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`IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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`C.A. No. 12844-VCMR
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`PUBLIC VERSION
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`STEPHEN APPEL, Individually and on
`Behalf of All Others Similarly Situated,
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`Plaintiff,
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`
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`v.
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`
`DAVID J. BERKMAN, STEPHEN J.
`CLOOBECK, RICHARD M. DALEY,
`FRANKIE SUE DEL PAPA, JEFFREY
`W. JONES, DAVID PALMER, HOPE
`S. TAITZ, ZACHARY D. WARREN,
`ROBERT WOLF, and CENTERVIEW
`PARTNERS LLC,
`
`
`Defendants.
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`
`
`
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`
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`DEFENDANT STEPHEN J. CLOOBECK’S OPENING BRIEF IN
`SUPPORT OF HIS MOTION TO DISMISS COUNT I OF PLAINTIFF’S
`VERIFIED AMENDED CLASS ACTION COMPLAINT
`
`
`
`
`Dated: November 15, 2018
`
`
`
`
`Stephen B. Brauerman (No. 4952)
`Sara E. Bussiere (No. 5725)
`BAYARD, P.A.
`600 N. King Street, Suite 400
`P.O. Box 25130
`Wilmington, Delaware 19899
`(302) 655-5000
`Counsel to Defendant Stephen J.
`Cloobeck
`
`
`
`Filed November 26, 2018
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`EFiled: Nov 26 2018 05:31PM EST
`Transaction ID 62696283
`Case No. 12844-VCMR
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`TABLE OF CONTENTS
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`Page
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`INTRODUCTION ..................................................................................................... 1
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`STATEMENT OF FACTS ........................................................................................ 2
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`NATURE AND STAGE OF THE PROCEEDINGS ................................................ 4
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`ARGUMENT ............................................................................................................. 6
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`I.
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`Cloobeck’s Abstention Does Not Give Rise as a Matter of Law
`to a Breach of Fiduciary Duty Claim Against Cloobeck ...................... 6
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`CONCLUSION .......................................................................................................... 9
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`i
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`
`Cases
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`TABLE OF AUTHORITIES
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`Page(s)
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`Appel v. Berkman,
`2018 WL 947893 (Del. Feb. 20, 2018) ......................................................................................4
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`Belfint, Lyons & Shuman, P.A. v. Pevar,
`844 A.2d 991 (Del. 2004) ..........................................................................................................5
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`Brinckerhoff v. Enbridge Energy Co.,
`2012 WL 1931242 (Del. Ch. May 25, 2012), aff’d, 67 A.3d 369 (Del. 2013) ..........................5
`
`Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC,
`27 A.3d 531 (Del. 2011) ............................................................................................................1
`
`In re Crimson Expl. Inc. Stockholder Litig,
`2014 WL 5449419 (Del. Ch. Oct. 24, 2014) .............................................................................5
`
`Dalton v. Am. Inv. Co.,
`1981 WL 7618 (Del. Ch. June 4, 1981) .................................................................................8, 9
`
`In re Ebix, Inc. Stockholder Litig.,
`2016 WL 208402 (Del. Ch. Jan. 15, 2016) ................................................................................5
`
`Emerald Partners v. Berlin,
`2003 WL 21003437 (Del. Ch. Apr. 28, 2003), aff’d, 840 A.2d 641 (Del. 2003) ......................5
`
`Propp v. Sadacca,
`175 A.2d 33 (Del. Ch. 1961), modified on other grounds, sub nom Bennett v.
