To amend, or not to amend? That may not be “the question” posed in William Shakespeare’s “Hamlet,” but it is “the question” a plaintiff should ask itself upon receiving, and before responding to, a motion from the defendant to dismiss a complaint. A recent letter opinion from the desk of Vice Chancellor Glasscock in In re USG Corporation Stockholder Litigation, No. 2018-0602-SG (Del. Ch. March 11, 2021) (the Letter Opinion) reminds Delaware litigants about the importance of thinking through that question and the potential consequences of an imprudent answer.

Background

Vice Chancellor Sam Glasscock issued his Letter Opinion in response to the plaintiffs motion for leave to file a second amended class action complaint (the motion), which, in the court’s words, came to it “in oddly circuitous fashion.” Circuitous is an apt description for the lead up to the Motion, which took center stage after two years of civil litigation.

The Original Class Action Complaint and Injunction Proceedings

In August 2018, former shareholders of USG Corporation, (USG or the company) filed an action against the company’s board of directors alleging breaches of fiduciary duties. At its core, the action concerned the adequacy of stockholder disclosures and board approvals of a transaction pursuant to which Gebr. Knauf KG (Knauf), the company’s purported controlling stockholder, acquired USG (the acquisition). Indeed, although they had approved the acquisition, the plaintiffs argued the company’s interested board of directors believed, but did not disclose to the shareholders, that USG’s intrinsic value was nearly 15% higher than the deal price.

A week after initiating the action, the plaintiffs filed a motion for a preliminary injunction and moved for expedited proceedings. Over the following weeks, the parties briefed the plaintiffs’ motion for expedition, which the court granted after a hearing. The parties then briefed plaintiff’s motion for a preliminary injunction, which the court denied after a hearing.

The First Amended Class Action Complaint and a Motion to Dismiss

Six months later, in April 2019, the acquisition closed. The docket remained substantively dormant however until November 2019, when the plaintiffs filed their First Amended Class Action Complaint (the FAC) asserting one breach of fiduciary duty claim against each of USG’s directors “regarding their approval of the acquisition” and based on their alleged “failure to obtain the ‘highest value available for USG in the marketplace,’ in a process that … was infected by a conflicting stockholder (Knauf) and approved in bad faith by an interested (and/or nonindependent) board.” See In re USG Corp. Stockholder Litigation, 2020 WL 5126671, at *12 (Del. Ch. Aug. 31, 2020).

The defendants moved to dismiss the FAC, disputing Knauf’s controlling shareholder status and arguing that the board’s conduct was subject to the business judgment rule under Corwin v. KKR Financial Holdings, and that the “cleansing effect” of Corwin barred the court from conducting a substantive review of the acquisition. The defendants also argued that dismissal was required because the FAC failed to state nonexculpated claims for breach of the duty of loyalty against the directors. In re USG Corp. Stockholder Litig., 2020 WL 5126671, at *12, 13.

In its 31-page decision granting the Defendants’ motion to dismiss, the court explained its reasons for (i) refusing to find Knauf was USG’s controlling stockholder; (ii) finding the Corwin doctrine could have but did not cleanse the Acquisition; and (iii) concluding that the Plaintiffs did not plead allegations sufficient to state a fiduciary claim against any of the Defendants in light of the § 102(b)(7) exculpatory provision within USG’s Charter—i.e., that the Plaintiffs failed to state a nonexculpated claim. In re USG Corp. Stockholder Litigation, 2020 WL 5126671, at *12–13.

Plaintiffs’ Motion for Reargument on the Granted Motion to Dismiss

Four days after the court’s memorandum opinion granting dismissal, the plaintiffs moved for reargument, in part arguing that the court “overlooked the fact that one defendant, Jennifer Scanlon, was an officer as well as a director of USG, and that, in her officer role, she was not exculpated from damages for a violation of a duty of care in relation to a disclosure to stockholders[.]” In re USG Corp. Stockholder Litig., 2020 WL 7041190, at *1 (Del. Ch. Dec. 1, 2020).

