throbber
Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 1 of 28 PageID #: 949
`
`United States District Court
`EASTERN DISTRICT OF TEXAS
`SHERMAN DIVISION
`
`No. 4:17CV227
`Judge Mazzant/Judge Craven
`



`
`§§
`
`§§
`

`MARK E. SPEESE, J.V. LENTELL,

`JEFFERY M. JACKSON, STEVEN L.

`PEPPER, MICHAEL J. GADE,
`LEONARD H. ROBERTS, RISHI GARG,§
`ROBERT D. DAVIS, GUY J.

`CONSTANT, PAULA STERN,

`JPMORGAN CHASE BANK, N.A, and

`THE BANK OF NEW YORK MELLON §
`TRUST COMPANY, N.A.

`Defendants
`
`ARNAUD VAN DER GRACHT DE
`ROMMERSWAEL, Derivatively on
`Behalf of RENT-A-CENTER, INC.
`Plaintiff
`
`V.
`
`and
`
`§§
`
`§§
`
`RENT-A-CENTER, INC., a Delaware
`Corporation
`


`Nominal Defendant §
`
`ORDER ADOPTING REPORT AND
`RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
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`Came on for consideration the report of the United States Magistrate Judge in this action, this
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`matter having been referred to the United States Magistrate Judge pursuant to 28 U.S.C. § 636. On
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`August 11, 2017, the Magistrate Judge issued a Report and Recommendation, recommending
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`Defendants Motion to Dismiss Plaintiff’s Second Amended Complaint (Doc. No. 29) be denied, with
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`the part of the motion seeking dismissal of Plaintiff’s POS claims for failure to demonstrate demand
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`futility being denied without prejudice. Defendants filed objections to the Report and
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`Recommendation, and Plaintiff filed a response to the objections. The Court conducts a de novo
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`

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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 2 of 28 PageID #: 950
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`review of the Magistrate Judge’s findings and conclusions.
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`BACKGROUND
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`This is a direct and shareholder derivative action brought by Arnaud van der Gracht de
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`Rommerswael (“Plaintiff”) on behalf of nominal defendant Rent-A-Center, Inc. (“RAC” or the
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`“Company”) against Mark E. Speese, J.V. Lentell, Jeffery M. Jackson, Steven L Pepper, Michael
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`J. Gade, Leonard H. Roberts, Rishi Garg, Robert D. Davis, Guy J. Constant, and Paula Stern
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`(“Individual Defendants”) for breach of fiduciary duty, waste of corporate assets, unjust enrichment,
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`and declaratory judgment. The Individual Defendants are current and former officers and directors
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`of RAC who allegedly “presided over the Company while its stock price has been decimated and its
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`leadership forced to resign.” Docket Entry # 30 at pg. 1. Individual Defendants, together with RAC,
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`are referred to as “RAC Defendants.”
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`The original complaint was filed on April 3, 2017. RAC Defendants filed a motion to dismiss
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`on April 25. Rather than respond to the motion to dismiss his original complaint, Plaintiff amended
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`his complaint twice, once on May 9 and again on May 19 (with leave of court) to address actions
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`taken by RAC’s Board of Directors following the filing of the initial complaint. The live complaint
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`is Plaintiff’s Verified Second Amended Stockholder Direct and Derivative Complaint for Breach of
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`Fiduciary Duty, Waste of Corporate Assets, Unjust Enrichment, Aiding and Abetting, and
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`Declaratory Judgment (the “SAC”). (Doc. No. 26).
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`The Court provides the following facts, as outlined in the Report and Recommendation. RAC
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`is one of the largest rent-to-own operations in America. SAC, ¶ 1. RAC is managed by a board of
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`directors (the “Board”). At the time Plaintiff filed suit, Defendants Pepper, Gade, Garg, Jackson,
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`Lentell, Roberts, and Speese were members of the Board (the “Directors”). Id., ¶ 141. Defendant
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`2
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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 3 of 28 PageID #: 951
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`Stern previously served as a member of the Board. Id., ¶ 33. The Directors, along with Stern, are
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`referred to collectively as the “Director Defendants.” Defendants Davis and Constant are former
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`executive officers of the Company, and together with the Director Defendants, are referred to as
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`“Individual Defendants.” Individual Defendants, together with RAC, are referred to as “RAC
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`Defendants” or just “Defendants.”
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`The SAC asserts seven causes of action, including five derivative counts and two direct
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`counts.1 The four derivative counts remaining include claims of breach of fiduciary duty, unjust
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`enrichment, and waste of corporate assets against the Individual Defendants. The two direct causes
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`of action are for declaratory judgment concerning the alleged illegal “Proxy Put” provisions and the
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`alleged entrenching actions by the Board.
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`The allegations in Plaintiff’s SAC relate to the following issues: (1) alleged acts for the
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`purposes of entrenching Board members, including the Board’s adoption of Proxy Put provisions
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`in certain of the Company’s financing agreements; (2) the Company’s financial and management
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`performance, particularly for the implementation of a new point-of-sale (“POS”) system; (3)
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`statements made and approved by the Individual Defendants regarding the Company’s financial and
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`management performance and the POS system; and (4) alleged corporate waste related to severance
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`compensation paid to two former RAC executives. Specifically, the SAC alleges as follows.
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`1 In one derivative count, Plaintiff alleged RAC’s lenders—JPMorgan Chase Bank, N.A.
`(“JPMorgan”) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”)—were
`liable for aiding and abetting the Individual Defendants’ breaches of fiduciary duty in connection
`with the Proxy Put provisions in the Company’s debt agreements. On July 10, 2017, the undersigned
`dismissed Plaintiff’s claims against JPMorgan and BNY Mellon without prejudice.
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`3
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`

