The following e-filed documents, listed by NYSCEF document number (Motion 008) 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 138, 160, 161 were read on this motion to/for DISMISS.

The Defendants in this case are not entitled to dismissal of this lawsuit at this stage based on In re Kenneth Cole Productions, Inc., 27 NY3d 268 (2016) or the other arguments that they advance in their motions to dismiss.^[FN1]

Simply put, the Conversion (hereinafter defined) is subject to the entire fairness standard of review such that dismissal is not warranted at this stage of the litigation because the well-pled FAC (hereinafter defined) alleges, at a minimum, a reasonably conceivable set of facts that many of the MFW procedural safeguards (hereinafter defined) are not satisfied, breach of fiduciary duty, breach of the Certificate of Incorporation, and demand futility such that they establish standing.

As discussed more particularly below, the FAC sets forth specific particularized facts as to how the Conversion is the product of a poisoned process where controller Mitchell Jacobson and his longtime friend and associate, "independent" (in name only) director and Special Committee Chairman Philip Peller, sought from the outset to disempower the Board from making an informed review of the exchange of the Jacobson/Gershwind Class B shares at a substantial premium not provided for in the Certificate of Incorporation. The procession of the transaction was not conditioned from inception on approval from an informed independent special committee and an informed majority of the minority stockholders (see infra at 10-11, 24-25). The Special Committee was not independent (see infra at 11-14, 25-28). The advisors were pre-selected before the Special Committee was formed (see infra at 15-16, 28-29). They were not vetted for conflicts. The Certificate of Incorporation provides for a one-for-one conversion of the shares at issue. The financial advisor did not adequately consider those transactions as part of its analysis and was financially incentivized to recommend a conversion transaction at a premium ratio, which diluted the minority Class A shareholders' interest in the Company. The Special Committee and Board did not exercise due care in retaining experts, reviewing all appropriate information including precedent no premium transactions and negotiating a fair price for the transaction (see infra at 17-18, 30-31). Indeed, its initial counter-offer assumed a substantial premium of 12.5%. The Proxy solicitation itself was materially misleading because it did not disclose that the Certificate of Incorporation provided for a one-for-one conversion of the shares at issue or the conflicts (see infra at 18-19, 31-32). Additionally, and as discussed below, the claims as alleged are not exculpated claims subject to dismissal at this stage of the litigation (see infra at 19, 35-36).

Kenneth Cole was a shareholder class action challenging a going-private merger in which [*2]the Court of Appeals adopted the standard of review announced by the Delaware Supreme Court in Kahn v M & F Worldwide Corp., 88 A3d 635 (Del 2014) [MFW] for going-private mergers.^[FN2] The facts were relatively straightforward. Kenneth Cole Productions, Inc. (KCP) was organized with two classes of common stock — Class A, which was traded on the New York Stock Exchange, and Class B. Taking into account his Class A and Class B shares, Kenneth D. Cole had approximately 89% of the voting power of the KCP shareholders.

During the relevant time period, the Board of KCP was comprised of Mr. Cole, Michael J. Blitzer, Philip R. Peller, Denis F. Kelly, Robert C. Grayson, and Paul Blum. Messrs. Blitzer and Peller were elected by Class A shareholders (of which Mr. Cole held 6% of the voting stock) and Messrs. Kelly and Grayson were elected by both Class A and Class B positions, effectively giving Mr. Cole the sole authority to fill those positions (Kenneth Cole, 27 NY3d at 272).

At a Board meeting held in February 2012,^[FN3] Mr. Cole informed the Board that he intended to make an offer to take the company private.^[FN4] After making this announcement, Mr. Cole left the meeting, excluding himself from the process, and the Board established a special committee to consider the proposal and negotiate any potential merger.^[FN5]

On February 23, 2012, Mr. Cole made an initial offer of $15 per share. The offer was conditioned on approval by (i) the special committee and then (ii) a majority of the shareholders. Mr. Cole explained that if the offer was not accepted, it would not adversely affect his relationship with the KCP shareholders. Within a few days of the announcement, certain shareholders sued alleging breach of fiduciary duty. The special committee hired appropriate [*3]counsel and hired a financial advisor to negotiate the terms of the going-private transaction with Mr. Cole. After multiple rounds of negotiations, Mr. Cole ultimately agreed to pay $15.25 for the purchase of each outstanding share of Class A stock, and 99.5% of fully informed minority shareholders voted in favor of the fully disclosed terms of the merger.^[FN6] In the amended complaint in that case, the plaintiffs sought (i) a declaration that Mr. Cole and the directors breached their fiduciary duties owed to the minority shareholders, (ii) an award of damages to the class, and (iii) a judgment enjoining the merger.

In response to the motion to dismiss filed in that case, the trial court dismissed the complaint holding that the complaint "'fail[ed] to set forth facts demonstrating a lack of independence on the part of any of the . . . individual defendants'" (id. at 273, quoting In re Kenneth Cole Productions, Inc., 2013 NY Slip Op 302114[U], *7 [Sup Ct, NY County 2013]), and because "'the complaint d[id] not adequately allege any facts that, if true, demonstrate[d] that the decision not to seek other bids constituted a breach of fiduciary duty'" (id., quoting Kenneth Cole, 2013 NY Slip Op 302114[U], *7-8). On appeal, the Appellate Division affirmed holding that "'[c]ontrary to the plaintiff's claim, the motion court was not required to apply the 'entire fairness' standard to the transaction'" (id., quoting In re Kenneth Cole Prods., Inc., S'holder Litig., 122 AD3d 500, 500 [1st Dept 2014]). On appeal from the Appellate Division's decision, the Court of Appeals addressed the standard by which courts reviewing going-private mergers are subject (id. at 278). The defendants in that case argued that the Board's conduct under review was subject to the business judgment rule and required deference warranting dismissal. For their part, the plaintiffs argued that the Board's conduct should be subject to the entire fairness standard and that deference and dismissal was not appropriate. The Court of Appeals adopted what it termed "a middle ground" reasoning:

the business judgment rule should be applied as long as the corporation's directors establish that certain shareholder-protective conditions are met; however, if those conditions are not met, the entire fairness standard should be applied.

We begin with the general principle that courts should strive to avoid interfering with the internal management of business corporations. To that end, we have long adhered to the business judgment rule, which provides that, where corporate officers or directors exercise unbiased judgment in determining that certain actions will promote the corporation's interests, courts will defer to those determinations if they were made in good faith (see 40 W. 67th St. v. Pullman, 100 NY2d 147, 153, 760 N.Y.S.2d 745, 790 N.E.2d 1174 [2003]; Chelrob, Inc. v. Barrett, 293 NY 442, 459—460, 57 N.E.2d 825 [1944] ). The doctrine is based, at least in part, on a recognition that: courts are ill equipped to evaluate what are essentially business judgments; there is no objective standard by which to measure the correctness of many corporate decisions (which involve the weighing of various considerations); and corporate directors are charged with the authority to make those decisions (see Auerbach v. Bennett, 47 NY2d 619, 630—631, 419 N.Y.S.2d 920, 393 N.E.2d 994 [1979] ). Hence, absent fraud or bad faith, courts should respect those business determinations and refrain from any further judicial inquiry (see id. at 631, 419 N.Y.S.2d 920, 393 N.E.2d 994). We have, therefore, held that the *275 substantive determination of a committee of disinterested directors is beyond judicial inquiry under the business judgment rule, but that "the court may inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee" (id. at 623—624, 419 N.Y.S.2d 920, 393 N.E.2d 994).