`Propp, 187 A.2d 405 (Del. 1962) ..............................................................................................7
`
`Ratcliffe v. Fletcher,
`690 A.2d 466 (Del. 1996) ..........................................................................................................5
`
`In re Tri-Star Pictures, Inc., Litig.,
`1995 WL 106520 (Del. Ch. Mar. 9, 1995).........................................................................7, 8, 9
`
`In re Volcano Corp. Stockholder Litig.,
`143 A.3d 727 (Del. Ch. 2016)....................................................................................................6
`
`In Re Wheelabrator Technologies, Inc. Shareholders Litigation,
`C.A. No. 11495 ..........................................................................................................................7
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`Other Authorities
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`Rule 12(b)(6) ................................................................................................................................5, 6
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`ii
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`INTRODUCTION
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`The Court should dismiss Stephen J. Cloobeck (“Cloobeck”) as a Defendant
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`in this action because the Amended Complaint does not allege that Cloobeck
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`participated in the challenged vote and accompanying disclosures. To the contrary,
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`the Amended Complaint purports to state a breach of fiduciary duty claim against
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`Cloobeck based on his (1) “disappointment with the price of the Transaction” and
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`belief that “it was not the right time to sell the Company,” which he “voiced . . . at
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`two different Board meetings,” and (2) abstention from the Board’s vote to
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`approve the Transaction.1 (Am. Compl. ¶¶ 1, 9, 15, 84, 90, 95, 134-138, 141,
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`143.)2
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`Lumping Cloobeck in with the Diamond directors who actually voted to
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`approve the Transaction, Plaintiff conclusorily alleges that, “[t]he Director
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`Defendants failed to fulfill their fiduciary duties in connection with the Transaction
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`by (i) running an ill-timed and conflict-laden sales process, (ii) appointing to the
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`1 Capitalized terms not defined herein shall have the meanings attributed to them in
`the Amended Complaint.
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` 2
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` Cloobeck accepts, without conceding, the truth of the facts alleged in the
`Amended Complaint for the purposes of this Motion. See Cent. Mortg. Co. v.
`Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del. 2011)
`(observing that the Court must “accept all well-pleaded factual allegations in the
`Amended Complaint as true, accept even vague allegations in the Amended
`Complaint as ‘well pleaded’ if they provide the defendant notice of the claim, draw
`all reasonable inferences in favor of the plaintiff, and deny the motion unless the
`plaintiff could not recover under any reasonably conceivable set of circumstances
`susceptible of proof”).
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`1
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`Strategic Review Committee a majority of conflicted directors with personal and
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`professional ties to Apollo, (iii) failing to secure fair value for Diamond’s shares,
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`and (iv) failing to disclose all material information necessary to allow Diamond
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`stockholders to make an informed tender and/or appraisal decision.” (Am. Compl.
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`¶ 164.) Beyond these unsupported conclusions, the Amended Complaint does not
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`allege any facts upon which the Court could conclude that Cloobeck played any
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`role in the challenged transaction or the disclosures necessary to effect it.
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`Consequently, Plaintiff cannot state a claim against Cloobeck.
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`STATEMENT OF FACTS
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`Cloobeck was the founder, chairman, and former chief executive officer of
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`Diamond Resorts International, Inc. (“DRII” or the “Company”). Until the
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`Transaction that is the subject of this action, Cloobeck was the Company’s largest
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`stockholder. (Am. Compl. ¶ 15.) Defendants David J. Berkman, Richard M.
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`Daley, Frankie Sue Del Papa, Jeffrey W. Jones, David Palmer, Hope S. Taitz,
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`Zachary D. Warren and Robert Wolf (collectively, the “Director Defendants”) also
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`served on DRII’s board of directors. (Am. Compl. ¶¶ 14, 16–23.) Defendant
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`Apollo Management VIII, L.P., an affiliate of non-party Apollo Global
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`Management, LLC (collectively, “Apollo”) acquired DRII in the Transaction.
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`(Am. Compl. ¶ 125.) Plaintiff Stephen Appel was a stockholder of DRII prior to
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`the Transaction. (Am. Compl. ¶ 13.)
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`2
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` On February 24, 2016, the Board formed a strategic review committee
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`consisting of Taitz, Jones, Berkman, and Wolf (the “Committee”) to consider a
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`potential sale of the Company. (Am. Compl. ¶ 63.) The Committee retained
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`Centerview Partners LLP as its financial advisor and conducted a sales process.
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`(Am. Compl. ¶¶ 63, 65, 67, 80, 82-83.)
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`On June 25, 2016, the DRII board met to consider the Committee’s
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`recommendation to negotiate a transaction with Apollo. (Am. Compl. ¶ 83.)
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`Cloobeck opposed the sale, which was approved by all other directors, and advised
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`the board that “he was disappointed with the price and the Company’s
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`management for not having run the business in a manner that would command a
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`higher price, and that in his view, it was not the right time to sell the Company.”