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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 4 of 28 PageID #: 952
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`Proxy Put provisions in RAC’s debt agreements
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`In August of 2015, Engaged Capital, LLC (“Engaged Capital”), an investor group with a
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`significant stake in RAC, began engaging with RAC in an “attempt to determine how to improve the
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`returns of the Company for the benefit of all stockholders.” Id., ¶ 9. On December 7, 2016, Engaged
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`Capital sent RAC’s Board a private letter, noting its concerns with the Company’s governance and
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`suggesting the Company “immediately explore all available strategic alternatives, including a
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`potential sale of the Company.” Id., ¶¶ 9, 107.
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`Following discussions with the Board, on February 23, 2017, Engaged Capital sent a formal
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`letter to RAC setting forth its initial five nominees for director positions for election to the Board
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`at the 2017 Annual Meeting of Stockholders (“2017 Annual Meeting”). Id., ¶¶ 9-10. Engaged
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`Capital indicated it would withdraw two of the five nominees provided three of the Company’s seven
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`directors would be up for election at the 2017 Annual Meeting. Id., ¶ 10. According to Plaintiff, the
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`Board obstructed these efforts, almost immediately, by challenging the validity of Engaged Capital’s
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`nominations. Id., ¶ 109.
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`Plaintiff alleges the steps Engaged Capital can take “are limited by the defensive measures
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`put in place by the Board,” particularly the “Proxy Put in place in its debt agreements.” Id., ¶ 85.
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`The Company’s financing includes a credit agreement negotiated with JPMorgan and an indenture
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`agreement negotiated with BNY Mellon. Id.,¶ 86. According to Plaintiff, these agreements are
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`significant because they contain provisions that are triggered under a “change of control,” when a
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`majority of the Board changes, referred to herein as the “Proxy Put” provisions. Id. A change of
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`control can also occur under the Proxy Put provisions if new directors are not “continuing directors,”
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`as defined within these agreements. Id., ¶ 87.
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`4
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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 5 of 28 PageID #: 953
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`According to Plaintiff, if a change in control occurs, the Company faces serious harm.
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`Specifically, a change in control would force the Company to purchase all of the outstanding notes
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`at 101% of their original principal amount, plus accrued interest to the date of repurchase, and would
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`allow JPMorgan to force the Company to pay the amount owed under the loan.2 Id. RAC would not
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`be able to pay these debts back, as it had only $95.4 million in cash and cash equivalents as of
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`December 31, 2016. Id., ¶ 90. According to Plaintiff, “this Proxy Put will hang over any election,
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`impairing stockholders free exercise of their vote knowing that electing Engaged Capital’s slate runs
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`the risk of RAC having to immediately pay $750 million, without adequate means.” Id., ¶ 11.
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`Plaintiff alleges the Proxy Put “is a defensive measure that interferes with the stockholder
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`voting franchise without any compelling justification, and would embed structural power-related
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`distinctions between groups of directors not found in the certificate of incorporation.” Id., ¶ 92.
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`Plaintiff alleges the Board members’ agreement to the Proxy Put could only be done to entrench
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`themselves “just in case such a situation as here arises,” and the entrance into the Proxy Put was in
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`breach of the Board’s fiduciary duties. Id., ¶ 11. Plaintiff further alleges the adoption of the Proxy
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`Put is inexcusable, asserting the members of the Board “were required to know that they were
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`breaching their fiduciary duties in agreeing to the Proxy Put.” Id., ¶ 93.
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`Despite warnings from Delaware courts starting in 2009 regarding the potentially
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`“eviscerating” nature of the change of control penalties imposed by proxy put clauses, the senior
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`notes were issued after these warnings, in November 2010 and March 2013, and the Board kept the
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`Proxy Put in the credit agreement despite amendments in July 2011 and March 2014. Id., ¶¶ 93-94,
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`2At the time the complaint was filed, Rent-A-Center had $550 million worth of senior notes
`outstanding and a $186.7 million outstanding loan with JPMorgan. SAC, ¶ 86.
