Michael Robert Marchner, Jr. v. Bryant R. Riley

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MICHAEL ROBERT MARCHNER, )
JR., derivatively on behalf of B. )
RILEY FINANCIAL, INC., a )
Delaware Corporation, )
)
Plaintiff, )
)
v. ) C.A. No. 2025-0164-LWW
)
BRYANT R. RILEY, ROBERT L. )
ANTIN, TAMARA “TAMMY” )
BRANDT, ROBERT D. )
D’AGOSTINO, THOMAS J. )
KELLEHER, RENEÉ E. LABRAN, )
RANDALL E. PAULSON, MICHAEL )
J. SHELDON, and MIRIAM “MIMI” )
K. WALTERS, )
)
Defendants, )
)
and )
)
B. RILEY FINANCIAL, INC., )
Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: December 22, 2025
Date Decided: March 30, 2025

Carmella P. Keener, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Robert
C. Finkel, Adam J. Blander, Justyn J. Millamena, WOLF POPPER LLC, New York,
New York; Counsel for Plaintiff
Raymond J. DiCamillo, Sandy Xu, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Adam S. Paris, Diane L. McGimsey, Sheeva L. Nesva,
Annabelle A. Spezia-Lindner, Tyler J. Andrews, SULLIVAN & CROMWELL LLP,
Los Angeles, California; Counsel for Nominal Defendant B. Riley Financial, Inc.
and Defendants Bryant R. Riley and Thomas J. Kelleher

Garrett B. Moritz, R. Garrett Rice, Kevin A. Rudolph, ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; Craig Varnen, GIBSON, DUNN &
CRUTCHER LLP, Los Angeles, California; Monica K. Loseman, GIBSON, DUNN
& CRUTCHER LLP, Denver, Colorado; H. Chase Weidner, GIBSON, DUNN &
CRUTCHER LLP, New York, New York; Counsel for Defendants Robert D.
D’Agostino, Robert L. Antin, Tamara Brandt, Reneé E. LaBran, Randall E. Paulson,
Michael J. Sheldon, and Miriam K. Walters

WILL, Vice Chancellor
This case presents a hindsight critique of a business decision gone awry. The

plaintiff seeks to recast an unfortunate investment as a breach of the duty of loyalty.

He does not succeed.

In 2023, B. Riley Financial, Inc. invested hundreds of millions of dollars to

facilitate the take-private acquisition of Franchise Group, Inc., an entity led by Brian

Kahn, a friend of B. Riley’s founder Bryant Riley. Months after the transaction

closed, Kahn was implicated in a massive securities fraud. The fallout was

financially devastating for B. Riley, which took significant write-downs on its

Franchise Group-related investments.

Yet the alleged fraud did not occur at B. Riley. It did not even occur at

Franchise Group. The misconduct took place at Prophecy Asset Management LP—

a third-party entity that Kahn was affiliated with, but B. Riley is not. B. Riley’s

board is nevertheless accused of ignoring “red flags” about Kahn and breaching its

fiduciary duties by approving the take-private and related loans.

The plaintiff’s theory stretches Caremark well beyond its limits. To state an

oversight claim, a plaintiff must plead that directors consciously disregarded

evidence of non-compliance with positive law within the corporation. The plaintiff

here essentially complains that the board did not uncover fraud at an outside

company before the federal government did. Nothing suggests that the board knew

about the wrongdoing at Prophecy at the time of the Franchise Group take-private.

1
Imperfect diligence on an investment that later sours is a matter of business risk, not

bad faith.

Unable to show that a majority of the board faces a substantial likelihood of

liability, the plaintiff attempts to disqualify the outside directors by arguing they are

beholden to Bryant Riley. He theorizes that the directors intentionally violated their

fiduciary duties simply to help Riley protect Kahn. In support, he relies almost

exclusively on ordinary course director compensation, stale business and personal

ties, and generic social relationships. These thin allegations are insufficient to

overcome the heavy presumption of director independence.

Because the plaintiff has failed to plead that a majority of the board is

interested or lacks independence, demand is not excused. The defendants’ motions

to dismiss under Court of Chancery Rule 23.1 are granted.

I. FACTUAL BACKGROUND

Unless otherwise noted, the following facts are drawn from the plaintiff’s

Verified Stockholder Derivative Complaint (the “Complaint”) and the documents it

incorporates by reference, or are subject to judicial notice.1

1
Verified S’holder Deriv. Compl. (Dkt. 1) (“Compl.”); see Freedman v. Adams,
2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (“When a plaintiff expressly refers to
and heavily relies upon documents in her complaint, these documents are considered to be
incorporated by reference into the complaint.” (citation omitted)); In re Books–A–Million,
Inc. S’holders Litig., 2016 WL 5874974, at *1 (Del. Ch. Oct. 10, 2016) (“This court may
consider the Proxy Statement to establish what was disclosed to stockholders and other
2
A. B. Riley and Its Board

Nominal defendant B. Riley Financial, Inc. (“B. Riley” or the “Company”) is

a Delaware corporation headquartered in Los Angeles, California.2 Founded in

1997, B. Riley provides investment banking, wealth management, and advisory

services to public and private companies, financial sponsors, and financial

institutions.3

The Company has a nine-member board of directors (the “Board”).4 During

the relevant period, the Board included two B. Riley officers—Co-Chief Executive

Officers Bryant Riley (“Riley”) and Thomas Kelleher—and seven “outside

directors.”5 The outside directors were Robert Antin, Tammy Brandt, Robert

facts that are not subject to reasonable dispute.” (citing In re Gen. Motors (Hughes)
S’holder Litig., 897 A.2d 162, 170 (Del. 2006))).
Exhibits to the Transmittal Affidavit of Sandy Xu, Esq. in Support of the Nominal
Defendant’s and Officer Defendants’ Opening Brief in Support of their Motion to Dismiss
(Dkt. 20) and to the Transmittal Affidavit of Kevin A. Rudolph in Connection with the
Outside Director Defendants’ Opening Brief in Support of their Motion to Dismiss
(Dkt. 21) are cited as “Nominal Def.’s and Officer Defs.’ Ex. __” and “Outside Defs.’ Ex.
__,” respectively. Exhibits lacking internal pagination are cited by the last three digits of
their Bates stamps. Certain exhibits were produced in response to a pre-suit books and
records demand pursuant to confidentiality agreements containing incorporation by
reference provisions. Pettry ex rel. FedEx Corp. v. Smith, 2021 WL 2644475, at *8 n.90
(Del. Ch. June 28, 2021) (explaining that “Section 220 documents[] [were] incorporated
by reference into the Complaint to the extent [they] directly dispute[d] [p]laintiff’s
conclusory assertion[s]”), aff’d, 273 A.2d 750 (Del. 2022).
2
Compl. ¶ 48.
3
Id. ¶ 1.
4
Id. ¶ 29.
5
Id. ¶¶ 49, 57. Bryant Riley is also the Chairman of the Company. Id.