. . .

This Court's seminal decision regarding freeze-out mergers is Alpert v. 28 Williams St. Corp., 63 NY2d 557, 483 N.Y.S.2d 667, 473 N.E.2d 19 (1984). In that case, we recognized that, where there are common directors or majority ownership between the parties involved in a transaction, "the inherent conflict of interest and the potential for self-dealing requires careful scrutiny of the transaction" (id. at 570, 483 N.Y.S.2d 667, 473 N.E.2d 19). In reviewing a two-step merger in Alpert, we held that while, "[g]enerally, the plaintiff has the burden of proving that the merger violated the duty of fairness, ... when there is an inherent conflict of interest, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the merger" (id.; see Chelrob, Inc., 293 NY at 461—462, 57 N.E.2d 825). This "entire fairness" standard has two components: fair process and fair price (see Alpert, 63 NY2d at 569—570, 483 N.Y.S.2d 667, 473 N.E.2d 19). The fair process aspect concerns timing, structure, disclosure of information to independent directors and shareholders, how approvals were obtained, and similar matters (see id. at 570—571, 483 N.Y.S.2d 667, 473 N.E.2d 19). The fair price aspect can be measured by whether independent advisors rendered an opinion or other bids were considered, which may demonstrate the price that would have been established by arm's length negotiations (see id. at 571, 483 N.Y.S.2d 667, 473 N.E.2d 19). Considering the two components, the transaction is viewed as *276 a whole to determine if it is fair to the minority shareholders (see id. at 567, 483 N.Y.S.2d 667, 473 N.E.2d 19; see also Kahn v. Lynch Communication Sys., Inc., 638 A.2d 1110, 1115 [Del.1994] ).

. . .

In MFW, a controlling shareholder sought to purchase all of the shares of stock and take the corporation private, but made the proposal contingent from the outset upon two shareholder-protective measures—negotiation and approval by a special committee of independent directors, and approval by a majority of shareholders that were unaffiliated with the controlling shareholder (see id. at 638). As in the case before us, the controlling shareholder also made it clear that it was not interested in selling any of its shares, would not vote in favor of any alternative sale or merger and, if the merger was not recommended, its future relationship with the company—including its desire to remain a shareholder—would not be adversely affected (see id. at 641).

. . .

The court articulated a number of reasons for the adoption of this new standard, including that: where the controlling shareholder clearly disabled itself from using its control to dictate the outcome, the merger acquired the characteristics of "third-party, arm's length mergers" that are reviewed under the business judgment rule . . . .

. . .

The standard was summarized as follows: "in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority" (id. at 645).

We now adopt that standard of review for courts reviewing challenges to going-private mergers.

. . .

Overall, the MFW standard properly considers the rights of minority shareholders—to obtain judicial review of transactions involving interested parties, and to proceed to trial where there is adequate proof that those interests may have affected the transaction—and balances them against the interests of directors and controlling shareholders in avoiding frivolous litigation and protecting independently-made business decisions from unwarranted judicial interference.

According to the Delaware Supreme Court, for purposes of this rule, a complaint is sufficient to state a cause of action for breach of fiduciary duty—and the plaintiff may proceed to discovery—if it alleges "a reasonably conceivable set of facts" showing that any of the six enumerated shareholder-protective conditions did not exist (MFW, 88 A.3d at 645). Conclusory allegations or bare legal assertions with no factual specificity are not sufficient, and will not survive a motion to dismiss (see Godfrey v. Spano, 13 [*4]NY3d 358, 373, 892 N.Y.S.2d 272, 920 N.E.2d 328 [2009]; Health—Loom Corp. v. Soho Plaza Corp., 209 AD2d 197, 198, 618 N.Y.S.2d 287 [1st Dept.1994] [ . . . a complaint must contain specific allegations of coercive power over others or that interested or controlled directors constitute a majority] ). Mere speculation cannot support a cause of action for breach of fiduciary duty (see e.g. Kassover v. Prism Venture Partners, LLC, 53 AD3d 444, 450, 862 N.Y.S.2d 493 [1st Dept.2008] ).

. . .

the question is whether a director is beholden to the controlling party or so under that party's influence that the director's discretion would be compromised (see MFW, 88 A.3d at 648—649). Friendships, traveling in the same circles, some financial ties, and past business relationships are not enough to rebut the presumption of independence; the ties must be material in the sense that they could affect impartiality (see id. at 649). None of the allegations of the complaint, even if true, indicate that any of the members of the special committee engaged in fraud, had a conflict of interest or divided loyalties, or were otherwise incapable of reaching an unbiased decision regarding the proposed merger (compare Marx v. Akers, 88 NY2d 189, 202, 644 N.Y.S.2d 121, 666 N.E.2d 1034 [1996] ).

As to the third MFW condition, the complaint does not allege that the special committee **222 ***559 lacked the freedom to reject Cole's offer or was prevented from hiring its own advisors, nor does it dispute that the committee did, in fact, select its own financial advisors and legal counsel.

. . .

the complaint fails to allege any basis to conclude that the committee had an incentive to accept an inadequate price without meaningful negotiations or that it engaged in any unfair conduct. Additionally, the final price of $15.25 per share was higher than the original offer . . . .

. . .

Regarding the fifth condition, the complaint lacks any specific challenges to the information contained in, or allegedly omitted from, the proxy statement provided to the minority shareholders prior to the vote, such that it could be said that the shareholders were not informed (see Kimeldorf v. First Union Real Estate Equity & Mtge. Invs., 309 AD2d 151, 158, 764 N.Y.S.2d 73 [1st Dept.2003] ).

(Kenneth Cole, 27 NY3d at 274-280 [emphasis added]). Because the Court of Appeals held that the plaintiff had failed to properly allege any specific facts that any of the six MFW procedural safeguards were not satisfied, the business judgment rule applied. Inasmuch as no bad faith or fraud had been properly alleged, the Court of Appeals deferred to the determinations of the Board and special committee in recommending the merger and affirmed the dismissal of the [*5]complaint.

The facts in this case as alleged are not however like those in Kenneth Cole. As discussed, the well-pled FAC contains specific allegations which set forth a reasonably conceivable set of facts as to how many (i.e., more than two) of the MFW procedural safeguards are not satisfied (see Kenneth Cole, 27 NY.3d at 278, quoting MFW, 88 A3d at 645; Flood v Synutra Intl., Inc., 195 A3d 754 [Del 2018]).

According to the well pled first amended complaint (NYSCEF Doc. No. 89; the FAC), the conversion transaction (the Conversion) at issue was a conflicted controller transaction pursuant to which the Jacobson/Gershwind family controlling shareholders of the Company expropriated an unfair 22.5% premium not provided for in the Company's Certificate of Incorporation (the Certificate of Incorporation; NYSCEF Doc. No. 130).^[FN7] The FAC alleges that in fact the Defendants feigned lip service to the six MFW procedural safeguards adopted by the Court of Appeals in Kenneth Cole for going-private mergers (the MFW procedural safeguards), but did not however adhere to them from the get-go such that business judgment rule protection is not available and that entire fairness review of the transaction is appropriate (see Synutra, 195 A3d at 763 [holding the controller must "self-disable before the start of substantive economic negotiations."]). Inasmuch as the Defendants do not meet their burden of demonstrating entire fairness at this stage of the litigation, dismissal at this time is not appropriate (see Limmer v Medallion Grp., Inc., 75 AD2d 299, 303 [1st Dept 1980]; Davidow v LRN Corp., 2020 WL 898097, *15 n 112 [Del Ch Feb 25, 2020], citing Orman v Cullman, 794 A2d 5, 21 n 36 [Del Ch 2002]).