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`5
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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 6 of 28 PageID #: 954
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`99. According to Plaintiff, although the Proxy Put provisions create potentially catastrophic risks for
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`the Company, there is no evidence the Board received, or negotiated for, extraordinary consideration
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`in return. Id., ¶ 99. When the financing agreements were negotiated, the market was very favorable,
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`and RAC’s stock price was much higher than it is now. Id.
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`The POS system
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`In mid-2015, RAC began implementing the new POS system, which was intended to be a
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`significant upgrade from RAC’s previous system. Id., ¶ 2. The POS system “handle[d] a number of
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`client-related services” and “tracked collection-related activities” which RAC’s then-Chief Executive
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`Officer (“CEO”), defendant Robert D. Davis (“Davis”), described as “critical” to RAC’s business.
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`Id., ¶ 3. Defendant Guy J. Constant (“Constant”), then-Chief Financial Officer (“CFO”), agreed the
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`change to the Company’s stores was significant. Id.
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`According to Plaintiff, the rollout of the new POS system was a failure plagued with
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`problems that, at times, included complete outages which prevented RAC from taking electronic
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`payments. Id., ¶¶ 4-5. The Individual Defendants “tried to downplay the drag on results as just
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`expected hiccups from a major change in how employees operate and the activity involved in
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`adopting the new POS system.” The Individual Defendants repeatedly called the negative impact of
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`the POS system “short-term,” even though the POS system was “significantly dragging down the
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`Company’s results, including earnings per share (‘EPS’) by 20% in the fourth quarter of 2015.” Id.,
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`¶ 4. The Individual Defendants’ “poor governance, including particularly their failures in
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`implementing and overseeing the POS system, exposed the Company and certain of the Individual
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`Defendants” to multiple securities fraud class action lawsuits. Id., ¶¶ 5, 8.
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`6
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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 7 of 28 PageID #: 955
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`The Company “finally revealed the truth about the POS system disaster in October 2016”
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`when it issued a press release. Id., ¶¶ 5, 72. In this press release, RAC Defendants revealed the POS
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`implementation caused a “larger than expected negative impact on Core sales” and indicated it would
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`take “several quarters to fully recover from the impact to the Core portfolio.” Id., ¶ 72. This
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`revelation caused the Company’s market capitalization to drop nearly 30% from $684 million to
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`$487.6 million. Id., ¶ 73. Since 2015, RAC’s stock price has fallen from over $40 a share to under
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`$8 at the time this action was filed, representing an 80% drop. Id., ¶ 83.
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`Despite the Company’s poor performance and the Individual Defendants’ alleged breaches
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`of fiduciary duty, when defendants Constant and Davis resigned on December 2, 2016, and January
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`9, 2017, they received approximately $750,000 and $1.8 million in severance, respectively. Id., ¶¶
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`79-81. According to Plaintiff, the Board’s granting these amounts breached its duty to the Company
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`and caused significant harm, was made in bad faith, and constitutes waste. Id., ¶ 82.
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`Alleged Entrenching Actions
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`According to Plaintiff, RAC’s Board is classified, meaning only some of its directors are up
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`for election each term. Id., ¶¶ 12, 104. “RAC’s Board has been designed to resist outside challenges
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`for a long time, and its composition reflects that fact,” with five directors serving for over a decade
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`and two having served for over twenty years. Id., ¶ 103. Plaintiff further alleges the Company has
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`a variety of policies that contribute to Board entrenchment, including the combination of
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`Chairman/CEO roles, the prohibition of stockholders from calling special meetings, requiring an
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`80% supermajority vote to amend certain charter provisions, and requiring unanimous stockholder
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`support for actions taken by written consent. Id., ¶ 105. Additionally, Plaintiff alleges the Company
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`admits its “organizational documents and debt instruments contain provisions that may prevent or
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`7
