In re Biglari Holdings, Inc. S'holder Derivative Litig.

93 F.Supp.3d 936

In re BIGLARI HOLDINGS, INC. SHAREHOLDER DERIVATIVE LITIGATION.

No. 1:13–cv–00891–SEB–MJD.

United States District Court, S.D. Indiana, Indianapolis Division.

Signed March 18, 2015.

Avraham Noam Wagner, The Wagner Firm, Los Angeles, CA, Louis Nathaniel Boyarsky, Glancy Prongay & Murray LLP, Los Angeles, CA, Offer Korin, Katz & Korin P.C., Indianapolis, IN, for Plaintiff.

Christopher J. Clark, Adams, Hawward, Nicolas & Welsh, Louisville, KY, Debra Ann Mastrian, Krieg Devault LLP, Indianapolis, IN, James Christian Word, Latham & Watkins, LLP, Washington, DC, Scott Stuart Morrisson, Krieg Devault LLP, Carmel, IN, for Defendants.

ORDER ON DEFENDANTS' MOTION TO DISMISS

SARAH EVANS BARKER, District Judge.

This cause is before the Court on Defendants' motion to dismiss Plaintiff Chad R. Taylor's Amended Complaint [Docket No. 113], filed on March 31, 2014 pursuant to Federal Rule of Civil Procedure 12(b)(6). Since the filing of Defendants' motion, the Court has consolidated the cases of Taylor v. Biglari et al. (1:13–cv–00891–SEB–MJD) and Donahue v. Biglari et al. (1:14–cv–00025–SEB–DML), both shareholder derivative suits brought against the six board members of Biglari Holdings, Inc., into a single action. Docket No. 124. The Amended Complaint in Taylor v. Biglari [Docket No. 107] serves as the operative complaint in the consolidated action. For the reasons set forth below, Defendants' motion to dismiss must be and therefore is GRANTED.

Factual and Procedural Background

Biglari Holdings, Inc. (“BH”) is an Indiana holding company whose assets include two restaurant chains, Western Sizzlin and Steak n Shake. ¶ 27.¹ Plaintiffs Chad R. Taylor and Edward Donahue are BH shareholders. ¶ 26.²

This suit is primarily concerned with the actions of BH's namesake, Defendant Sardar Biglari (“Biglari”), who has served as the chairman of the company's board of directors since June 2008 and as its CEO since August 2008. ¶ 29. In 2000, Biglari founded Biglari Capital Corporation (BCC), which in turn was the sole general partner in the Lion Fund, an investment venture and hedge fund. Id. Among the other investments Biglari has made in the last decade through these vehicles, he has sought and acquired a controlling interest in the two restaurant chains referenced above. By August 2005, Biglari had acquired a sufficient stake in the 40–year–old, financially struggling Western Sizzlin chain to have himself appointed to the company's board. ¶ 53. Within another year, Biglari had increased his share of the company's stock to 43%, and had been named the company's CEO. ¶ 54. He then turned his investment attention to Steak n Shake, where by August 2007 he had obtained a 5.8% ownership stake. Shortly thereafter, in March 2008, he prevailed in a proxy fight, and the company's shareholders voted him, and co-Defendant Philip Cooley, onto the board. Biglari was subsequently named CEO in August 2008—a position he continues to hold. ¶¶ 58–59.

In August 2009, the two companies consolidated under Biglari's leadership as Steak n Shake acquired Western Sizzlin for a premium of 7% above market value; the board of the combined companies later passed a 20–for–1 “reverse stock split,” increasing the entity's share price from $13 to $360 a share. ¶¶ 65–68. On April 8, 2010, the consolidated company changed its name to Biglari Holdings, Inc. (“BH”). ¶ 70. In a deal announced the same month, BH acquired BCC, the general partner of Biglari's investment vehicle, the Lion Fund. BH bought BCC for the nominal price of $1 plus an amount equal to BCC's capital base, estimated at the time to be $4.75 million; the buyout was also contingent upon shareholder approval of a new compensation package for Biglari consisting of a $900,000 annual salary as well as annual incentive payments based on the company's book value growth. ¶ 72. This package, in modified form, did receive shareholder approval in November 2010. ¶ 74.

The current members of the BH board are Sardar Biglari, Phillip L. Cooley, Kenneth R. Cooper, Dr. Ruth J. Person, William L. Johnson, and James P. Mastrian. ¶¶ 29–36. The latter four directors also constitute the board's Governance, Compensation, and Nominating Committee. Clark Decl., Ex. 8 at 33. All five members of the board other than Biglari have professional ties to him that extend outside their joint service on the BH board; these contacts include involvement with Biglari's Lion Fund, service on the predecessor Western Sizzlin board, joint service on outside boards, and—in the case of Philip Cooley—a previous professor-student relationship. Id. Plaintiff alleges that the members of the board and GCN Committee approved three transactions in 2013—what he calls the “Entrenchment Transactions”—that improperly benefitted Biglari personally rather than the broader corporate interest their fiduciary duties bound them to safeguard. Pl.'s Mot. 3–4. These three transactions give rise to the derivative claims.