1. The FAC has detailed specific allegations that the controllers did not condition the procession of the transaction from inception on the approval of a special committee and a majority of the minority stockholders (i.e., the first MFW procedural safeguard is not satisfied)

To obtain business judgment rule protection, a controller conflicted transaction, such as the one alleged here, must be conditioned from inception (i.e., ab initio) on both special committee approval and an uncoerced, informed majority of the minority vote (Kenneth Cole, 27 NY3d at 277; Synutra, 195 A3d at 763—764; Olenik v Lodzinski, 208 A3d 704, 707 [Del 2019]). The FAC alleges that rather than approach the full Board of the Company (as was done in Kenneth Cole and as is required), in September 2022, Mitchell Jacobson approached longtime family friend, associate and Board ally Mr. Peller, and schemed with him as to how to reclassify the Jacobson/Gershwind family's Class B shares into Class A shares at a substantial premium (i.e., rather than merely convert them into Class A shares on a one-for-one basis as provided for in the Certificate of Incorporation (NYSCEF Doc. No. 89 ¶ 3).

When approached, Mitchell Jacobson's pal, Mr. Peller, did not immediately and timely bring Mitchell Jacobson's proposal to the Board's attention as required (and as was done in Kenneth Cole). Instead, he is alleged to have "strategized how to disempower the Board from rejecting it" and set the stage for a "deeply flawed process marked by conflicts of interest and systematic disregard of minority shareholder protections" (id. ¶¶ 3, 46-47, 58). Thus, Mitchell Jacobson did not condition the procession of the transaction on approval of an uncoerced special committee and a majority of informed minority stockholders. He sought to undermine that process from the outset so that he could extract a premium for his Class B shares by diluting the minority Class A shareholders' interests in the Company (id. ¶¶ 45-50). As such, the FAC supports a reasonably conceivable set of facts that the first MFW procedural safeguard was not satisfied such that business judgment rule protection and dismissal are not appropriate.

2. The FAC has detailed specific allegations that the Special Committee was not independent (i.e., the second MFW procedural safeguard is not satisfied)

To obtain business judgment rule protection, a controller conflicted transaction must also be approved by a special committee ^[FN8] that is free from the controller's influence (and not longtime associates and dependents of the Jacobson/Gershwind family), such that their personal, financial, or professional ties could not compromise their judgment (In re Cadus Corp. S'holders Litig., 189 AD3d 437, 437 [1st Dept 2020]; In re BGC Partners, Inc., 2019 WL 4745121, *11—12 [Del Ch Sept 30, 2019]; Voigt v Metcalf, 2020 WL 614999, *14 [Del Ch Feb 10, 2020]). The FAC sets forth more than a reasonably conceivable set of facts that the Company's special committee (the Special Committee) formed to evaluate the proposal was not independent because its members, Mr. Peller, Michael Kaufmann, and Steven Paladino, lacked independence from the controllers.^[FN9]

According to the FAC, Mr. Peller was beholden to Mitchell Jacobson and Sidney Jacobson. Previously, he had been a partner at Arthur Andersen where he worked as the Company's auditor for years and depended upon them as a key loyal client (NYSCEF Doc. No. 89 ¶ 11). When he left Arthur Andersen, the Jacobsons put him on the Board where they served with him for an astonishing approximately 25 years, which is more than three times the average tenure of directors of S&P 500 companies and well beyond what leading governance authorities deem acceptable.^[FN10] They also gave money to each other's pet charities. For example, Mitchell Jacobson donated to the Tisch MS Research Center, where Mr. Peller has served on the board for years, and Mr. Peller has regularly donated to the Sid Jacobson Jewish Community Center, which was founded by Sidney Jacobson and where Mitchell Jacobson and his wife have long served as board members or honorary board members (id. ¶ 13).^[FN11] In fact, as alleged, Mr. Peller also depended upon Sidney and Mitchell Jacobson for year-after-year appointment (id. ¶ 4) and his sole disclosed source of income for the approximately 13 years was his Board compensation. Over the course of his tenure, the Company has paid him approximately $5 million (id. ¶¶ 14, 52).

Putting aside that Mr. Peller's multi-generational Board tenure makes him presumptively not independent, this is not the first time Mr. Peller's independence from the Jacobsons has been questioned. To wit, in Plymouth County Retirement Assn. v Schroeder, 576 F Supp 2d 360 (ED NY 2008), the court sustained claims against Mr. Peller in connection with a stock option backdating scheme that benefited Mitchell Jacobson and others, finding the conduct "so egregious" that Mr. Peller's "independence in acting on behalf of the company is presumably compromised" (id. at 372). As such, the second MFW procedural safeguard is also not satisfied.

Additionally, the FAC contains other specific detailed allegations that Special Committee [*6]members Michael Kaufmann and Steven Paladino also lacked independence (id. ¶¶ 55-56). The FAC asserts that Mr. Kaufmann maintained a decades-long (i.e., over 40 years) personal and professional relationship with Mr. Peller, extending back to the 1980s when both men worked together for six years at Arthur Andersen (id. ¶ 163). That relationship, according to the FAC, was instrumental in Mr. Kaufmann's appointment to the Board.^[FN12] Mr. Kaufmann also served as CEO of Cardinal Health, a longtime customer of the Company (id. ¶ 17). As such, Mr. Kaufmann is alleged to have been controlled by and beholden to the Jacobsons.

According to the FAC, Mr. Paladino too was not independent. He had significant financial and professional ties to the Company and the Jacobsons (id. ¶¶ 55-56). For decades, Mr. Paladino served as a senior executive at Henry Schein, Inc., which was both a customer and supplier of the Company (id. ¶ 18). The FAC further alleges that both Mr. Kaufmann and Mr. Paladino served on the Board at the pleasure of the Jacobson/Gershwind family, who exercised control over whether they would be re-nominated or retained (id. ¶ 163).

Inasmuch as the second MFW procedural safeguard as alleged is also not satisfied, the transaction at issue is subject to entire fairness review and dismissal is not appropriate.

3. The FAC has detailed specific allegations that the Special Committee was not empowered to freely select its own advisors and to say no definitively (i.e., the third MFW procedural safeguard is not satisfied)

To obtain business judgment rule protection, a special committee must also have genuine authority to select its own advisors and reject the controller's proposal (MFW, 88 A3d at 645; Kahn v Lynch, 638 A2d 1110, 1121 [Del 1994]; In re Loral Space & Commc'ns Inc., 2008 WL 4293781, *23 [Del Ch Sept 19, 2008]).

