greenwood, and Michael Auerbach, alleging they breached their fiduciary duties as directors. Tilray and its directors moved to dismiss the second count according to Court of Chancery Rule 23.1, arguing that pre-suit demand was required and not futile. Applying Aronson v. Lewis, the court found that the plaintiffs pleaded with particularity that demand was futile because each of the directors was conflicted: Kennedy was a Founder and part of the Founder control group; Auerbach was a director on the boards of both Privateer and Tilray; and Greenwood was a cannabis lobbyist who previously had lobbied on the Founders' behalf to deregulate cannabis. Given the likelihood that all three directors were interested in the Reorganization, the court found that the plaintiffs had adequately pled demand futility.
The court also found personal jurisdiction over Groh and Blue based on the conspiracy theory of jurisdiction, which treats an individual’s co-conspirators as the individual’s agents, thereby allowing the agents’ forum-directed activities to satisfy Delaware’s long-arm statute as applied to the individual. In analyzing the question using the five elements laid out in Istituto Bancario SpA v. Hunter Engineering Co., the court found that the plaintiff adequately alleged that Groh and Blue were part of a control group, which satisfied the first two elements requiring a conspiracy and that the defendants was a member of the conspiracy. For the third element, both Blue and Groh took steps to file and amend Privateer’s charter in Delaware, which the court found was “a substantial act . . . in furtherance of the conspiracy.” And for the fourth and fifth element, the court found that the complaint adequately pled that Blue and Groh knew the documents were filed in connection with the Reorganization.
Authored by Ryan M. Philp, Allison M. Wuertz, and Muhammad Burney.