3
D’Agostino, Reneé LaBran, Randall Paulson, Michael Sheldon, and Miriam

Walters.6

B. B. Riley’s Relationship with FRG

B. Riley had a lucrative, years-long relationship with Franchise Group, Inc.

(“FRG”)—a publicly-traded operator of franchise businesses, including Sylvan

Learning, The Vitamin Shoppe, and Pet Supplies Plus. 7 FRG was founded in

August 2018 by Brian Kahn, a private equity investor.8

From 2018 to 2023, B. Riley advised on or financed several FRG transactions,

including underwriting FRG’s 2018 initial public offering and advising Kahn’s firm,

Vintage Capital Management LLC, on portfolio acquisitions.9 B. Riley also made

significant loans to Kahn and his affiliates.10

In 2021, B. Riley assisted with FRG’s acquisition of W.S. Badcock

Corporation, a home furnishings company.11 B. Riley and its affiliates acquired

6
Id. ¶¶ 58-64.
7
Nominal Def.’s and Officer Defs.’ Ex. 4 (Franchise Gp., Inc., Form 10-K) 7;
Compl. ¶¶ 70, 73.
8
Compl. ¶ 73. Vintage Capital Management LLC, a private equity firm founded by Kahn,
merged FRG’s predecessor with Liberty Tax, Inc., a publicly traded company. Id.
9
Id. ¶¶ 73, 77.
10
Nominal Def.’s and Officer Defs.’ Ex. 2 (Form 10-K, B. Riley Fin., Inc., for fiscal year
ending December 31, 2023) (“B. Riley 2023 Form 10-K”) 5, 160; see also
Compl. ¶¶ 219, 224 (alleging the loans were thinly collateralized).
11
Compl. ¶ 82.

4
Badcock’s consumer credit receivables. 12 By early 2023, B. Riley representatives

told FRG that “[B. Riley] would prefer to explore the acquisition of all of the

outstanding equity of FRG, rather than expose itself to continued balance sheet risk

without any equity or similar upside.”13

C. The FRG Take-Private

In March 2023, B. Riley proposed taking FRG private at $30 per share.14 FRG

established a special committee to evaluate the offer, and the committee retained

outside legal counsel and a financial advisor.15

During due diligence in April 2023, FRG’s management and advisors updated

FRG’s financial projections to reflect significant economic headwinds.16

Acknowledging these issues, B. Riley refused to increase its $30 per share offer but

proceeded with the transaction.17 It agreed that Kahn would control the surviving

company.18

12
Id. ¶¶ 86-87.
13
Id. ¶ 104 (citing Nominal Def.’s and Officer Defs.’ Ex. 6 (Schedule 14A, Definitive
Proxy Statement, Franchise Gp., Inc.) (“FRG Proxy”) 21).
14
Id. ¶ 109.
15
Id. ¶¶ 119-21.
16
Id. ¶¶ 121-22.
17
Id. ¶¶ 125-27.
18
Id. ¶ 130.
5
On May 5, FRG uploaded updated projections to a virtual data room that was

shared with B. Riley. The projections reflected a nearly 30% decrease in FRG’s

2023 EBITDA and a “significant decline” in operating performance.19

Three days later, on May 8, B. Riley’s Board met to consider the

take-private.20 Co-CEO Riley gave a presentation based on stale January 2023 FRG

projections, which allegedly concealed FRG’s deteriorating financial condition.21

Director Paulson—who had participated in the Company’s deal team meetings with

FRG—did not mention the May 5 projections.22 The Board meeting lasted just over

an hour, and no formal vote was taken.23 The next day, on May 9, the Board

approved B. Riley’s participation in the transaction by unanimous written consent.24

On May 10, FRG announced the $2.6 billion take-private transaction in which

B. Riley and a private equity partner would acquire 64% of FRG’s outstanding

common stock at $30 per share.25 The same day, FRG disclosed disappointing first-

19
Id. ¶¶ 131, 133-34.
20
Compl. ¶¶ 135-36; Nominal Def.’s and Officer Defs.’ Ex. 7 (Minutes of the Meeting of
the Board of Directors of B. Riley Fin., Inc., dated May 8, 2023).
21
Compl. ¶¶ 136-42.
22
Id. ¶¶ 164, 166; see id. ¶ 169 (alleging that Paulson “presumptively had knowledge that
[the presentation] was stale and misleading”).
23
Id. ¶ 156.
24
Id. ¶ 157.
25
Id. ¶¶ 172-73.
6
quarter operating results and withdrew its forecast for 2023.26 The announcements

were allegedly coordinated to prevent FRG’s stock price from “plummet[ing].” 27

The take-private closed in August 2023.28 B. Riley committed $216.5 million

in equity to FRG’s new parent entity.29 Simultaneous with closing, B. Riley and

Vintage rolled up pre-existing loans into a single note with an aggregate principal

amount of approximately $201 million, bearing interest at 12% annually and

maturing on December 31, 2027.30

D. Post-Closing Headwinds and Disclosures

Although FRG ceased reporting as a public company after the take-private, it

retained public debt.31 Rating agencies soon downgraded FRG’s debt due to its poor

operating results and additional debt incurred from the transaction.32 The plaintiff

alleges that these downgrades “dramatic[ally] impact[ed]” the value of B. Riley

common stock and were a “red flag” that should have made Board members rethink

the take-private.33

26
Id. ¶¶ 176-79, 187.
27
Id. ¶ 188.
28
Id. ¶ 201.
29
Id. ¶ 204.
30
B. Riley 2023 Form 10-K at 106.
31
Compl. ¶ 209.
32
Id. ¶ 210.
33
Id. ¶¶ 211, 213-15, 218.
7
In December 2023, B. Riley first publicly disclosed its $200.5 million loan to

Vintage.34 That same month, home goods retailer Conn’s Inc. acquired Badcock

from FRG for preferred stock valued at $70 million.35 To finance the acquisition, B.

Riley made a $108 million term loan to Conn’s.36 This further investment was wiped

out when Conn’s filed for bankruptcy in July 2024. 37

E. Kahn’s Fraud and B. Riley’s Fallout

On November 2, 2023, John Hughes—the co-founder of Prophecy Asset

Management LP—pled guilty to a criminal conspiracy charge for hiding losses of

$294 million from investors. 38 The Securities and Exchange Commission (SEC)

filed a parallel complaint.39 Kahn was soon described as a co-conspirator by the

media.40

34
Id. ¶ 219.
35
Id. ¶ 286.
36
Nominal Def.’s and Officer Defs.’ Ex. 9 (B. Riley Fin. Investor Overview, dated
Dec. 13, 2023) 63.
37
Compl. ¶ 292.
38
Id. ¶¶ 232-33.
39
Id. ¶ 238; see SEC v. Hughes, No. 3:23-cv-21816 (D.N.J. Nov. 2, 2023); see also
Landesbank Baden-Wurttemberg v. Walton Seattle Mezz Hldgs. VI-B, L.L.C.,
2013 WL 1286192, at *5 n.8 (Del. Ch. Apr. 1, 2013) (explaining that the court “may take
judicial notice of publicly available judicial filings in a related action pending in another
jurisdiction”).
40
Compl. ¶ 233.
8
The SEC’s complaint alleged that Kahn controlled $1 billion of Prophecy’s

leveraged capital and that the scheme touched several transactions involving B.