According to the well-pled amended FAC, the Special Committee did not and was not free to select independent advisors and was not put in a position where it was free to reject the controller's proposal — i.e., a proposal with any premium at all. In fact, rather than engaging in genuine, arm's-length bargaining, the Special Committee started from the position that the controllers would receive a premium for the shares of 12.5%. Given the Certificate of Incorporation's provision for a one-for-one exchange of the Class B shares, this, according to the FAC, is additional evidence of a lack of independence and that the Special Committee was not empowered to say no definitively (NYSCEF Doc. No. 89 ¶ 89).

According to the FAC, the entire process was undermined by the "advisors." The lawyers were pre-selected; Kirkland & Ellis was retained before the Special Committee had been formed and was not vetted for any potential conflicts of interest (id. ¶ 58).^[FN13] Evercore, the financial advisor, was incentivized not to provide accurate financial analysis that would guide the Board in meeting its fiduciary duty of due care, but to instead, recommend a transaction that included a premium whether the premium was appropriate or not. Indeed, according to the FAC, Evercore excluded no-premium structures from consideration at the outset (NYSCEF Doc. No. 89 ¶ 62) and it did so because it was to receive a $2,000,000 "success fee" if the Special Committee requested Evercore to prepare a fairness opinion to support the Conversion, and discretionary fees payable by the Special Committee in its "sole and absolute discretion" if the Conversion was completed (id. ¶¶ 61-62).^[FN14]

Additionally, the FAC alleges that the Special Committee members understood that if the Conversion was not pushed through, they would again face re-election the following year, and the Jacobson/Gershwind family (who retained voting control) would replace them and Mr. Peller would lose his sole source of compensation such that they could not say no definitively (id. ¶ 14, 158).

Ultimately, according to the well-pled FAC, the Special Committee yielded to the controller's demands and ultimately approved an offer in the midpoint between the initial proposal made by the Jacobson/Gershwind family (35% premium) and the initial counterproposal made by the Special Committee (12.5% premium) (id. ¶ 89). Thus, inasmuch as the FAC alleges a reasonably conceivable set of facts that the third MFW procedural safeguard is not satisfied, the transaction is subject to the entire fairness standard and dismissal is not appropriate.

4. The FAC has detailed specific allegations that the Special Committee did not meet its duty of care in negotiating a fair price (i.e., the fourth MFW procedural safeguard is not satisfied)

To obtain business judgment rule protection, a special committee must also exercise due care in negotiating a fair price. The failure to conduct a diligent, informed, and conflict-free process may support an inference of gross negligence or recklessness (MFW, 88 A3d at 645; In re Baltic Trading S'holders Litig., 160 AD3d 599, 601 [1st Dept 2018]; In re Rural Metro Corp. S'holders Litig., 88 A3d 54, 90 [Del Ch 2014]). The FAC alleges specific facts as to how the Special Committee failed to meet its duty of care by recklessly engaging in a process that was grossly negligent and devoid of meaningful diligence. As discussed above, Evercore's financial incentives to promote the Conversion transaction that included a premium by diluting the minority class A shareholders' interests interfered with this process and the failure to properly [*7]vet Kirkland & Ellis did too. Additionally, the Special Committee never proposed or even properly considered a no-premium transaction, despite the Certificate of Incorporation's provision that the conversion of the Class B shares be on a one-for-one basis (NYSCEF Doc. No. 89 ¶¶ 64-68). The Special Committee ignored precedent transactions that provided a roadmap for no-premium conversion transactions under similar Certificate of Incorporation-based one-for-one conversion regimes (id.). By failing to hire non-conflicted advisors who could provide non-conflicted advice and by failing to meaningfully analyze these comparable transactions, the Special Committee deprived itself of critical context to evaluate the fairness of a proposed premium transaction at all, or specifically, why the 22.5% premium transaction which far exceeded the ten-year average of 14.6% for comparable control transactions (id. ¶ 129) was fair.^[FN15] Thus, inasmuch as the fourth MFW procedural safeguard is not satisfied, the transaction is subject to entire fairness review and dismissal is not appropriate.

5. The FAC has detailed specific allegations that the vote of the minority was not informed (i.e., the fifth MFW procedural safeguard is not satisfied)

To obtain business judgment rule protection, a vote of the minority shareholders must be fully informed. As alleged, this did not occur. Material information was omitted from or mislead the Proxy (see MFW, 88 A3d at 645; City of Sarasota Firefighters' Pension Fund v Inovalon Holdings, Inc., 319 A3d 271, 288 [Del 2024]; Morrison v Berry, 191 A3d 268, 282 [Del 2018]). More specifically, the FAC alleges that the shareholder vote was materially uninformed because the Proxy failed to disclose any reference to the Company's Certificate of Incorporation provision which provided for a one-for-one conversion for the Class B shares (NYSCEF Doc. No. 89 ¶¶ 102-124). This missing information deprived the minority shareholders of the ability to assess whether the proposed 22.5% premium was appropriate. To be clear, the FAC does not allege that the minority shareholders could not have nonetheless voted in favor of the Conversion. The FAC argues that the minority shareholders were deprived of critical material information which affected the total mix of information that they were entitled to possess when they made the decision as to whether to approve the Conversion. Additionally, according to the FAC, the Proxy also failed to adequately disclose the Special Committee's conflicts of interest and the Company's rationale for pursuing the Conversion (id. ¶¶ 103-108) at this premium price. Inasmuch as the fifth MFW procedural safeguard is not satisfied, the Conversion is subject to entire fairness review and dismissal is not warranted.

On March 12, 2025, the Plaintiff sued. The FAC alleges (i) the Conversion was a coercive and self-dealing transaction, where the Company's controlling shareholders extracted an improper $156 million windfall from the Company's minority shareholders, (ii) the transaction should be reviewed using the entire fairness standard because many of the six MFW procedural safeguards were not satisfied, (iii) the Defendants breached the Certificate of Incorporation which operates as a contract between the directors and shareholders such that the directors may be held liable for approving a transaction in violation of its terms, (iv) the Defendants breached their fiduciary duties of care and loyalty, (v) the Plaintiff's claims are direct, not derivative and [*8](vi) non-exculpated claims because the Defendants' alleged wrongdoing involved bad faith, intentional misconduct, a knowing violation of the law, actions taken for personal financial benefit, and a breach of the duty of loyalty (id. ¶¶ 38-165; Grika v McGraw, 57 NYS3d 675, *3 [Sup Ct, NY County 2016], affd sub nom L.A. Grika ex rel. McGraw, 161 AD3d 450 [1st Dept 2018]; Wietschner ex rel. JP Morgan Chase & Co. v Dimon, 139 AD3d 461, 462 [1st Dept 2016]). Even if the Plaintiff's claims are derivative, the FAC adequately alleges derivative allegations and demand futility:

144. Plaintiff believes its claims are direct class claims. However, in the alternative, Plaintiff brings this Action derivatively to redress injuries suffered by the Company as a direct result of breaches of fiduciary duty and other misconduct by the Defendants.

145. Plaintiff currently is a beneficial owner of MSC common stock and has continuously owned MSC common stock at all relevant times. Plaintiff will adequately and fairly represent the interests of MSC and its shareholders in enforcing and prosecuting their rights and have retained counsel competent and experienced.

146. Plaintiff did not make a demand on the Demand Board to investigate or initiate the claims asserted herein because demand is excused as futile.

147. Demand is excused because the Board failed to fully inform itself about the Reclassification as would be reasonably appropriate under the circumstances.