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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 8 of 28 PageID #: 956
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`deter another group from paying a premium over the market price to Rent-A-Center’s stockholders
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`to acquire its stock.” Id., ¶ 104.
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`On March 21, 2017, the Board announced it would nominate defendants Speese, Roberts,
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`and Jackson for the three Class II Director positions to be elected by stockholders at the Company’s
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`annual meeting of stockholders. Because the Board was only putting up three directors for election,
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`Engaged Capital withdrew two of its nominees, putting up its own slate of three director nominees.
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`Id., ¶ 89. Plaintiff alleges the Board refused even to allow Engaged Capital’s nominees to be fairly
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`considered for election. Id., ¶ 109.
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`Plaintiff alleges the Board challenged Engaged Capital’s nominees with numerous
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`entrenching methods (the “Entrenching Actions”), including: (1) announcing a Poison Pill rights
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`agreement (the “Poison Pill”) in the midst of Engaged Capital’s challenge, effectively preventing
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`stockholders from acquiring more than 15% of the Company’s outstanding stock; (2) refusing to
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`grant Engaged Capital a waiver to that Poison Pill, despite Engaged Capital’s assurances that it had
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`“no intention to mount a takeover bid or participate in any change of control transaction;” and (3)
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`changing the already-set record date for shareholders to be able to vote at the 2017 Annual Meeting.
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`Id., ¶¶ 15, 111-15 & 118-20. According to Plaintiff, the Entrenching Actions have already exposed
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`the Company to multiple lawsuits from Engaged Capital, which remain ongoing. Id., ¶ 131.
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`Plaintiff alleges the Board has engaged in acts that serve no legitimate purpose other than to
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`further entrench the Board members in their positions as directors. Id., ¶ 128. According to Plaintiff,
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`their actions did nothing but impede stockholders’ ability to engage in a fair voting process and
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`spawned numerous exchanges with Engaged Capital through proxy filings and press releases. Id.
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`Plaintiff alleges there was no threat or other justification for the Board’s engaging in the Entrenching
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`8
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`Actions described above; even if there was a perceived threat, the Board’s actions were grossly
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`overzealous and unnecessary. Id.
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`REPORT AND RECOMMENDATION
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`RAC Defendants filed the current motion to dismiss on June 8, 2017. On August 11, 2017,
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`the Magistrate Judge issued a sixty-nine page Report and Recommendation, recommending
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`Defendants Motion to Dismiss Plaintiff’s Second Amended Complaint (Doc. No. 29) be denied, with
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`the part of the motion seeking dismissal of Plaintiff’s POS claims for failure to demonstrate demand
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`futility being denied without prejudice.
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`Regarding Defendants’ motion to dismiss Plaintiff’s breach of fiduciary duty proxy
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`put/change of control provision claims, the Magistrate Judge concluded as follows.
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`•
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`•
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`•
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`•
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`The continuing wrong doctrine, an equitable exception to the contemporaneous
`ownership rule, gives Plaintiff standing to pursue the proxy put claims.
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`Even assuming the continuing wrong doctrine is not applicable in this case, Plaintiff
`has satisfied the contemporaneous ownership rule by alleging he owned stock since
`May of 2015, almost two years prior to the initiation of this lawsuit in early April
`2017 and “well before the proxy contest at the core of Plaintiff’s allegations.” Doc.
`No. 43 at 20-21.
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`Plaintiff’s claims concerning the language in the debt agreements state a justiciable
`controversy.
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`Accepting all well-pled allegations as true, Plaintiff has sufficiently pled a claim with
`respect to the Proxy Put provisions. Specifically, Plaintiff has sufficiently pled a
`plausible claim because he alleged the adoption of the Proxy Put provisions was
`improper and unjustified, even if they did not contain a so-called “dead hand”
`provision.
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`Regarding Defendants’ motion to dismiss Plaintiff’s breach of fiduciary duty POS system
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`claims, the Magistrate Judge first considered whether there are particularized allegations in the SAC
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`that the Individual Defendants breached their fiduciary duties of loyalty or good faith in connection
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`9
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`