Riley.41 To conceal losses, Kahn allegedly pledged nearly $200 million in shares of

a publicly traded company to a Prophecy affiliate. 42

The plaintiff here believes that earlier lawsuits in 2020 to 2022 about similar

conduct “should have raised red flags to B. Riley and its Board about whether to

continue to transact with Kahn.”43

On a November 8 earnings call, Riley defended Kahn, stating he had “no

direct experience with what ha[d] been alleged” and that Kahn’s denial of any

involvement was “good enough for [Riley].”44 Media reports began scrutinizing the

close ties between Kahn and B. Riley.45 B. Riley soon received subpoenas regarding

its relationship with Kahn. 46

41
Id. ¶ 243.
42
Id. ¶ 240.
43
Id. ¶¶ 251, 258.
44
Id. ¶ 253.
45
Id. ¶ 257 (citing Jonathan Weil, How an Unremarkable Deal Became a Big Threat to a
Small Investment Bank, Wall St. J. (Feb. 12, 2024)); see also id. ¶¶ 254-56.
46
Id. ¶¶ 347, 358.

9
F. B. Riley’s Investigation and FRG’s Bankruptcy

On December 18, 2023, the B. Riley Board met to discuss the Prophecy

fallout.47 The Audit Committee—Paulson, D’Agostino, and LaBran—took the

lead in designing a review process.48 The Audit Committee retained the Company’s

existing outside counsel, Sullivan & Cromwell LLP, to help it assess B. Riley’s

relationship with Kahn and his associates.49

On February 19, 2024, Sullivan & Cromwell reported to the Board that it

found no evidence of misconduct by B. Riley personnel or knowledge of the

fraudulent activities at Prophecy before the November 2023 take-private

announcement. 50 The plaintiff alleges that using pre-existing Company counsel

“ensured that [the findings] would exonerate” B. Riley.51 Nevertheless, B. Riley,

with the Board’s blessing, issued a press release detailing its findings.52

47
Id. ¶¶ 275-78; see also Outside Defs.’ Ex. 3 (B. Riley Board of Director Meeting
Minutes, dated Dec. 18, 2023).
48
Compl. ¶¶ 60-62, 280.
49
Id. ¶ 280.
50
Nominal Def.’s and Officer Defs.’ Ex. 10 (Minutes of Meeting of the Board of Directors
of B. Riley Fin., Inc., dated Feb. 19, 2024); see Compl. ¶¶ 294-95.
51
Compl. ¶ 285.
52
Id. ¶¶ 299-300.

10
Soon after, B. Riley’s auditor “expressed concerns about using existing

Company counsel . . . for the review.”53 As a result, the Audit Committee retained

an independent law firm, Winston & Strawn LLP, to perform an investigation.54 In

mid-March, Paulson reported to the Board that Winston & Strawn’s investigation

was complete and “did not uncover a single badge of fraud” by B. Riley.55 B. Riley

disclosed these findings in an April 2024 Form 8-K.56

The plaintiff questions Winston & Strawn’s independence based on prior

engagements for B. Riley portfolio companies and a 2019 conference sponsorship. 57

He also criticizes Paulson’s role in leading the investigations as Audit Committee

Chair given his involvement in the FRG take-private negotiations.58

Meanwhile, FRG’s financial performance declined. In May 2024, B. Riley

reported a net loss of $51 million during the first quarter of the year, which it partly

attributed to FRG.59 FRG filed for bankruptcy in November 2024.60 B. Riley

53
Id. ¶ 306.
54
Id. ¶ 309; id. ¶¶ 308-09; Outside Defs.’ Ex. 5 (B. Riley Board of Directors Meeting
Minutes, dated Feb. 28, 2024).
55
Compl. ¶¶ 320, 324.
56
Id. ¶¶ 330-31.
57
Id. ¶¶ 333-34.
58
Id. ¶ 329.
59
Id. ¶¶ 343, 345.
60
Id. ¶ 352.

11
ultimately took approximately $490 million in write-downs for the failed FRG

investment.61

G. The Federal Securities Litigation

In January 2024, B. Riley stockholders filed a securities class action in the

United States District Court for the Central District of California.62 Their complaint

alleged that B. Riley, Riley, and Kelleher made materially false and misleading

public statements by failing to disclose Kahn’s involvement in the Prophecy

conspiracy.63

In December 2025, the federal court largely denied a motion to dismiss,

sustaining certain claims against the Company and Riley. 64

H. This Litigation

On February 14, 2025, plaintiff Michael Robert Marchner filed this derivative

action after obtaining Company books and records under 8 Del. C. § 220.65 The

Complaint advances four counts for breach of fiduciary duty against Riley (Count I),

Kelleher (Count II), the Audit Committee (Count III), and the remaining members

61
Id. ¶ 353.
62
Id. ¶ 359; In re B. Riley Fin., Inc. Sec. Litig., 2:24-cv-00662-SPG-AJR (C.D. Cal.).
63
Compl. ¶ 360.
64
Pl.’s Letter Regarding Suppl. Authority (Dkt. 50) Ex. A.
65
Dkt. 1; Compl. ¶ 370.

12
of the Board (Count IV).66 The claims allege failed oversight, material

misstatements and omissions, corporate waste, and bad faith.67

The defendants moved to dismiss the Complaint on May 1, 2025.68 After

briefing was complete,69 oral argument was presented on December 11.70 The

federal court’s motion to dismiss ruling prompted the plaintiff to file a supplemental

submission on December 17, which the defendants responded to on December 22. 71

The motions to dismiss were then taken under advisement.

II. LEGAL ANALYSIS

The defendants moved to dismiss the Complaint under Court of Chancery

Rule 23.1 for failure to plead demand excusal and under Rule 12(b)(6) for failure to

state a claim upon which relief can be granted.72 The Rule 23.1 motions are

66
Compl. ¶¶ 489-512.
67
Id. ¶¶ 149, 448, 504 (oversight); id. ¶¶ 493, 449 (misstatements);
id. ¶¶ 494, 497, 500, 503, 510 (corporate waste); id ¶¶ 416, 491-92, 497-98 (disloyalty or
bad faith).
68
Opening Br. in Supp. of Nominal Def. B. Riley Financial, Inc. and Defs. Bryant R. Riley
and Thomas J. Kelleher’s Mot. to Dismiss (Dkt. 20) (“B. Riley Defs.’ Opening Br.”);
Outside Director Defs.’ Opening Br. in Supp. of Mot. to Dismiss (Dkt. 21) (“Outside
Directors Defs.’ Opening Br.”).
69
Pls.’ Answering Br. in Opp’n to Defs.’ Mots. to Dismiss (Dkt. 27) (“Pls.’ Answering
Br.”); Reply Br. in Supp. of Defs.’ Mot. to Dismiss (Dkt. 32); Defs.’ Reply Br. in Supp. of
Mot. to Dismiss (Dkt. 34).
70
Dkt. 54.
71
Dkts. 50, 52.
72
B. Riley Defs.’ Opening Br. 17, 52, 63; Outside Directors Defs.’ Opening Br. 9, 29.