148. First, the Board failed to consider the language of the Charter itself, which prohibited an exchange of Class B for Class A shares in excess of a one-to-one conversion. A properly empowered and sufficiently independent special committee complying with its duty of care would have, at minimum, used the Charter's no-premium requirement as a starting point for negotiations. Yet across 29 meetings, not once did the Special Committee discuss the threshold question of whether a control premium was even permissible under the Charter, let alone explain why the Company's governing documents should be disregarded.

149. Second, the Special Committee did not adequately consider no-premium transactions. The Board's financial advisor, Evercore, systematically excluded no-premium precedent transactions as not "relevant," despite the Charter's prohibition on a conversion from Class B to Class A shares other than on a no-premium, one-to-one basis. That failure had a profound and negative effect on the Board's negotiating position. No-premium transactions are not merely "relevant," but the only conversions authorized under the Charter.

150. The Special Committee's failure to inform itself is particularly striking given that its first counterproposal to the controlling shareholders' 35% premium request was a 12.5% premium payable in cash—demonstrating that the Committee never seriously considered that the Charter might prohibit any premium at all. While Evercore eventually presented an analysis of no-premium cases after the first round of negotiations, that cannot cure the Special Committee's failure to ground its analysis in the Company's governing [*9]documents from the outset.

151. Even a cursory review of the Company's formation documents should have revealed the glaring flaw in the Special Committee's negotiations. But the Board doubled down on the Special Committee's error when it rubber-stamped the Reclassification. As noted above, there was no discussion of the Charter in the meeting of the full MSC Board (with controllers absent) to approve the resolutions.

152. Demand is also excused because the Reclassification was so egregious on its face that it could not have been the product of sound business judgment by the directors. Simply put, violations of clear charter provisions cannot result from valid business judgment. Nor can ignoring violations of charter provisions be the product of valid business judgment. See Plymouth Cnty. Ret. Ass'n, 576 F. Supp. 2d at 372—73; accord Melzer v. CNET Networks, Inc., 934 A.2d 912, 914— 15 (Del. Ch. 2007) ("[T]o the extent a director knowingly backdated a stock option in violation of the company's charter, that director's action is ultra vires and is not the product of valid business judgment."). See also, e.g., Garfield v. Allen, 277 A.3d 296, 331 (Del. Ch. 2022) ("Delaware precedent makes clear that when the allegations of a complaint support a reasonable inference that a fiduciary violated a plain and unambiguous restriction on the fiduciary's authority, then the plaintiff has asserted a claim for a breach of the fiduciary duty of loyalty that rebuts the protections of the business judgment rule.").

153. The Charter unambiguously prohibited a conversion of Class B shares to Class A shares except on a one-to-one basis with no premium, yet the Board never seriously considered that prohibition.

154. Despite this clear charter prohibition, the Board instead began negotiations assuming a premium, and eventually approved a Reclassification that provided the Jacobson/Gershwind Family with a 22.5% premium—millions of dollars in additional Class A shares beyond what the Charter permitted. This was not a business judgment call subject to the business judgment rule; it was a direct violation of the Company's governing documents.

155. Alternatively, demand is excused because a majority of the Board—six of nine directors—was interested in the transaction. Under New York law, a director is "interested" either through direct self-interest in the transaction or through a loss of independence due to control by an interested party. Marx v. Akers, 666 N.E.2d 1034, 1041 (NY 1996). The "question of independence turns on whether a director is, for any substantial reason, incapable of making a decision with only the best interests of the corporation in mind." In re Oracle Corp. Derivative Litig., 824 A.2d 917, 938 (Del. Ch. 2003).

156. Mitchell Jacobson and Gershwind (individually and as part of the Jacobson/Gershwind Family) were directly interested because they each received a material benefit from the Reclassification: it enabled them to convert their Class B shares [*10]to Class A shares at 22.5% premium, which granted them millions of dollars' worth of additional Class A shares than the Charter permitted.

157. The Jacobson/Gershwind Family controlled a supermajority of the voting power. And time and again, the Jacobson/Gershwind Family exercised its supermajority voting power to handpick its desired candidates to the Board, assure that those candidates secured the necessary votes, and re-elect to the Board its preferred slate of candidates. Once elected, those same candidates then served side-by-side with Mitchell Jacobson and Gershwind—to whom they owed their board seats.

158. The controllers' suggestion to the rest of the Board that if the Reclassification could not be rammed through, they would return to the "status quo" pays mere lip-service to the actual state of affairs. Those same Board members would again be up for re-election the following year, and the Jacobson/Gershwind Family would retain the requisite voting power to replace them at will. That pressure alone—i.e., the implicit threat that opposing the controllers' wishes today could mean losing one's board position tomorrow—compromises any director's independence. Directors including Peller and Goeser, who depended on MSC director fees as their only publicly reported compensation or ongoing connection to the business world, faced an impossibly conflicted choice: accede to the controllers' demands or risk termination by the very people they were supposed to oversee. This structural coercion rendered any purported "negotiation" a charade.

159. The directors' ability to receive unvested options also depended on maintaining the Jacobson/Gershwind Family's favor, further compromising their independence. By way of example, in 2022, the non-controller directors received roughly half of their compensation in restricted stock units worth $125,000: the first 50% vested on the first anniversary of the grant, and the remaining tranche was to vest on the second anniversary. Each of the purportedly independent directors had unvested stock options at the time the Special Committee was negotiating the Reclassification and all directors voted on it. Because directors must remain with MSC to vest these options (absent death, disability, or retirement), the requirement that they stay in the Jacobson/Gershwind Family's good graces to secure their unvested compensation created yet another layer of structural dependence that fatally undermined any claim of independence.

160. Peller, Goeser, and Kaufmann's independence was compromised for several additional reasons.

161. Peller's excessively long tenure on the Board—nearly 25 years under Jacobson/Gershwind control, 17 years of which he served as lead independent director—has compromised his ability to act independently from the controlling family. Peller has earned millions of dollars as an MSC director and relied on his MSC directorship as his only publicly disclosed income for the past 13 years, making him financially dependent on the very controllers he was supposed to oversee. Peller also has decades-long personal and professional relationships with members of the [*11]Jacobson/Gershwind Family. And a federal court has already found Peller committed conduct to benefit Mitchell Jacobson that was "so egregious" that his "independence in acting on behalf of the company is presumably compromised." Plymouth Cnty. Ret. Ass'n, 576 F. Supp. 2d at 372. And that was relatively early in his Board tenure. It is inferable that Peller's allegiance to the Jacobson/Gershwind Family has only hardened in the nearly two decades since.

162. Goeser similarly lacks independence from the Jacobson/Gershwind Family. Goeser served as an MSC director for 16 years—well beyond the tenure that proxy advisors consider compromising to director independence. She has earned nearly $3.5 million from her directorship, and has relied on her MSC directorship as her only source of publicly disclosed income for the past 6 years. Through her positions at Siemens AG, PPL, and Watts Water, Goeser also has a longstanding and ongoing business relationship with MSC and the Jacobson/Gershwind Family, which predates her time on the Board.