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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 10 of 28 PageID #: 958
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`with the POS system so as to adequately allege demand futility. The Magistrate Judge stated to
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`excuse demand pursuant to FED. R. CIV. P. 23.1, Plaintiff must raise a reasonable doubt that the
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`Board could have exercised independent and disinterested judgment in addressing a demand, by
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`alleging particularized facts to show a majority of the Directors face a “substantial likelihood” of
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`personal liability for knowingly not discharging their fiduciary duties. Doc. No. 43 at 40. The
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`Magistrate Judge noted the presence of an exculpatory clause in RAC’s certificate of incorporation
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`means the bar for establishing a substantial likelihood of personal liability is much higher; that
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`Plaintiff must plead particularized factual allegations supporting the inference that the alleged
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`violation “was made in bad faith, knowingly or intentionally.” Id.
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`The Magistrate Judge considered Plaintiff’s allegations regarding the Directors as a group
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`and found they were insufficient under Delaware law. According to the Magistrate Judge, under
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`Delaware law, “whether the Directors face a substantial likelihood of liability must be determined
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`on a director-by-director basis, and thus [Plaintiff’s] conflation of all the directors into a single entity
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`is insufficient under Rule 23.1.” Id. at 44 (quoting In re ITT Corp. Derivative Litig., 653 F. Supp.
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`2d 453, 460-61 (S.D.N.Y. 2009)). The Magistrate Judge then considered Plaintiff’s allegations
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`against defendants Jackson, Lentell, and Pepper, members of the Audit & Risk Committee during
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`the time the improper statements identified in the SAC were made. However, according to the
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`Magistrate Judge, neither an awareness of facts nor a conscious disregard of oversight duties can be
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`inferred solely from a director’s service on a committee. Doc. No. 43 at 45. The Magistrate Judge
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`held Plaintiff fails to plead particularized facts showing the Audit & Risk Committee failed to
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`oversee “financial controls” or that Jackson, Lentell, and Pepper, as members of the committee,
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`knew these financial controls were impacted by the POS system rollout or that they failed to act or
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`10
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`