13
dispositive.73 The plaintiff did not make a demand on the Board and has not

adequately pleaded that doing so would have been futile.74

Under Rule 23.1, a stockholder who files derivative claims must “state with

particularity . . . [the] effort[s] by the derivative plaintiff to obtain the desired action

from the entity” and “the reasons for not obtaining the action or not making the

effort[.]”75 The plaintiff need not make a demand where doing so would be futile.

“Rule 23.1 requires that a plaintiff who asserts demand futility must ‘comply with

stringent requirements of factual particularity that differ substantially from the

permissive notice pleadings governed solely by Rule 8(a).’”76

A. Demand Futility

In determining whether a pre-suit demand is futile, the court “is confined to

the well-pleaded allegations in the Complaint, the documents incorporated into the

73
Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) (“[T]he requirement[s] of Chancery
Court Rule 23.1 exist[] at the threshold to prevent abuse and to promote intracorporate
dispute resolution.”), overruled on other grounds by, Brehm v. Eisner, 746 A.2d 244
(Del. 2000).
74
Compl. ¶ 410 (arguing that demand was futile).
75
Ct. Ch. R. 23.1; see Brehm, 746 A.2d at 254 (“Rule 23.1 is not satisfied by conclusory
statements or mere notice pleading.”).
76
In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 985 (Del. Ch. 2007) (citation
omitted).
14
Complaint by reference, and facts subject to judicial notice.” 77 The facts are

evaluated “in their totality,” and all reasonable inferences are drawn in favor of the

plaintiff.78 The court will reject “conclusory allegations” or “inferences that are not

objectively reasonable[.]”79

Under United Food & Commercial Workers Union v. Zuckerberg, the court

must consider:

(i) whether the director received a material personal benefit from the
alleged misconduct that is the subject of the litigation demand;

(ii) whether the director faces a substantial likelihood of liability on
any of the claims that are the subject of the litigation demand;
and

(iii) whether the director lacks independence from someone who
received a material personal benefit from the alleged misconduct
that is the subject of the litigation demand or who would face a
substantial likelihood of liability on any of the claims that are the
subject of the litigation demand.80

77
In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632, at *4 (Del. Ch. Dec. 15, 2021)
(citing White v. Panic, 783 A.2d 543, 546-47 (Del. 2001)), aff’d, 282 A.3d 1054
(Del. 2022) (TABLE).
78
Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015).
79
In re GoPro, Inc., 2020 WL 2036602, at *8 (Del. Ch. Apr. 28, 2020).
80
United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State
Pension Fund v. Zuckerberg, 262 A.3d 1034, 1058 (Del. 2021).
15
This inquiry is done on a “director-by-director” basis.81 “If the answer to any of the

questions is ‘yes’ for at least half of the members of the demand board, then demand

is excused as futile.”82

At the time this suit was filed, the Board consisted of the same nine members

in place during the relevant events: Riley, Kelleher, Antin, Brandt, D’Agostino,

LaBran, Paulson, Sheldon, and Walters. 83 The defendants do not contest the

plaintiff’s allegations that Riley, Kelleher, and Antin lack independence and

disinterestedness for purposes of the demand futility analysis.84 Thus, to excuse

demand, the plaintiff must successfully challenge the impartiality of at least two

other Board members.85 He has not done so.

The first Zuckerberg prong, which considers whether a director received a

material personal benefit from the alleged misconduct, is not at issue.86 The plaintiff

only makes passing references to compensation received by the directors in the

81
Khanna v. McMinn, 2006 WL 1388744, at *14 (Del. Ch. May 9, 2006); Desimone v.
Barrows, 924 A.2d 908, 943 (Del. Ch. 2007) (explaining that a plaintiff must “plead facts
specific to each director”).
82
Zuckerberg, 262 A.3d at 1059.
83
Compl. ¶¶ 49-64.
84
B. Riley Defs.’ Opening Br. 40 & n.13; Tr. of Oral Arg. on Defs.’ Mots. to Dismiss
(Dkt. 53) (“Hr’g Tr.”) 42.
85
Zuckerberg, 262 A.3d at 1059.
86
Id. The plaintiff also raised the directors’ compensation as impugning their
independence from Riley, which I address below. See infra Section II.A.2.
16
ordinary course.87 “[U]nder Delaware law, the receipt of customary directors’ fees

does not suggest a conflict of interest, the rationale being that, if it did, every director

who receives a director’s fee would be deemed biased.”88 The plaintiff instead

focuses on the second and third Zuckerberg prongs.89 My analysis proceeds

accordingly.

As explained below, the plaintiff did not plead particularized facts putting in

doubt that five of the six contested directors—Brandt, D’Agostino, LaBran, Sheldon,

and Walters—are independent and disinterested. I first evaluate whether those

directors face a substantial likelihood of liability under the second Zuckerberg prong,

before turning to their independence under the third. I conclude that a majority of

those five directors could impartially consider a demand and decline to evaluate the

independence of the sixth director, Paulson.

1. Substantial Likelihood of Liability

The defendants do not contest that Riley, Kelleher, and Antin are disabled for

demand futility purposes. Thus, I limit my analysis under the second Zuckerberg

87
Compl. ¶¶ 58-64.
88
In re Nat’l Auto Credit, Inc. S’holders Litig., 2003 WL 139768, at *10 (Del. Ch.
Jan. 10, 2003); see also Robotti & Co., LLC v. Liddell, 2010 WL 157474, at *14 (Del. Ch.
Jan. 14, 2010) (explaining that ordinary course compensation for one’s service as a
director, “standing alone, cannot be the basis for asserting a lack of independence”).
89
Compl. ¶¶ 36-37, 39-45.

17
prong to the five outside directors necessary to constitute a Board majority: Brandt,

D’Agostino, LaBran, Sheldon, and Walters (the “Demand Majority”).