The company announced the first of these disputed deals, the Licensing Agreement, in January 2013. Under its terms, Biglari granted to BH an “exclusive license to use the name and mark Biglari” in connection with the company's businesses; the license extends for 20 years, and it is royalty-free unless a “triggering event”—such as a change in corporate control or Biglari's termination as CEO without cause—occurs. ¶ 75. In the event that the royalties provision is triggered, BH will owe Biglari for five years a sum equal to 2.5% of the company's revenue for that year. Based on 2012 numbers, BH's annual obligation would be $17.5 million out of a net operating income of $38.82 million. ¶ 76. In an SEC filing, the company acknowledged that the Licensing Agreement, together with other parts of Biglari's incentive package, could deter a change of corporate control: “The combination of these provisions along with others referenced (e.g., contracts cancellable if Mr. Biglari is no longer Chairman and CEO) altogether could have the effect of preventing a transaction involving a change of control of the Company or deterrence of a potential proxy contest.” ¶ 82.

In the second challenged transaction, BH sold BCC—which it had bought from Biglari three years prior—back to Biglari in July 2013. In doing so for a price of $1.7 million, Plaintiff contends that the GCN Committee ignored the recommendations of an outside valuation firm that had pegged the fund's value at the significantly higher sum of $8.8–10.2 million. Pl.'s Resp. 6–7 (citing Am. Compl. ¶ 87). Before the sale took place, however, BCC had already “distributed to the company substantially all of BCC's partnership interests in the Lion Fund [totaling approximately $5.8 million]” and retained solely a $100,000 general partner interest in the Lion Fund at the time of the deal. According to Defendants, this earlier transaction—coupled with the committee's efforts to take into account the effect the sale of BCC would have on its financial obligations to Biglari himself—explains the discrepancy between the sale price and the outside firm's appraisal of BCC's value, which did not take into account these considerations. Defs.' Br. 16–18. Additionally, in connection with the deal, the company stated publicly that it would continue to employ the funds associated with BCC as its primary investment vehicle; in the agreements attendant to this sale and the creation of the Lion Fund II (a new fund in which BCC is the general partner), the company committed approximately $326 million in securities, which are subject to a five-year “lock up” period. ¶¶ 84–85.

The final “entrenchment transaction” at issue is the 2013 Rights Offering, first disclosed by BH in a Form S–3 Registration Statement on February 5, 2013. ¶ 90. A rights offering is a corporate stock device for raising capital, whereby a corporation issues a number of “rights” to existing shareholders, entitling them—if they choose to invest the additional capital required for their exercise—to convert these rights into additional shares of stock. If the rights offering is not fully subscribed by the existing shareholders, other shareholders who have exercised these rights may then “oversubscribe,” meaning they can acquire the shares not taken. The “rights” are distributed evenly in proportion to existing ownership shares (at 5 rights per share), and may be traded on the open market. As originally announced, the Offering aimed to raise approximately $50 Million for the company. On August 6, 2013, the board made a final announcement of the details of the Rights Offering, in which prices were set and the capital target was raised to approximately $75 Million. The Rights Offering commenced on August 27, 2013, and it raised in excess of $75 million in new capital for BH; Plaintiff contends that Biglari “and his affiliates” increased their ownership share of the company from 15.4% to 16.1% as a result of the oversubscription option. Def.'s Br. 19; Am. Compl. ¶ 95.³

On June 3, 2013, Plaintiff Chad R. Taylor filed a shareholder derivative complaint against BH as a nominal defendant and the six board members as individual defendants, alleging that the “entrenchment transactions” and other board actions have violated the members' duty to the corporate interest. Docket No. 1. In August 2013, Plaintiff moved to enjoin the Rights Offering, which was then not yet complete; the Court denied that motion on September 12, 2013. Docket No. 69. Plaintiff's Amended Complaint, filed on March 10, 2014, charges the individual defendants with breach of their fiduciary duty, gross mismanagement, abuse of control, and waste of corporate assets; it seeks rescission of some of the disputed transactions, disgorgement of “illicit shares and profits,” recovery of damages to the company, and certain changes to the company's governance and articles of incorporation. Docket No. 107.

Legal Analysis

Standard of Review

Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal of claims for “failure...