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`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 11 of 28 PageID #: 959
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`cure the Company’s inadequate disclosures. Id. at 46. Thus, Plaintiff has fallen short of alleging a
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`Caremark bad faith failure to act. Id.
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`The Magistrate Judge then considered the totality of Plaintiff’s allegations to determine
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`whether they demonstrate a reasonable doubt about the Board’s impartiality. Id. at 47. The
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`Magistrate Judge held as follows:
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`The SAC’s allegations, even considered cumulatively, regarding improper statements
`do not meet the stringent standard of factual particularity required under Rule 23.1.
`In addition to the requirements set forth above, to establish a threat of director
`liability based on a disclosure violation, Plaintiff ‘must plead facts that show that the
`violation was made knowingly or in bad faith, a showing that requires allegations
`regarding what the directors knew and when.’ In re Citigroup, 964 A.2d at 133-34.
`‘Without knowing when and how the alleged disclosure violations occurred, it is
`impossible to determine if the directors made misstatements or omissions knowingly
`or in bad faith.’ Id. at 134. The SAC does not contain specific factual allegations
`that reasonably suggest sufficient Board involvement in the preparation of the
`disclosures to conclude at this time that the Individual Defendants face a substantial
`likelihood of personal liability. Id.
`
`The SAC also lacks factual allegations critical to a Caremark claim. See Guttman,
`823 A.2d at 506-07 (finding the complaint lacked factual allegations critical to
`Caremark claim, such as lack of board committees, committees’ failure to meet
`regularly and committees’ failure to devote adequate time to work). Plaintiffs’ SAC
`lacks specific factual allegations sufficient to create a substantial likelihood of
`success on its claim that a majority of the Directors consciously failed to monitor or
`oversee RAC’s operations or the implementation of the POS system.
`
`* * *
`
`Like the holding in In re Citigroup, the factual allegations in the SAC are not
`sufficient to allow the Court to reasonably conclude a majority of the Directors face
`a substantial likelihood of liability that would prevent them from impartially
`considering a demand. Id. at 132. Thus, the allegations in the SAC do not
`sufficiently satisfy the Court that Plaintiff should be excused from his obligation in
`a derivative suit to make demand prior to filing suit.
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`Doc. No. 43 at 47-48.
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`Rather than recommend outright dismissal for failure to adequately plead demand futility
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`11
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`with regard to the POS system claims, the Magistrate Judge was of the opinion Plaintiff should be
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`afforded one additional opportunity to amend to present particularized factual allegations to satisfy
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`the heightened pleading requirements of Rule 23.1.
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`Thus, the Magistrate Judge recommended this part of RAC Defendants’ motion to dismiss
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`be denied without prejudice to refiling. The Magistrate Judge recommended that it be ordered that
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`within twenty days from the date of entry of an Order Adopting the Report and Recommendation,
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`if any, Plaintiff be required to file an amended complaint, pleading particularized facts on a director-
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`by-director basis, where appropriate, creating a reasonable doubt that a majority of the Board is
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`interested in the alleged wrongdoing, not independent, or would face a substantial likelihood of
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`personal liability.
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`Turning to Defendants’ motion to dismiss Plaintiff’s breach of fiduciary duty entrenchment
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`claims, the Magistrate Judge noted at the outset that Defendants’ motion did not assert, as with the
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`POS system and corporate waste claims, that the SAC fails to demonstrate demand futility, thus
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`requiring dismissal. Doc. No. 43 at 52. According to the Magistrate Judge, although Defendants’
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`reply brief contained two sentences regarding demand futility for Plaintiff’s alleged entrenchment
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`claims, Defendants’ motion never addressed demand futility for these claims. Rather, the motion
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`challenged Plaintiff’s standing to bring the claims and whether Plaintiff has asserted a “plausible”
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`claim under Rule 12(b)(6). Therefore, the Magistrate Judge declined to consider the “fleeting
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`assertion raised for the first time in RAC Defendants’ reply that Plaintiff has not alleged the
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`particularized director-by-director facts required to plead demand futility for his entrenchment
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`claims.” Id.
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`The Magistrate Judge then found Plaintiff has standing as he has alleged a personal stake in
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`12