“Directors are unable to impartially consider a demand if they face a

substantial likelihood of personal liability on the claims asserted.”90 The plaintiff

seeks to meet this burden by claiming that the Demand Majority (1) failed in their

duties to oversee B. Riley’s business and affairs, and (2) made materially false and

misleading disclosures. 91 Because B. Riley’s certificate of incorporation exculpates

its directors from personal liability under 8 Del. C. § 102(b)(7), the plaintiff must

90
Central Laborers’ Pension Fund v. Karp, 349 A.3d 1165, 1183 (Del. Ch. 2025)
(explaining that, to establish a substantial likelihood of liability at the pleading stage, a
plaintiff must “make a threshold showing, through the allegation of particularized facts,
that their claims ha[ve] some merit” (quoting Rales v. Blasband, 634 A.2d 927, 934
(Del. 1993))); see also Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984) (“The [c]ourt . . .
in the exercise of its sound discretion must be satisfied that a plaintiff has alleged facts with
particularity which, taken as true, support a reasonable doubt that the challenged
transaction was the product of a valid exercise of business judgment. Only in that context
is demand excused.”).
91
The Complaint suggests four theories of non-exculpated liability: breach of the duty of
oversight under Caremark, the making of material misstatements or omissions, corporate
waste, and bad faith. Compl. ¶¶ 448, 504 (Caremark); id. ¶¶ 493, 499 (misstatements);
id. ¶¶ 494, 497, 500 (waste); id. ¶¶ 416, 491-92, 497-98 (bad faith). At oral argument,
however, the plaintiff’s counsel clarified that the disclosure theories are “encompassed
within Caremark,” while making no attempt to advance the waste and bad faith theories.
Hr’g Tr. 56-57 (The Court: “So your theory of liability for the board on substantial
likelihood of liability prong is Caremark prong one or Caremark prong two? . . . That’s
it?” Counsel: “Yes.”). For completeness, I address both the oversight and disclosure
theories on the merits and treat the remaining theories as abandoned or folded into
Caremark. Regardless, any freestanding waste claim would fail. The challenged
transactions—including the FRG take-private and the associated loans—involved
substantial consideration and do not represent an exchange “so one sided that no business
person of ordinary, sound judgment could conclude that the corporation has received
adequate consideration.” Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993).
18
plead particularized facts supporting a reasonable inference that the Demand

Majority acted disloyally or in bad faith.92 He has not done so.

a. The Oversight Allegations

First, the plaintiff claims that the Demand Majority failed in its duties of

oversight. As Chancellor Allen explained in Caremark, this “is possibly the most

difficult theory in corporation law upon which a plaintiff might hope to win a

judgment.”93 In Stone v. Ritter, the Supreme Court identified two “necessary

conditions predicate for director oversight liability: (a) the directors utterly failed to

implement any reporting or information system or controls; or (b) having

implemented such a system or controls, consciously failed to monitor or oversee its

operations.”94 “[O]nly a sustained or systematic failure of the board to exercise

oversight . . . will establish the lack of good faith that is a necessary condition to

liability.”95

92
Nominal Def.’s and Officer Defs.’ Ex. 3 (Am. and Restated Certificate of Incorporation
of B. Riley Financial, Inc.) art. 8(A) (insulating directors from liability “to the fullest extent
permitted under Delaware General Corporation Law Section 102(b)(7)”); see Richardson
v. Clark, 2020 WL 7861335, at *9 (Del. Ch. Dec. 31, 2020). The effect of the exculpation
clause is to shield the director defendants from monetary liability, except for breaches of
fiduciary duty taken in bad faith or disloyalty to the corporation. See 8 Del. C. § 102(b)(7).
93
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996).
94
911 A.2d 362, 370 (Del. 2006).
95
Caremark, 698 A.2d at 971.

19
The plaintiff invokes both prongs of Caremark.96 He alleges that the Demand

Majority failed to establish adequate controls to monitor the Company’s credit and

investment risks associated with Kahn and FRG. 97 He also alleges that the directors

consciously disregarded “red flags”—specifically, FRG’s declining financial

projections, public debt downgrades, and the collateralization of Kahn’s loans.98 He

contends that this purported lack of oversight allowed B. Riley to suffer massive

financial losses when Kahn was later implicated in the fraud at Prophecy. 99

But the Complaint lacks particularized allegations indicating that any of the

Demand Majority directors acted with the bad faith necessary to state an oversight

claim.100 As explained below, the plaintiff impermissibly attempts to equate a bad

business outcome with a breach of the duty of loyalty.101

96
See Constr. Indus. Laborers Pension Fund v. Bingle, 2022 WL 4102492, at *6 (Del. Ch.
Sept. 6, 2022) (discussing the two “prongs” of Caremark), aff’d, 297 A.3d 1083
(Del. 2023) (TABLE).
97
Compl. ¶¶ 448, 504.
98
Id. ¶ 218.
99
Id. ¶¶ 3, 249.
100
Bingle, 2022 WL 4102492, at *1 (“[T]he lack of oversight pled must be so extreme that
it represents a breach of the duty of loyalty. This in turn requires a pleading of scienter,
demonstrating bad faith[.]”).
101
See Stone, 911 A.2d at 370, 373 (cautioning that a Caremark claim cannot lie where a
plaintiff, “[w]ith the benefit of hindsight . . . seeks to equate a bad outcome with bad faith”).
20
i. Caremark Prong 1

The first prong of Caremark considers whether a board-level reporting and

oversight system monitors material corporate risks and legal compliance.102 “[T]o

satisfy their duty of loyalty, directors must make a good faith effort to implement an

oversight system and then monitor it.”103 Directors may only be held liable when

they do not make a good faith “attempt to assure a reasonable information and

reporting system exists.”104

The Complaint acknowledges the existence of functioning oversight

mechanisms: an active Audit Committee that met regularly;105 the engagement of

external auditors;106 and the retention of outside counsel to assist and report to the

committee.107 For B. Riley—a financial services firm—an Audit Committee tasked

102
See Marchand v. Barnhill, 212 A.3d 805, 821 (Del. 2019) (“Caremark does have a
bottom-line requirement that is important: the board must make a good faith effort—i.e.,
try—to put in place a reasonable board-level system of monitoring and reporting.”).
103
Id.
104
Caremark, 698 A.2d at 971.
105
See supra notes 47-55 and accompanying text; Compl. ¶ 447 (quoting the Audit
Committee’s charter, which charged the Committee with “carry[ing] out its oversight
responsibility,” “review[ing] the Company’s policies with respect to risk assessment and
risk management,” and “review[ing] and approv[ing] all related party transactions in
accordance with the Company’s Code of Business Conduct and Ethics”).
106
See supra notes 53-54 and accompanying text.
107
See supra notes 49-56 and accompanying text.

21
with risk assessment and the Board’s hiring of financial and legal advisors is the sort

of industry-specific compliance approach Delaware law expects.

These oversight mechanisms demonstrate that the Demand Majority did not

“utterly fail[] to implement any reporting or information system or controls”—the

exacting standard required to plead bad faith. 108 Indeed, a Caremark claim of this

variety will fail where a plaintiff concedes the existence of an active audit

committee, rather than alleging the company lacked one or that it devoted “patently

inadequate time to its work.”109 The “existence of [such] board-level systems of

monitoring and oversight[,]” including “a relevant committee” and “the board’s use

of third-party monitors, auditors, or consultants[,]” vitiates the plaintiff’s claim. 110

Because the Complaint confirms that the Board employed internal controls and

reporting, the plaintiff cannot establish the utter failure of oversight required to

support an inference of bad faith.