In its decision denying the plaintiffs’ request for reargument, the court found the FAC failed to adequately allege that Scanlon “breached the duty of care in her role as an officer facilitating distribution of proxy materials,” and thus refused to reconsider its finding that the FAC failed to state a nonexculpated claim.

The court explained that neither the FAC nor the plaintiffs’ briefing or oral argument on the motion to dismiss alleged that “Ms. Scanlon, as a corporate officer, was grossly negligent in the dissemination of disclosures” related to the acquisition. Taking it one step further, the court stated that even if the FAC had satisfied “the plaintiff-friendly pleading standard,” the failure of the plaintiffs to brief or present the allegation at argument amounted to waiver, rendering reargument inappropriate.

Motion for Leave to File Second Amended Class Action Complaint and an Intervening Appeal to the Delaware Supreme Court

After being foreclosed from reargument, the plaintiffs refused to stipulate to a dismissal in accordance with the court’s memorandum opinion on the motion to dismiss. Instead, on Dec. 11, 2020, Plaintiffs filed their motion seeking leave to file a second amended class action complaint.

After the parties completed briefing on the motion, but before the court issued its decision, the plaintiffs filed a notice of appeal of the court’s memorandum opinion on the motion to dismiss, despite the fact that there was neither a final order in the case nor a request from the plaintiffs to certify an interlocutory appeal before the court. As a result of the appeal, the court stayed the action and its decision on the motion.

Two months later, the Delaware Supreme Court dismissed the plaintiffs’ appeal for failing to comply with Supreme Court Rule 42. It its order of dismissal, the Supreme Court noted that the Plaintiffs admitted to filing the atypical appeal “out of an abundance of caution” because according to the plaintiffs, there was a suggestion (albeit an incorrect one) that the court’s underlying memorandum decision “might be a final, appealable order and the [plaintiffs] wanted to ensure that they preserved their opportunity to appeal.” Fitzgerald v. Leer, 2021 WL 568494, at *1 (Del. Feb. 16, 2021).

Following resolution of the plaintiffs’ intervening appeal—and after more than two years since their initiation of the action, one year since their filing of the FAC and after the parties completed and the court reviewed multiple rounds of briefing and written submissions on the issues of expedition, an injunction, a motion to dismiss and an intervening appeal—the court lifted the stay and issued its decision denying the motion and refusing to grant the plaintiffs’ leave to file further amended pleadings.

Analysis

The Juxtaposition between Delaware’s Liberal Policy on Amendments and Court of Chancery Rule 15(aaa)

In support of its decision denying further amendment, the court explained in its letter opinion the “general and liberal” scope of Court of Chancery Rule 15, which governs amendments to pleadings.

Under Rule 15(a), “a party may amend the party’s pleading once as a matter of course at any time before a responsive pleading is served … otherwise a party may amend the party’s pleading only by leave of court or by written consent of the adverse party.”

Nearly two decades ago, however, the court adopted Rule 15(aaa) to “form an exception to that general and liberal rule” and to “provide a more stringent standard when a motion to dismiss has been submitted before a motion to amend is made.” Rule 15(aaa)’s more stringent standard warns litigants that a party that wishes to respond to a motion to dismiss … by amending its pleading must file an amended complaint, or a motion to amend in conformity with this Rule, no later than the time such party’s answering brief in response to … the foregoing motion [to dismiss] is due to be filed … and in the event a party fails to timely file an amended complaint … and the court thereafter concludes that the complaint should be dismissed … such dismissal shall be with prejudice … unless the court, for good cause shown, shall find that dismissal with prejudice would not be just under all the circumstances.

That is, in cases where a motion to dismiss has been filed in response to a complaint, Rule 15(aaa) will permit an amended pleading in two situations: when the amendment is filed on or before the due date of a brief opposing dismissal; and after a decision on the motion to dismiss if there is a showing of “good cause” as to why the dismissal should be without prejudice.