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`(Am. Compl. ¶ 84 (emphases in original).) As a result, Cloobeck abstained from
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`the vote. (Am. Compl. ¶ 84.) The DRII board met again on June 26, 2016 to
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`approve the Transaction. (Am. Compl. ¶ 89.) Again, Cloobeck abstained from the
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`vote because of his disappointment with the price and the timing of the
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`Transaction. (Am. Compl. ¶ 90.)
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`On August 16 and 17, 2016, Cloobeck tendered his shares pursuant to the
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`Tender Offer. (Am. Compl. ¶ 119.) The Merger closed on September 2, 2016.
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`(Am. Compl. ¶ 125.)
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`3
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`NATURE AND STAGE OF THE PROCEEDINGS
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`Plaintiff filed his initial complaint on October 21, 2016 (D.I. 1). Cloobeck
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`timely moved to dismiss Count I of the Complaint on December 13, 2016. (D.I.
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`10.) Plaintiff filed his answering brief on January 27, 2017, but did not respond to
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`any of the arguments raised in Cloobeck’s motion. (D.I. 21.) Cloobeck replied on
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`February 23, 2017 and argued that Plaintiff’s failure to respond to his motion
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`constituted waiver and provided additional justification for dismissing the
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`complaint against Cloobeck. (D.I. 27.) Cloobeck again renewed his separate and
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`independent grounds for dismissal at oral argument on the motions to dismiss and
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`emphasized that Plaintiff did not respond to his motion, and therefore waived any
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`opposition. (D.I. 39 at 54:12-19.) Plaintiff did not address Cloobeck’s arguments
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`at oral argument. Nor did Plaintiff address Cloobeck’s arguments on appeal,
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`which Cloobeck continued to assert. Appel v. Berkman, 2018 WL 947893, at *8
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`(Del. Feb. 20, 2018) (“But this argument, although fairly raised in the Court of
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`Chancery, was never addressed by that court, and neither was Cloobeck’s
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`argument that plaintiffs’ non-response waived this issue.”).
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`After remand, Cloobeck renewed his motion to dismiss the initial complaint
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`on March 9, 2018. (D.I. 49.) Instead of addressing Cloobeck’s motion, Plaintiff
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`4
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`filed an amended complaint on August 29, 2018 (the “Amended Complaint”).3
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`(D.I. 97.) Cloobeck moved to dismiss the Amended Complaint on October 15,
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`2018. (D.I. 103.) This is Cloobeck’s opening brief in support of his motion to
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`dismiss the Amended Complaint pursuant to Court of Chancery Rule 12(b)(6).
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`3 The Court should find that Plaintiff waived his right to oppose Cloobeck’s
`motion. Cloobeck presented in his motion separate reasons for dismissal, which
`Plaintiff ignored in his answering brief and at oral argument. Plaintiff also ignored
`Cloobeck’s arguments on appeal. Delaware law is clear that a party waives an
`argument by not addressing it. Emerald Partners v. Berlin, 2003 WL 21003437, at
`*43 (Del. Ch. Apr. 28, 2003), aff'd, 840 A.2d 641 (Del. 2003) (“It is settled
`Delaware law that a party waives an argument by not including it in its brief.”); see
`also In re Crimson Expl. Inc. Stockholder Litig, 2014 WL 5449419 (Del. Ch. Oct.
`24, 2014). Consequently, Cloobeck’s motion stands unopposed. In re Ebix, Inc.
`Stockholder Litig., 2016 WL 208402, at *22 n.189 (Del. Ch. Jan. 15, 2016) (“A
`party's failure to raise an argument in its answering brief on a motion to dismiss
`constitutes waiver of that argument.”). A party cannot avoid the consequences of a
`waiver just because the Court grants the motion on other grounds and he obtains a
`reversal of that decision on appeal on other grounds. Brinckerhoff v. Enbridge
`Energy Co., 2012 WL 1931242, at *1 (Del. Ch. May 25, 2012), aff’d, 67 A.3d 369
`(Del. 2013) (determining on remand that “Brinckerhoff's requests for reformation
`and rescission were waived”); see also Ratcliffe v. Fletcher, 690 A.2d 466 (Del.