108
Stone, 911 A.2d at 370.
109
Guttman v. Huang, 823 A.2d 492, 507 (Del. Ch. 2003); see also Fisher v. Sanborn,
2021 WL 1197577, at *10-11 (Del. Ch. Mar. 30, 2021) (dismissing a Caremark prong one
claim where the complaint conceded the existence of audit and risk committees that met
regularly).
110
Marchand, 212 A.3d at 823 (explaining that the existence of such levers is
commonplace “[i]n decisions dismissing Caremark claims”); see also In re MetLife Inc.
Deriv. Litig., 2020 WL 4746635, at *13 (Del. Ch. Aug. 17, 2020) (dismissing a plaintiff’s
claim under Caremark prong one because it was “clear from the [c]omplaint that . . . an
extensive network of internal controls” existed).
22
The plaintiff attempts to resuscitate his claim by arguing that the oversight

systems were flawed. He highlights an auditor’s finding of weakness in the

“effectiveness of management’s review controls over investment valuations” and in

levers to “properly identify and disclose material related party transactions.” 111 But

allegations that a compliance system was flawed or ineffective do not support an

inference that directors utterly failed to monitor, as is mandatory for Caremark

liability.112 As Marchand v. Barnhill makes clear, “directors have great discretion

to design context- and industry-specific approaches tailored to their companies’

businesses and resources.”113

The plaintiff has therefore not shown that any of the Demand Majority

directors face a substantial likelihood of liability under the first prong of Caremark.

ii. Caremark Prong 2

The second prong of Caremark concerns a board’s duty to attend to “obvious

and material” signs of non-compliance with positive law that emerge through the

reporting system.114 To state such a claim, a plaintiff must plead that the directors

111
Compl. ¶ 338.
112
Okla. Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *17, *24 (Del.
Ch. Dec. 18, 2017) (explaining that “it is not enough to say that the board’s response was
ineffective[,]” and that “[b]ad results alone do not imply bad faith” (citing In re Gen.
Motors Co. Deriv. Litig., 2015 WL 3958724, at *17 (Del. Ch. June 26, 2015), aff’d,
133 A.3d 971 (Del. 2016) (TABLE))).
113
Marchand, 212 A.3d at 821.
114
In re TransUnion Deriv. S’holder Litig., 324 A.3d 869, 886-87 (Del. Ch. 2024).

23
were presented with “red flags related to compliance with law and consciously

disregarded” them in bad faith.115 “Because bad faith is the touchstone for Caremark

liability, the court’s role is not to second-guess a board’s response to a red flag.

Claims that quibble with the timing or success of corrective action necessarily

fail.”116

The plaintiff alleges that FRG’s declining financial projections, debt

downgrades, and loan collateralization were “red flags” that the Demand Majority

consciously disregarded. 117 His argument fails on multiple fronts.

First, the plaintiff improperly relies on a constructive knowledge theory. The

Complaint alleges that the Audit Committee “should have recognized” that the

financial projections used to support the take-private were stale, and “should have”

known about B. Riley’s undisclosed FRG stock ownership and the risky

collateralization of Kahn’s margin loans.118 Delaware courts routinely reject

constructive knowledge as insufficient to plead bad faith under Caremark.119 A

115
MetLife, 2020 WL 4746635, at *14; see also Stone, 911 A.2d at 371.
116
Clem v. Skinner, 2024 WL 668523, at *8 (Del. Ch. Feb. 19, 2024).
117
Compl. ¶ 218.
118
Id. ¶¶ 149, 155, 448.
119
E.g., City of Detroit Police & Fire Ret. Sys. v. Hamrock, 2022 WL 2387653, at *24
(Del. Ch. June 30, 2022).
24
plaintiff must state specific facts showing actual knowledge of misconduct and a

conscious failure to act.120

Second, the purported “red flags” cannot support a non-exculpated claim.

None are “red flags” of unlawful behavior. They are quintessential business risks—

regarding credit, debt downgrades, and valuation—that directors of a company like

B. Riley weigh when deciding whether to proceed with an investment.121 The

reliance on earlier financial projections to model post-reorganization valuation, or

the assumption of debt—even if risky—is far from an illegal ruse.122 As Chancellor

Chandler explained in In re Citigroup Inc. Shareholder Derivative Litigation, to

impose oversight liability for failure to monitor business risk, which “is

fundamentally different” from illegal conduct, would “eviscerate the core

protections of the business judgment rule.”123 Directors are free “to pursue risky

120
See Pettry, 2021 WL 2644475, at *7.
121
See In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 130-31 (Del. Ch. 2009)
(contrasting “business risks” with “red flags” to state a Caremark claim (citing In re Am.
Int’l Gp., Inc., 965 A.2d 763, 776, 797-99 (Del. Ch. 2009), aff’d sub nom., Teachers’ Ret.
Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011))); see In re
ProAssurance Corp. S’holder Deriv. Litig., 2023 WL 6426294, at *14 (Del. Ch.
Oct. 2, 2023) (explaining that evaluating business risk is “the quintessential board
function” (citation omitted)).
122
See Compl. ¶ 412.
123
Citigroup, 964 A.2d at 125, 131; see also ProAssurance, 2023 WL 6426294, at *14
(dismissing a Caremark claim premised on a risky commercial decision, and explaining
that imposing oversight duties for business risk would undermine the business judgment
rule).
25
transactions without the specter of being held personally liable if those decisions

turn out poorly.”124

Third, the plaintiff’s accusation of conscious disregard is belied by the very

conduct described in the Complaint. Even if the Demand Majority’s late awareness

of the collateralization of Kahn’s loans or FRG’s declining financials constituted red

flags, the Board did not ignore them. For instance, the Board’s alleged reliance on

stale projections in January 2023 was addressed by April 2023 when it used newer

projections to decide how to respond to FRG’s counteroffer. 125 When actual

evidence of potential illegality—albeit at a different company—emerged regarding

Kahn’s fraud at Prophecy, the Audit Committee acted swiftly by asking outside

counsel at Sullivan & Cromwell to investigate any potential involvement by the

Company.126 And when the Company’s auditor requested an independent review,

the Audit Committee retained Winston & Strawn to conduct a second

investigation.127 The Board’s retention of two separate law firms to investigate B.

124
Citigroup, 964 A.2d at 126; see also Strassburger v. Earley, 752 A.2d 557, 582 (Del.
Ch. 2000) (“The business judgment rule shields directors from liability for good faith
business decisions, even those that turn out to be mistaken.”); Binks v. DSL.net, Inc.,
2010 WL 1713629, at *5 (Del. Ch. Apr. 29, 2010) (“The business judgment rule operates
to ‘protect corporate officers and directors and the decisions they make, and our courts will
not second-guess these business judgments.’” (citation omitted)).
125
See Compl. ¶ 131; see also supra notes 19-26 and accompanying text.
126
Compl. ¶¶ 275-80.
127
Id. ¶ 306-09.

26
Riley’s involvement with the problems at FRG negates any reasonable inference of

bad faith.128

Finally, the plaintiff’s claim suffers from a fundamental doctrinal mismatch.