163. Kaufmann lacks independence due to his appointment to the Board through his decades-long relationship with Peller, who himself lacks independence from the Jacobson/Gershwind Family. Kaufmann worked with Peller for six years at Arthur Andersen, and this relationship was instrumental in his Board appointment. And both Kaufmann and Paladino likewise lacked independence because the Jacobson/Gershwind Family controlled whether they would continue in their board seats, even while they were specifically charged with representing minority shareholders' interests during the Reclassification negotiations—creating an inherent conflict between their duty to minority shareholders and dependence on the controllers for their position.

164. The Director Defendants' conduct reflects their "controlled mindset" that prioritized the Jacobson/Gershwind Family's interests over those of MSC's minority shareholders, and accepted artificial limitations dictated by the controllers, including systematically excluding no-premium alternatives and never questioning whether any premium was permissible under the Charter.

165. The Director Defendants' actions constitute a breach of loyalty. By allowing the Jacobson/Gershwind Family to control the negotiation parameters from the outset, the directors abdicated their duty to act as independent fiduciaries for minority shareholders and knowingly labored under the false pretense of arm's-length bargaining. Their willingness to repeatedly capitulate to the controllers' escalating demands instead of using their superior leverage through the Charter's prohibition on premiums, or create additional leverage, reflects conscious disregard for their duty of loyalty. The reason that the Director Defendants abdicated their duty is clear enough: they were beholden to a controller who appointed them to the Board.

A party may move to dismiss one or more causes of action pursuant to CPLR 3211(a)(1), (3), and (7). CPLR 3211(a)(1) requires dismissal where documentary evidence "conclusively establishes a defense to the claims as a matter of law" (Gawrych v Astoria Fed. Sav. and Loan, 148 AD3d 681, 682 [2d Dept 2017]). Pursuant to CPLR § 3211(a)(3), dismissal may be justified if a party lacks the legal capacity to sue. Pursuant to CPLR § 3211(a)(7), the court must afford the pleadings a liberal construction and accept the facts alleged in the complaint as true, according the plaintiff the benefit of every favorable inference (Leon v Martinez, 84 NY2d 83, 87—88 [1994]). The court's inquiry on a motion to dismiss is whether the facts alleged fit within any cognizable legal theory (id.). Bare legal conclusions are not accorded favorable inferences, however, and need not be accepted as true (Biondi v Beekman Hill House Apt. Corp., 257 AD2d 76, 81 [1st Dept 1999]).

In their motions to dismiss (Mtn. Seq. Nos. 008-010), the Defendants argue that (i) the Conversion complied with the MFW procedural safeguards, (ii) the Plaintiff lacks standing, (iii) the FAC fails to state a claim for breach of the Certificate of Incorporation, (iv) the FAC fails to allege a breach of the fiduciary duty of disclosure, and (v) the FAC fails to allege a non-exculpated claim. The arguments all fail.

As discussed above, the FAC sets forth very specific detailed allegations that provide a conceivable basis as to how many of the MFW procedural safeguards are not satisfied. For starters, as discussed above, Mitchell Jacobson did not "self-disable before the start of substantive economic negotiations" (see Synutra, 195 A3d at 763). Quite the contrary, according to the FAC, Mitchell Jacobson did not even approach the Board directly. Instead, he approached his longtime friend and Board ally Mr. Peller whom he had known for decades. The FAC alleges that they schemed together to effectuate the Conversion transaction at a premium by diluting the minority class A shareholders' interests as opposed to a conversion on a one-for-one ratio that is provided for in the Certificate of Incorporation and to disempower the Board from conducting appropriate due diligence which should have included proper consideration of one-for-one conversion ratio transactions (id. ¶¶ 45-50, 69-99). As discussed more completely above, the controllers thus did not condition the procession of the transaction from inception on the approval of a special committee and a majority of the minority stockholders (see Kenneth Cole, 27 NY3d at 277, quoting MFW, 88 A3d at 644; Synutra, 195 A3d at 763-764; Olenik, 208 A3d at 707).

Second, and as discussed above, the Special Committee was not independent (see In re Cadus Corp., 189 AD3d at 437). To adequately plead a lack of independence, a plaintiff must allege facts supporting a reasonable inference that a majority of the committee members were "sufficiently loyal to, beholden to, or otherwise influenced by an interested party" such that their ability to exercise independent judgment was undermined (id.). A director's close personal relationship with a controller, joint attendance at charitable events, long board tenure subject to the controller's control, or significant compensation from the controller may reasonably call independence into question (In re BGC Partners, Inc., 2019 WL 4745121, *11—12; Voigt, 2020 WL 614999, *14). The question is not whether any single allegation suffices, but whether the alleged evidence, "taken as a whole," plausibly establishes that a director is compromised (M+J Savitt, Inc. v Savitt, 2009 WL 691278, *6 [SD NY Mar 17, 2009] [applying New York law]; accord F5 Cap. v Pappas, 856 F3d 61, 83 [2d Cir. 2017] ["[T]he court must 'consider all the particularized facts pled by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other'"], quoting Del. Cnty. Emps. [*12]Ret. Fund v Sanchez, 124 A3d 1017, 1019 [Del 2015] [applying Delaware law]). A director is considered "interested" in a transaction when (i) the director has a personal financial interest in the transaction, or (ii) the director's independence is compromised by the control or influence of an interested party (In re Comverse Tech. Inc., 56 AD3d 49, 55 [2008]).

As discussed above, the FAC adequately alleges that a majority of the Special Committee members were not independent. Mr. Peller is alleged to have been completely beholden to Sidney and Mitchell Jacobson. He had previously served as the Company's auditor while a partner at Arthur Andersen and relied on the Jacobsons as a key client. When he left the firm, the Jacobsons placed him on the Board, where he served with them for approximately 25 years — three times the average tenure of directors of S&P 500 companies and well beyond what leading governance authorities deem acceptable.^[FN16] Mr. Peller's sole disclosed source of income for the past 13 years was his Board compensation, and the Company has paid him approximately $5 million over the course of his tenure (NYSCEF Doc. No. 89 ¶¶ 14, 52). The FAC further alleges extensive personal and charitable connections, as Mitchell Jacobson donated to the Tisch MS Research Center, where Mr. Peller served on the board, and Mr. Peller regularly donated to the Sid Jacobson Jewish Community Center, founded by Sidney Jacobson and where Mitchell Jacobson and his wife long served as board members or honorary board members (id. ¶ 13).^[FN17] The Court also notes that Mr. Peller's independence from the Jacobsons has been questioned before. In a case captioned Plymouth County Retirement Assn. v Schroeder, 576 F Supp 2d 360 (ED NY 2008), the court sustained claims against Mr. Peller arising from a stock option backdating scheme benefitting Mitchell Jacobson (id. at 372). Given that Mr. Peller was the Chairman of the Special Committee, and that he is alleged to have schemed with Mitchell Jacobson to have poisoned the proper review of Mitchell Jacobson's proposal by agreeing to pre-selected lawyers, and incentivizing the financial advisor Evercore to recommend a transaction which included a premium and to exclude from its analysis precedent transactions without a premium as the Certificate of Incorporation provides for, this alone sufficiently sets forth a reasonably conceivable set of facts requiring that the transaction be subject to entire fairness review based on the Special Committee's lack of independence. But the FAC alleges more.