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`this dispute. The Magistrate Judge then considered whether Plaintiff’s entrenchment claims fail to
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`state a claim and concluded Plaintiff has sufficiently pleaded the alleged Entrenching Actions were
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`taken for the primary or sole purpose of ensuring the Directors retained their positions. Id. at 59.
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`According to the Magistrate Judge, Plaintiff has also pleaded a plausible claim that the alleged
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`Entrenching Actions were taken for the primary or sole purpose of attempting to secure the
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`incumbent directors’ positions. Id. at 61-62.
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`The Magistrate Judge disagreed with Defendants’ assertion that the SAC fails to plead any
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`facts suggesting the alleged Entrenching Actions taken by the Board were “anything other than
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`reasonably tailored to the threat posed.” Id. at 64. Noting the difficulty in determining the line
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`between board actions that influence the electoral process in legitimate ways and those that preclude
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`effective stockholder action until “rather deep in [the court’s] analysis,” the Magistrate Judge found,
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`for purposes of deciding Defendants’ Rule 12(b)(6) motion, that Plaintiff has sufficiently alleged that
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`none of the alleged Entrenching Actions were reasonable in relation to any “threat” posed within the
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`appropriate legal framework. Id. at 62-63 (citing Chesapeake Corp. v. Shore, 771 A.2d 293, 320
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`(Del.Ch.2000)). The Magistrate Judge noted the threats identified in Chesapeake were “price
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`inadequacy” and “the risk of stockholder confusion,” neither of which is present here. Doc. No. 43
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`at 63.
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`According to Plaintiff, the only threat posed here was the possibility that up to three of
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`Engaged Capital’s directors would be elected, and this is not a case where there would be an
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`immediate change of control; thus the Board’s actions “should have been limited to attempts to
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`inform the shareholders about the Board’s view, rather than an attempts to force their hand by
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`manipulating the voting process.” Id. at 63-64. The Magistrate Judge concluded the allegations in
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`13
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`the SAC regarding the alleged Entrenching Actions are sufficient to state a claim to relief that is
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`plausible on its face. Id. at 64.
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`Finally, the Magistrate Judge considered Plaintiff’s corporate waste claims and found
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`Plaintiff has adequately pleaded demand futility for the claims for corporate waste for the approval
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`of the severance compensation to defendants Constant and Davis. Id. at 68. According to the
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`Magistrate Judge, the “SAC raises a reasonable doubt that the decision to approve the severance
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`compensation was the product of a valid exercise of business judgment.” Id.
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`OBJECTIONS
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`RAC Defendants filed objections to the Report and Recommendation. RAC Defendants first
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`assert the Magistrate Judge misapplied the standard for pleading a waste claim, and the claim should
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`be dismissed for failure to plead demand futility.
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`RAC Defendants next assert Plaintiff fails to state a claim for adopting “illegal proxy puts,”
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`and the Magistrate Judge improperly applied Delaware law governing “dead hand” proxy put
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`provisions to commonplace change in control provisions in the Company’s debt agreements.
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`According to RAC Defendants, Plaintiff has failed to meet the Delaware Supreme Court’s legal
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`standard for challenging a change in control provision, and there are no facts that “come close to
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`indicating that, at the time of adopting the change-in-control provision, there was a foreseeable
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`material risk to Rent-A-Center.” Doc. No. 45 at 5. RAC further assert Plaintiff lacks standing to
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`challenge these provisions, and the claims are nonjusticiable.
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`RAC Defendants next assert Plaintiff’s entrenchment claims should be dismissed because
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`Plaintiff lacks standing to bring them and he fails to state a claim upon which relief may be granted.
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`Finally, regarding Plaintiff’s POS system claims, RAC Defendants assert the Magistrate
`
`14
`
`