Rule 15(aaa) serves an important purpose in civil litigation—it ensures finality. Quoting the words of Justice Holland from the Delaware Supreme Court’s decision in Braddock v. Zimmerman, the court in its letter opinion reiterated that the rule “curtails the number of times that the Court of Chancery [will be] required to adjudicate multiple motions to dismiss the same action.” 906 A.2d 776, 783 (Del. 2006).

The court added its own updated interpretation of the rule’s purpose, explaining “[t]he pernicious conduct” the rule serves to address is what transpired in this action—a plaintiff first “files an inadequate complaint and, once a successful motion to dismiss was adjudicated, attempts to address the deficiencies noted by the court with another iteration of the cause of action, perhaps serially, to unwarranted expense and effort.”

No Plead Around Exception to Rule 15(aaa)

In what one can only surmise as an effort to avoid the consequences of litigating in a Rule 15(aaa) world, the plaintiffs argued that their motion should be subject to the more liberal standard of Rule 15(a), rather than the stringent requirements imposed by Rule 15(aaa).

To support this theory, the plaintiffs cited to the court’s comments in TVI Corporation v. Gallagher, suggesting the existence of a third situation when Rule 15(aaa) would permit an amended pleading: “namely, the filing of a motion to amend, following resolution of a motion to dismiss, as to claims that … were not within the purview of the motion to dismiss.” 2013 WL 5809271, at *21 (Del. Ch. Oct. 28, 2013).

According to the plaintiffs, the FAC “attempted to (although apparently did not) plead” the gross negligence claim against Scanlon regarding her conduct as an officer, rather than a director, of the company. As such, the Plaintiffs argued for application of Rule 15(a) and its liberal policy on amendment.

The court found TVI Corp. inapplicable and rejected the plaintiffs’ “not within the purview of the motion to dismiss” argument. In doing so, the court drew a distinction between the “absence of a pleading” and “an insufficient pleading.” The letter opinion went on to explain:

The claim that defendant Scanlon breached her fiduciary duty of care—the claim that the plaintiffs seek to reform and perfect in the proposed amended pleading—was subject to the motion to dismiss. The motion to dismiss sought dismissal of the entire amended complaint—which, in turn, included only one count: a breach of “fiduciary duties” against all the defendants. By definition, a breach of Scanlon’s duty of care would fall within that count, the dismissal of which was sought in the motion to dismiss.

In other words, the plaintiffs’ allegations regarding Scanlon’s conduct as an officer were not absent from the FAC or the motion to dismiss. Rather, the allegations were insufficiently plead and otherwise waived for failure to brief or argue the issue before the court.

Takeaways

The recent letter opinion from in In re USG Corp. is consistent with two decades of well-settled Delaware precedent concerning Rule 15(aaa). Yet, the letter opinion serves as a timely reminder for litigants of the unforgiving consequences for failing to ask: to amend, or not to amend; that is the question.

In this case, the plaintiffs had an opportunity to preview the defendants’ merit-related arguments in briefing on the issues of expedition and an injunction in 2018. In response, the plaintiffs presumably asked themselves a version of “the question” before they filed the FAC in the fall of 2019.

Thereafter, the plaintiffs had a second opportunity to evaluate the defendants’ merit arguments upon receipt of the defendants’ opening brief in support of their motion to dismiss the FAC in the early part of 2020. At that point, the plaintiffs should have again asked themselves “the question.” Instead, the plaintiffs chose to stand on their complaint through a motion to dismiss, through a motion for reargument and through an intervening appeal to the Delaware Supreme Court.

The court’s decision to refuse further amended pleadings after the foregoing procedural history is in line with the purpose of Rule 15(aaa) and should come as no surprise to litigants who remember to ask, and re-ask, to amend, or not to amend? Because that is the question.

Mackenzie M. Wrobel, an associate at Duane Morris, practices in the area of corporate and commercial litigation.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.