The FAC further alleges that the other two Special Committee members, Mr. Kaufmann and Mr. Paladino also lacked independence. Mr. Kaufmann maintained a decades-long personal and professional relationship with Mr. Peller, dating back to the 1980s, when they worked [*13]together for six years at Arthur Andersen. That relationship, according to the FAC, was instrumental in Mr. Kaufmann's appointment to the Board. Mr. Kaufmann also served as CEO of Cardinal Health, a longstanding customer of the Company, creating an additional financial dependency that further compromised his ability to act independently of the Jacobsons.

Similarly, the FAC alleges that Mr. Paladino had significant financial and professional ties to the Company and the controlling family. For decades, he served as a senior executive at Henry Schein, Inc., a customer and supplier of the Company. Both Mr. Kaufmann and Mr. Paladino allegedly served on the Board at the pleasure of the Jacobson/Gershwind family, who controlled whether they would be re-nominated or retained. Such dependency on the controllers for continued appointment or compensation is a well-recognized basis for finding a lack of independence (see In re BGC Partners, Inc., 2019 WL 4745121, *11—12; Voigt, 2020 WL 614999, *14).

Taken together, these allegations support more than a strong inference that the Special Committee members were not independent but instead were "sufficiently loyal to, beholden to, or otherwise influenced by" the Jacobsons such that their ability to exercise independent judgment was undermined (see In re Cadus Corp., 189 AD3d at 437). Accordingly, the second MFW procedural safeguard is not satisfied, the transaction is subject to entire fairness review and deference and dismissal is not warranted.

Third, the FAC alleges specific detailed facts as to how the Special Committee was not empowered to "freely select its own advisors and to say no definitively" (see MFW, 88 A3d at 645). A special committee that merely accedes to a controller's terms or fails to exercise genuine negotiating leverage does not satisfy this requirement (Kahn, 638 A2d at 1121; Ams. Mining Corp. v Theriault, 51 A3d 1213, 1244—1249 [Del 2012]). Delaware courts have recognized that a special committee's independence and effectiveness often depend on its ability to obtain unbiased advice from its own freely chosen legal and financial advisors (Loral Space, 2008 WL 4293781, *23). This simply did not happen.

According to the FAC, rather than engaging in genuine, arms-length bargaining, the Special Committee started from the position that the controllers would receive a 12.5% premium—despite the Certificate of Incorporation providing for a one-for-one exchange of the Class B shares—demonstrating that the Special Committee was not empowered to say no definitively (NYSCEF Doc. No. 89 ¶ 89). The FAC further alleges that the Special Committee's advisors were neither independent nor freely chosen. Kirkland & Ellis was retained before the Special Committee's formation and never vetted for any potential conflict of interest (id. ¶ 58),^[FN18] and Evercore had significant financial incentives to support a premium transaction, including a $2,000,000 "success fee" and discretionary payments if the Conversion was completed (id. ¶¶ 61-62).^[FN19] The FAC also alleges that Special Committee members understood that their [*14]reappointment depended on the Jacobson/Gershwind family, whose voting control made it unlikely that they could refuse the proposal without jeopardizing their Board positions, and in Mr. Peller's case, his sole source of compensation (id. ¶ 14, 158).

Ultimately, the controllers' squeezed the Special Committee into approving a midpoint offer between the controller's initial 35% premium and its own 12.5% counterproposal (id. ¶ 89) following multiple best and final offers from the Special Committee. It is thus irrelevant that the controllers met with the Special Committee and Board 29 times to extract their 22.5% premium because the Board started without proper advisors and from the premise that a substantial 12.5% premium (almost the ten-year average of 14.6% for comparable control transactions) when as alleged there was no basis for them to start from this perspective (id. ¶ 129). Accordingly, as the third MFW procedural safeguard is not satisfied, the transaction is subject to entire fairness review and deference and dismissal is not warranted.

Fourth, the FAC alleges that the Special Committee breached its duty of care and did not negotiate a fair price (MFW, 88 A3d at 645). To establish a breach, the complaint must allege facts supporting a reasonable inference that the directors were grossly negligent or reckless (Baltic Trading, 160 AD3d at 601), which may be shown by a wide disparity between the process used and the process that would have been rational (In re TIBCO Software Inc. S'holders Litig., 2015 WL 6155894, *23 [Del Ch 2015]). Directors must also identify and consider the compensation structure and conflicts of their financial advisors, as such conflicts can undermine the fairness of the process (Rural Metro Corp., 88 A3d at 90; Gesoff v IIC Indus., Inc., 902 A2d 1130, 1150—1151 [Del Ch 2006]). Contingent fees, like the one here, can create "powerfully conflicting incentives," which can undermine a special committee's compliance with its fiduciary duties (In re Match Grp., 2022 WL 3970159, *21).

As discussed above, the FAC adequately alleges that the Special Committee did not meet its duty of care in negotiating a fair price. The FAC alleges the Special Committee's process was grossly negligent and conflicted, beginning with the selection of advisors whose incentives and conflicts undermined the Special Committee's ability to act independently based on, among other things, the contingent fee structure of the arrangement. Kirkland & Ellis was retained before the Special Committee's formation and not vetted for conflicts (NYSCEF Doc. No. 89 ¶ 58), while Evercore stood to receive a $2,000,000 "success fee" if it supported a transaction with a premium (id. ¶¶ 61—62). The Special Committee never proposed or meaningfully evaluated a no-premium transaction, despite the Certificate of Incorporation mandating a conversion of Class B shares on a one-for-one basis (id. ¶¶ 64—68), and disregarded precedent transactions that had achieved similar conversion transactions without a premium. By ignoring those comparables and relying on conflicted advisors, the Special Committee deprived itself of the information necessary to evaluate the fairness of the proposed 22.5% premium—well above the ten-year average of 14.6% for comparable control transactions (id. ¶ 129). These allegations support a reasonable inference that the Committee's process was grossly negligent and not the product of due care. Accordingly, as the fourth MFW procedural safeguard is not satisfied, the transaction is subject to entire fairness review and deference and dismissal is not warranted.

Fifth, and equally as important, the business judgment rule applies only where shareholders were apprised of all material information prior to the vote (City of Sarasota Firefighters' Pension Fund, 319 A3d at 288), and a plaintiff need only allege facts supporting a rational inference that material facts were not disclosed or that the disclosures were materially misleading (Morrison, 191 A3d at 282). Because materiality determinations are fact-intensive, [*15]courts consistently hold that such issues are not appropriate for resolution on a motion to dismiss (Malpiede v Townson, 780 A2d 1075, 1086 [Del 2001]; Panwest NCA2 Holdings LLC v Rockland NCA2 Holdings, LLC, 205 AD3d 551, 551 [1st Dept 2022]).

As discussed above, the FAC alleges that Proxy failed to disclose material information to the minority shareholders in that it did not disclose either (i) appropriate analysis of the Conversion, (ii) the rationale for why the transaction was being presented and recommended despite the Certificate of Incorporation and its one-for-one exchange provision, and (iii) the conflicts of the Special Committee, the Board and the professionals including the disclosure of the incentivized fee structure geared towards recommending the transaction (see, e.g., NYSCEF Doc. No. 89 ¶¶ 100-124). These omissions allegedly deprived minority shareholders of the ability to assess whether the 22.5% premium was appropriate. Accordingly, as the fifth MFW procedural safeguard is not satisfied, the transaction is subject to entire fairness review and deference and dismissal is not warranted.