`

`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 15 of 28 PageID #: 963
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`Judge correctly concluded Plaintiff failed to plead demand futility. However, RAC Defendants
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`object to the recommendation that the motion to dismiss the POS system claims be denied without
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`prejudice to refiling after Plaintiff is given an opportunity to amend.
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`DE NOVO REVIEW
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`Plaintiff’s corporate waste claims
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`While “the discretion of directors in setting executive compensation is not unlimited,” In re
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`Citigroup, 964 A.2d 106, 138 (Del.Ch.2009), “[i]t is the essence of business judgment for a board
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`to determine if ‘a particular individual warrant [s] large amounts of money, whether in the form of
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`current salary or severance provisions.’” Brehm v. Eisner, 746 A.2d 244, 263 (Del.2000). “To
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`prevail on a waste claim . . . the plaintiff must overcome the general presumption of good faith by
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`showing that the board’s decision was so egregious or irrational that it could not have been based
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`on a valid assessment of the corporation’s best interests.” Kaufman v. Allemang, 70 F. Supp. 3d 682,
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`696 (D. Del. 2014).
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`A claim of waste requires the pleading of particularized facts demonstrating “the
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`consideration received by the corporation was so inadequate that no person of ordinary sound
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`business judgment would deem it worth that which the corporation paid.” Taylor v. Kissner, 893 F.
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`Supp. 2d 659, 673 (D. Del. 2012) (quoting Orloff v. Shullman, 2005 WL 3272355, at *11
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`(Del.Ch.2005)). Corporate waste is “confined to unconscionable cases where directors irrationally
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`squander or give away corporate assets, such as where “the challenged transaction served no
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`corporate purpose or where the corporation received no consideration at all.” See Brehm, 746 A.2d
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`at 263; see also White v. Panic, 783 A.2d 543, 554 (Del.2001).
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`15
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`

`

`Case 4:17-cv-00227-ALM-CMC Document 48 Filed 10/12/17 Page 16 of 28 PageID #: 964
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`Plaintiff alleges the Board paid wasteful amounts of severance compensation to defendants
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`Davis and Constant. The Magistrate Judge recognized, at this stage, the SAC contains “well-pleaded
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`factual allegations regarding the claim for waste for the approval of the severance compensation ‘that
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`make it impossible for [the Court] to conclude with reasonable certainty that the plaintiff could
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`prevail on no set of facts that could be reasonably inferred from the allegations in the [complaint].”
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`Doc. No. 43 at 68 (citing In re Citigroup, Inc. S’holder Derivative Litig., 964 A.2d 106, 138 (Del.
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`Ch. 2009))
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`According to RAC Defendants, Plaintiff has not and cannot plead that the Company received
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`no consideration at all for the severance compensation paid to Davis and Constant. RAC Defendants
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`assert Constant agreed to post-employment covenants, including non-competition and confidentiality
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`covenants, when he resigned as CFO, and Davis released all claims that he might have against the
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`Company. RAC Defendants attempt to distinguish Citigroup relied upon by the Magistrate Judge.
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`According to Defendants, the departing CEO in that case received severance worth more than $68
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`million, in addition to being provided an office, car, and services from an administrative assistant
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`and driver. In re Citigroup, 964 A.2d at 138.
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`While Defendants argue $750,000 and $1,800,000 compensation packages to Davis and
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`Constant do “not compare” to the $68 million severance paid to the departing CEO in Citigroup,
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`Plaintiff points out “Citigroup is a company with a market capitalization of $183.72 billion, which
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`is two hundred and eighty times as large as Rent-A-Center, at $657.21 million.” Doc. No. 47 at
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`2 (emphasis in original). According to Plaintiff, if Davis and Constant had recei

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