The oversight doctrine addresses failures to monitor internal corporate compliance

with positive law.129 But the purported “red flags” and corporate trauma were at

Prophecy—a third-party entity.130 B. Riley’s Board members had no duty to monitor

the internal compliance of a separate company.131 The plaintiff’s claim is essentially

one for negligent due diligence, which would be exculpated. Seeking to impose

liability by hindsight for a souring investment does not support a Caremark claim.132

The plaintiff has therefore not established that the Demand Majority directors

face a substantial likelihood of liability under the second prong of Caremark.

128
Id. ¶¶ 280, 309.
129
See Marchand, 212 A.3d at 821; Stone, 911 A.2d at 370.
130
See, e.g., Compl. ¶¶ 232-47.
131
ProAssurance, 2023 WL 6426294, at *16 (“This hindsight second-guessing of a
business decision that turned out poorly cannot reasonably support an inference of bad
faith.”).
132
The plaintiff briefly attempts to bolster his claim by arguing that the Board’s failure to
monitor its investment in FRG after the take-private closed is evidence of bad faith, relying
on IBEW Local Union 481 Defined Contribution Plan & Tr. v. Winborne. 301 A.3d 596
(Del. Ch. 2023); see Pl.’s Answering Br. 40. Winborne is inapposite. The court there
addressed a board’s failure to monitor an internal, related-party transaction purportedly
fraught with conflicts of interest. 301 A.3d at 631-32. B. Riley’s investment in FRG, by
contrast, was an arms-length negotiation with a third party. See Compl. ¶ 172. The failure
to perfectly monitor an investment that later goes awry is a matter of business judgment,
not bad faith.
27
b. Disclosures

The plaintiff next alleges that the directors breached their fiduciary duties

concerning “false and misleading statements and omissions” in the Company’s

public filings and press releases about the FRG take-private and B. Riley’s dealings

with Kahn.133 At oral argument, the plaintiff disclaimed pleading this as a separate

theory of liability, arguing instead that the disclosures are “encompassed within

Caremark.”134 This concession is doctrinally fitting. Delaware recognizes no

separate “duty of disclosure.” Rather, disclosure obligations represent an application

of the traditional duties of care and loyalty. 135 To the extent such a freestanding

claim were brought, it is not adequately pleaded.

“When the directors disseminate information to stockholders when no

stockholder action is sought, the fiduciary duties of care, loyalty and good faith

apply. Dissemination of false information could violate one or more of those

duties.”136 Because B. Riley’s charter contains a Section 102(b)(7) exculpatory

provision, the plaintiff must plead that the disclosures were disloyal.137 This requires

133
Compl. ¶¶ 360-62.
134
Hr’g Tr. 60.
135
See In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 800 (Del. Ch. 2022) (“The
duty of disclosure is an ‘application of the fiduciary duties of care and loyalty.’”).
136
Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998).
137
See supra note 92 (addressing the exculpation provision).

28
particularized facts supporting a reasonable inference that the directors acted with

scienter—meaning they knowingly or intentionally issued materially false public

statements.138 The plaintiff, however, alleges that the directors “willfully or

recklessly caused or permitted B. Riley to make” the disclosures.139 By hedging his

allegation with “recklessly”—a state of mind that implicates the duty of care—the

plaintiff falls short of pleading disloyalty with particularity.140

To the extent the Complaint alleges that the Board “willfully . . . caused” the

disclosure of material misstatements, there are no particularized facts pleaded in

support. The Complaint does not say which director made or caused the misleading

statements or omissions, or explain any involvement that the Demand Majority had

138
See Ellis v. Gonzalez, 2018 WL 3360816, at *7 (Del. Ch. July 10, 2018) (explaining
that due to an exculpation provision in the company’s charter, the plaintiff could not
“establish demand futility based on his disclosure claims unless he ‘plead[s] particularized
factual allegations that support the inference that the disclosure violation[s] w[ere] made
in bad faith, knowingly or intentionally’” (quoting Citigroup, 964 A.2d at 132) (emphasis
and quotations removed)), aff’d, 205 A.3d 821 (Del. 2019) (TABLE).
139
Compl. ¶¶ 360-61.
140
See, e.g., Norfolk Cty. Ret. Sys. v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746, at *12
n.104 (Del. Ch. Feb. 12, 2009) (“[R]ecklessness by itself only amounts to gross negligence,
which is not sufficient to demonstrate the state of mind necessary for finding a breach of
the duty of loyalty.”), aff’d, 977 A.2d 899 (Del. 2009) (TABLE); In re Lear Corp. S’holder
Litig., 967 A.2d 640, 652 n.45 (Del. Ch. 2008) (“Indeed, the definition [of gross negligence
in the corporate breach of fiduciary duty context] is so strict that it imports the concept of
recklessness into the gross negligence standard, thus conflating two standards that are
distinct when used in the criminal law concept.” (citation omitted)).
29
in the disclosures.141 It relies instead on impermissible group pleading, lifting vague

facts from the securities class action complaint—an action brought against the

Company and certain executives, not the outside directors.142 Absent particularized

allegations showing that the individual Demand Majority directors knew of Kahn’s

purported fraud when the statements were made, I cannot reasonably infer

scienter.143

2. Independence

The third Zuckerberg prong considers whether a given director “lacks

independence” from a person who received a material personal benefit from the

alleged misconduct or faces a substantial likelihood of liability. 144 Directors are

presumed to be independent.145 At the motion to dismiss stage, “a lack of

independence turns on ‘whether the plaintiffs have pled facts from which the

141
See Compl. ¶¶ 360-61 (arguing that the “[d]efendants . . . willfully or recklessly caused
or permitted B. Riley to make [various] false and misleading statements and omissions”).
142
See id. ¶ 360; see also Genworth Fin., Inc. Consol Deriv. Litig., 2021 WL 4452338,
at *22 (Del. Ch. Sept. 29, 2021) (rejecting a claim that accused a board of making
misstatements based on impermissible “group pleading”).
143
See Guttman, 823 A.2d at 498 (dismissing claims where the complaint was “devoid of
particularized allegations of fact demonstrating that the outside directors had actual or
constructive notice” of the alleged misconduct); In re Zimmer Biomet Hldgs., Inc. Deriv.
Litig., 2021 WL 3779155, at *15 (Del. Ch. Aug. 25, 2021) (“The lack of well-pleaded
allegations about the Director Defendants’ involvement in the disclosures ‘independently
preclude[s] a finding of demand futility.’” (quoting Ellis, 2018 WL 3360816, at *9)), aff’d,
279 A.3d 356 (Del. 2021) (TABLE).
144
Zuckerberg, 262 A.3d at 1059.
145
See Beam v. Stewart, 845 A.2d 1040, 1055 (Del. 2004).

30
director’s ability to act impartially on a matter important to the interested party can

be doubted because th[e] director may feel either subject to the interested party’s

dominion or beholden to that interested party.’”146

Bryant Riley is the only defendant to whom the plaintiff alleges any other

director owes a compromising allegiance. The plaintiff does not meaningfully allege

that Riley received a material personal benefit from the challenged transactions. He

instead argues that Riley faces a substantial likelihood of liability for his alleged

misconduct.147 As a result, the independence inquiry focuses on the Demand

Majority directors’ relationships with Riley.