The Defendants are not correct that they are entitled to dismissal based on their argument that the FAC does not set forth a legally cognizable basis for a breach of fiduciary duty cause of action. Among other things, and based on the facts set forth above, because the FAC alleges "a reasonably conceivable set of facts" showing that many of the six MFW procedural safeguards were not present (Kenneth Cole, 27 NY3d at 278, citing MFW, 88 A3d at 645), the complaint adequately alleges a breach of fiduciary duty.

The Defendants are also not correct that they are entitled to dismissal based on their argument that the complaint sets forth derivative claims and that demand futility is improperly alleged. As discussed below, the claims are direct claims because the harm was inflicted to the minority class A shareholders by diluting their interests and in the event that the plaintiff is successful, it is they who would recover

In determining whether a claim is direct or derivative, courts apply the two-part test articulated by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A2d 1031 (Del 2001) and adopted by New York courts in Serino v. Lipper, 123 AD3d 34 (1st Dept 2014): (1) who suffered the alleged harm (the corporation or the suing stockholders individually), and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually) (Serino, 123 AD3d at 40). A claim is direct where the harm and potential recovery belong to the stockholders individually, and derivative where both belong to the corporation. Serino further recognizes that if the alleged harm is to the individual rather than the corporation, a direct action may proceed (id.). The breach of fiduciary duty claims (the first and second cause of action) are direct claims. As alleged, it is the minority shareholders only who were injured and it is the minority shareholders, not the Company, who would recover. It is they who paid for the Conversion through the dilution of their ownership interest. The breach of fiduciary duty claim of disclosure (third cause of action) is also a direct claim for the same reasons. To wit, the alleged failure to disclose material information deprived the minority shareholders of their right to cast an informed vote on the Conversion. The breach of contract claim (fourth cause of action) is a direct claim as well. The Certificate of Incorporation is a contract between the directors and the shareholders governing the affairs of the corporation. Because the claim concerns the violation of contractual rights held by the shareholders in their individual capacity, and any recovery would flow directly to them, it is properly characterized as a direct claim.

Even if the claims were not direct, dismissal would not be appropriate because the FAC [*16]adequately alleges demand futility. Demand is excused where a complaint alleges with particularity that (i) the board failed to fully inform itself about the challenged transaction to the extent reasonably appropriate under the circumstances, (ii) a majority of the board was interested in the transaction, or (iii) the transaction was so egregious on its face that it could not have been the product of sound business judgment (Marx v Akers, 88 NY2d 189, 200—201 [1996]; Velez v Feinstein, 87 AD2d 309 [1st Dept 1982]). The test is disjunctive, meaning that satisfaction of any one prong establishes demand futility (Plymouth County Retirement Ass'n, 576 F Supp 2d at 369). Thus, if any of these procedural safeguards are met, demand is presumptively futile and need not be made (id. at 369—372).

As discussed above, the FAC sets forth specific particularized facts showing that the Board failed to fully inform itself as required by, among other things, that it did not seek to hire its own independent professional advisors without conflicts incentivized to recommend a transaction that included a substantial premium or to understand and receive appropriate financial analysis as to no premium precedent transactions so that it could properly evaluate the premium transaction demands of Mitchell Jacobson. Additionally, given the alleged lack of independence of the Special Committee and certain Board members from the controller, the process was poisoned such that the Special Committee and the Board simply were incapable of exercising independent judgment or responding to a demand such that demand futility is adequately alleged (see Plymouth County Retirement Assn. v Schroeder, 576 F Supp 2d 360, 372 [ED NY 2008]. Demand on these facts as alleged would have been entirely futile.

Finally, the Defendants are not correct that the FAC does not state a claim for breach of contract. A claim for breach of contract requires: (i) the existence of a valid contract, (ii) plaintiff performed in accordance with the contract, (iii) defendant breached its contractual obligations, and (iv) defendant's breach resulted in damages (34-06 73, LLC v Seneca Ins. Co., 39 NY3d 44, 52 [2022]). In the context of a claim for breach of a certificate of incorporation, "[t]he certificate of incorporation is subject to the usual rules of contract interpretation" (Barton v 270 St. Nicholas Ave. Hous. Dev. Fund Corp., 84 AD3d 696, 696 [1st Dept 2011]), and where the language is complete, clear, and unambiguous, it must be enforced according to its plain meaning (Quadrant Structured Prods. Co. v Vertin, 23 NY3d 549, 559—560 [2014]). As discussed above, the Certificate of Incorporation is a valid unambiguous contract, the Plaintiff is alleged to have met their obligations under the contract, the Defendants are alleged to have breached the contract which provides for a one-for-one exchange of the Jacobson/Gershwind Class B shares by breaching the express terms of the Certificate of Incorporation's conversion provision and by poisoning the process by which the minority shareholders could have voted to convert the shares at a premium and, the minority shareholders are alleged to have been damaged in the amount of $165 million. This is sufficient at this stage of the case.

Lastly, the Court notes that the Defendants are not correct that the FAC alleges exculpated claims or that they are otherwise entitled to dismissal at this stage of the lawsuit. To state a non-exculpated claim, a plaintiff must allege (i) "bad faith, intentional misconduct, a knowing violation of the law, or actions taken for personal financial benefit" (Grika v McGraw, 57 NYS3d 675, *3 [Sup Ct, NY County 2016], affd sub nom L.A. Grika ex rel. McGraw, 161 AD3d 450 [1st Dept 2018]), or (ii) a "breach of the duty of loyalty" (Wietschner ex rel. JP Morgan Chase & Co. v Dimon, 139 AD3d 461, 462 [1st Dept 2016]). As discussed above, the FAC alleges, among other things, that (i) each member acted disloyally by advancing the interests of the controlling Jacobson/Gershwind family at the expense of minority shareholders [*17](NYSCEF Doc. No. 89 ¶¶ 164-170), (ii) the Defendants knowingly approved materially misleading proxy materials, which advanced the interest of the Jacobson/Gershwind family to facilitate the approval of the Conversion (id. ¶¶ 103-124), and (iii) the Defendants also breached the Certificate of Incorporation in recommending the Conversion without having done proper due diligence and at a premium which far exceeded the ten-year average of 14.6% for comparable control transactions and without proper basis to do so (id. ¶¶ 129, 184-189). This is sufficient at this stage of the lawsuit (see Higgins v NY Stock Exch., Inc., 806 NYS.2d 339, 360 [Sup Ct NY County 2005]; Ad Hoc Comm. of Equity Holders of Tectonic Network, Inc. v Wolford, 554 F Supp 2d 538, 561 & n 161 [D Del 2008] [collecting cases] [providing that a Section 402(b) exculpatory provision may not be resolved on a motion to dismiss, as it constitutes an affirmative defense]).

The Court has considered the parties' remaining arguments and finds them unavailing.

Accordingly, it is hereby ORDERED that Defendants MSC Industrial Direct Co., Inc., Louise Goeser, Rahquel Purcell, and Rudina Seseri's motion (Mtn. Seq. No. 008) to dismiss the FAC is denied; and it is further

ORDERED that Defendants Philip Peller, Michael Kaufmann, and Steven Paladino's motion (Mtn. Seq. No. 009) to dismiss the FAC is denied; and it is further

ORDERED that the Jacobson/Gershwind family shareholders' motion (Mtn. Seq. No. 010) to dismiss the FAC is denied.