`1996) (“On remand, however, we ruled that the trial judge was free to consider
`the waiver and estoppel claims earlier asserted by Fletcher.”); Belfint, Lyons &
`Shuman, P.A. v. Pevar, 844 A.2d 991 (Del. 2004) (Table) (“We remand this matter
`to the Superior Court, who we believe is in the best position to examine the record
`and conclude whether Belfint waived its ‘voidness’ argument.”). Nor does the
`filing of the Amended Complaint, which does not add any new allegations against
`Cloobeck, save Plaintiff from his waiver. Plaintiff cannot dispute that he ignored
`Cloobeck’s motion and the separate and independent grounds for which it
`advocated dismissal. Plaintiff waived his right to oppose the motion and the Court
`should dismiss Cloobeck from this action.
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`5
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`
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`ARGUMENT
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`I. Cloobeck’s Abstention Does Not Give Rise as a Matter of Law to a
`Breach of Fiduciary Duty Claim Against Cloobeck
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`The Court should dismiss Count I of the Amended Complaint because
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`Cloobeck’s abstention from the vote to approve the Transaction cannot give rise as
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`a matter of law to a breach of fiduciary duty claim against Cloobeck. To prevail on
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`a motion to dismiss under Rule 12(b)(6) for failure to state a claim, a defendant
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`must demonstrate that “a complaint does not allege facts that, if proven, would
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`entitle the plaintiff to relief.” In re Volcano Corp. Stockholder Litig., 143 A.3d
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`727, 737 (Del. Ch. 2016). As this Court has stated:
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`[T]he governing pleading standard in Delaware to
`survive
`a motion
`to
`dismiss
`is
`reasonable
`“conceivability.” When considering such a motion, the
`Court must accept all well-pleaded factual allegations in
`the Complaint as true . . ., draw all reasonable inferences
`in favor of the plaintiff, and deny the motion unless the
`plaintiff could not recover under any reasonably
`conceivable set of circumstances susceptible of proof.
`This reasonable “conceivability” standard asks whether
`there is a “possibility” of recovery. The Court, however,
`need not accept conclusory allegations unsupported by
`specific facts or . . . draw unreasonable inferences in
`favor of the non-moving party. Failure to plead an
`element of a claim precludes entitlement to relief, and,
`therefore, is grounds to dismiss that claim.
`
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`Id. (internal citations and quotation marks omitted).
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`The Amended Complaint does not state a claim for breach of fiduciary duty
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`against Cloobeck. Cloobeck abstained from voting on the Transaction because he
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`6
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`was dissatisfied with the purchase price and disagreed with the timing of the
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`Transaction. He did not have any affirmative obligation to vote in favor of the
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`Transaction, disclosed his concerns to the Board on at least two occasions, and is
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`not alleged to have played any role in the creation of the allegedly deficient
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`disclosures. The Amended Complaint does not state a claim for breach of
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`fiduciary duty against Cloobeck.
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`“Delaware law clearly prescribes that a director who plays no role in the
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`process of deciding whether to approve a challenged transaction cannot be held
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`liable on a claim that the board's decision to approve that transaction was
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`wrongful.” In re Tri-Star Pictures, Inc., Litig., 1995 WL 106520, at *2 (Del. Ch.
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`Mar. 9, 1995) citing Citron v. E.I. du Pont de Nemours & Co., Del.Ch., 584 A.2d
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`490, 499 (1990); In Re Wheelabrator Technologies, Inc. Shareholders Litigation,
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`C.A. No. 11495, Jacobs, V.C. (Del. Ch. Sept. 1, 1992) at 19-20; Propp v. Sadacca,
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`175 A.2d 33, 39 (Del. Ch. 1961), modified on other grounds, sub nom Bennett v.
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`Propp, 187 A.2d 405 (Del. 1962).
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`This rule is not, however, absolute. Delaware law recognizes no per se rule
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`“unqualifiedly and categorically reliev[ing] a director from liability solely because
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`that director refrains from voting on the challenged transaction.” Tri-Star Pictures,
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`1995 WL 106520, at *3. To hold an abstaining director liable for breaching his
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`fiduciary duties in connection with a transaction on which he did not vote,
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`7
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`however, a plaintiff must allege that the director failed to act where he had a duty
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`to act or otherwise engaged in misconduct by abstaining from the vote. Tri-Star
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`Pictures, 1995 WL 106520, at *3 (recognizing circumstances where directors who
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`engage in wrongful conduct cannot avoid liability by abstaining); Dalton v. Am.
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`Inv. Co., 1981 WL 7618, at *2 (Del. Ch. June 4, 1981) (observing that a director
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`may face liability “from not taking a position when there is a clear duty to do so”).
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`The Amended Complaint contains no such allegations against Cloobeck and the
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`Court should dismiss him from this action.
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`The Court’s decision in Tri-Star Pictures is instructive. In Tri-Star Pictures,
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`the Court found that three directors who did not vote in favor of the transaction or
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`play any role in the preparation of the challenged proxy materials could not have
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`liability for the breaches alleged by plaintiffs. 1995 WL 106520, at *2. The Court
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`found that there was no claim that the defendant directors “played any role, overt
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`or covert, in the board’s decision-making process. That being so, those directors’
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`absence from the meeting, and their abstention from voting to approve the
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`Combination, does, in my view, have dispositive significance, and shields these
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`defendants from liability on any claims predicated upon the board's decision to
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`approve that transaction.” Id. at *3; Dalton, 1981 WL 7618, at *2 (Del. Ch. June
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`4, 1981) (recognizing that liability cannot follow from a good faith abstention).
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`8
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`As in Tri-Star Pictures and Dalton, the Amended Complaint does not allege
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`that Cloobeck’s abstention was in bad faith or violated any fiduciary obligations he
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`owed as a director. (See generally Am. Compl.) To the contrary, the Amended
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`Complaint alleges that Cloobeck informed himself about the Transaction, voiced
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`his concerns about the Transaction to the Board, and abstained from voting to
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`approve the Transaction. (Am. Compl. ¶¶ 1, 9, 15, 84, 90, 95, 134-138, 141, 143.)
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`The Amended Complaint repeatedly discusses Cloobeck’s assessment of the
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`Transaction with approval. (See, e.g., Am. Compl. ¶¶ 1, 9, 15, 84, 90, 95, 134-138,
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`141, 143.) These allegations cannot, as a matter of law, demonstrate that Cloobeck
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`breached his fiduciary duties in connection with a Transaction he did not approve
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`and the Court should dismiss him from this action.
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`CONCLUSION
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`
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`For the foregoing reasons, Stephen J. Cloobeck respectfully requests that the
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`Court dismiss the Amended Complaint against him with prejudice.
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`9
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`

`

`
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`Dated: November 15, 2018
`
`BAYARD, P.A.
`
` /s/ Stephen B. Brauerman
`Stephen B. Brauerman (No. 4952)
`Sara E. Bussiere (No. 5725)
`600 N. King Street, Suite 400
`P.O. Box 25130
`Wilmington, Delaware 19899
`(302) 655-5000
`
`Counsel to Defendant
`Stephen J. Cloobeck
`
`WORD COUNT: 2,227
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`10
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`CERTIFICATE OF SERVICE
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`I hereby certify that a true and correct copy of the foregoing document has
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`been served upon the following counsel on November 26, 2018.
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`VIA ELECTRONIC MAIL
`
`Peter B. Andrews, Esquire
`Craig J. Springer, Esquire
`David Sborz, Esquire
`Andrews & Springer LLC
`3801 Kennett Pike
`Building C, Suite 305
`Greenville, DE 19807
`
`Raymond J. DiCamillo
`Elizabeth A. DeFelice
`Daniel E. Kaprow
`Richards, Layton & Finger, P.A.
`920 N. King Street
`Wilmington, Delaware 19801
`
`Stephen P. Lamb
`Daniel A. Mason
`Brendan W. Sullivan
`Paul Weiss Rifkind Wharton & Garrison LLP
`500 Delaware Avenue, Suite 200
`Wilmington, DE 19899
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`
` /s/ Stephen B. Brauerman
`Stephen B. Brauerman (#4952)
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