Notably, the plaintiff’s argument is an attenuated one. He contends that the

directors would intentionally violate their own fiduciary duties to help Riley protect

his friend, Kahn. To the extent this premise is legally viable, the plaintiff must plead

facts establishing that the directors are so beholden to Riley that they cannot be

viewed as independent of him.

The plaintiff attempts to shortcut this assessment by branding Riley the “de

facto controller” of B. Riley.148 With only a 23.8% ownership stake, this is a feeble

146
Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (citing Sanchez, 124 A.3d at 1023
n.25).
147
See Compl. ¶ 411.
148
Id. ¶ 52.

31
contention under Delaware law.149 But even if he theoretically were a controlling

stockholder, that label is irrelevant to the demand futility analysis. The plaintiff’s

allegations are insufficient to show that five other Board members were dominated

by him, indebted to him for their director roles, or dependent upon their Board

compensation.150

“Under Delaware law, ‘[i]ndependence means that a director’s decision is

based on the corporate merits of the subject before the board rather than extraneous

considerations or influences.’”151 In assessing independence, “‘our law cannot

ignore the social nature of humans’ or that they are motivated by things other than

money, such as ‘love, friendship, and collegiality.’”152 The court “consider[s] 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, and

149
See In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003) (recognizing
that a 35% stockholder could be a controlling stockholder given the likelihood that fewer
than 100% of stockholders turn out for a vote); In re Morton’s Rest. Grp., Inc. S’holders
Litig., 74 A.3d 656, 665 (Del. Ch. 2013) (calling Cysive “the most aggressive finding” of
control); see also 8 Del. C. § 144(e)(2)(c).
150
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 67 (Del.
Ch. 2015) (providing that whether a person constitutes a controlling stockholder does not
“change[] the director-based focus of the demand futility inquiry”).
151
Id. at 59 (citing Aronson, 473 A.2d at 816).
152
Marchand, 212 A.3d at 818 (citation omitted); see Beam, 845 A.2d at 1052 (deeming a
non-interested director not independent where she “would be more willing to risk . . . her
reputation than risk the relationship with the interested [person]”).
32
draw all reasonable inferences from the totality of those facts in favor of the

plaintiffs.”153

I consider the independence of the five Demand Majority directors from

Riley: Brandt, Walters, Sheldon, D’Agostino, and LaBran.154 The plaintiff has not

pleaded particularized facts showing that these individuals were so conflicted by

their ties to Riley that they were unable to impartially consider a demand to pursue

the claims in this action.

a. LaBran

The plaintiff makes no meaningful attempt to satisfy the pleading standard

regarding LaBran’s independence. At oral argument, plaintiff’s counsel effectively

conceded the point.155 Doing so was logical given the limited facts about LaBran.

The Complaint lacks any particularized allegations that put LaBran’s

independence in doubt. It states only that she received $400,632 for her Board

service and that her role on the Audit Committee would cause her to “implicate

153
Sanchez, 124 A.3d at 1019.
154
Compl. ¶¶ 422-88. As noted above, the defendants concede that the independence of
Kelleher and Antin are not meaningfully in play. See supra notes 84-85 and accompanying
text.
155
Hr’g Tr. 59.

33
herself” by considering a demand.156 Taken together with the most generous of

inferences, these facts fall short.

There is no allegation that Riley is responsible for LaBran receiving director

compensation. Nor does the plaintiff allege that these ordinary course payments

were material to her such that her independence would be put in doubt. “Delaware

law recognizes that directors will be paid a fair and reasonable amount.” 157 The

conclusory assertion that a director would have to sue herself to bring a claim is also

insufficient to excuse demand.158

b. Sheldon

The plaintiff challenges Michael Sheldon’s independence from Riley based

on ordinary course director compensation of $627,812, his status as a “Facebook

friend” of Riley, his disclosure of their friendship on a D&O questionnaire, and the

fact that the two served together on the board of Aldila, Inc. fifteen years ago. 159

These allegations fall short of overcoming the presumption of independence.

As with LaBran, the plaintiff does not plead that Sheldon’s director compensation

156
Compl. ¶¶ 446-52.
157
Simons v. Brookfield Asset Mgmt. Inc., 2022 WL 223464, at *15 (Del. Ch.
Jan. 21, 2022).
158
See Citigroup, 964 A.2d at 121 (“Demand is not excused solely because the directors
would be deciding to sue themselves.”); Aronson, 473 A.2d at 815 (explaining that “the
mere threat of personal liability . . . is insufficient to challenge either the independence or
disinterestedness of directors”).
159
Compl. ¶¶ 479-80.

34
was material to him.160 The remaining allegations amount to nothing more than “thin

social-circle friendship” allegations, which Delaware courts routinely reject as

insufficient to show that a director’s discretion is sterilized.161 Acknowledging a

friendship on a routine compliance questionnaire does not elevate the relationship to

a bias-producing one. Past service on an outside board that ended more than a

decade ago does not render Sheldon beholden to Riley today. 162

c. Walters

The plaintiff questions the independence of Miriam Walters based on her

service on the board of Eos Energy Enterprises, Inc., her receipt of director

compensation, and her role on B. Riley’s ESG Committee. 163 None of these facts

overcome the presumption of independence.

First, the plaintiff theorizes that Walters would not have been appointed to the

Eos board “but for” Riley, and that her failure to resign amid a lawsuit regarding an

160
See Simons, 2022 WL 223464, at *15.
161
Sanchez, 124 A.3d at 1022; see also Beam, 845 A.2d at 1051-52 (“Mere allegations that
[directors] move in the same business and social circles, or a characterization that they are
close friends, is not enough to negate independence for demand excusal purposes.”).
162
See Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006)
(rejecting “conclusory allegations” that the directors were dominated by the interested
party because they served together on boards of unaffiliated companies as insufficient to
support a reasonable inference that the directors lacked independence).
163
Compl. ¶ 467.

35
Eos de-SPAC transaction shows she “acquiesced” to him.164 But being appointed

by a person does not, without more, create a sense of owingness that destroys

independence.165 Nor does a director’s purported acquiescence to the actions of

another director support an inference of domination. 166

The plaintiff next points to the roughly $1.3 million Walters received for

serving on the Eos and B. Riley boards.167 “[D]irector compensation alone cannot

create a reasonable basis to doubt a director’s impartiality.” 168 Because the plaintiff

has not pleaded particularized facts demonstrating that these fees were financially

material to Walters, the allegations are insufficient.169

Finally, the plaintiff critiques Walters’ membership on the ESG Committee,

claiming that she rubber-stamped Riley’s friends and business associates for Board

164
Id. ¶¶ 467, 473-75.
165
See In re Camping World Hldgs., Inc. S’holder Deriv. Litig., 2022 WL 288152, at *18
(Del. Ch. Jan. 31, 2022) (“[T]he ‘mere fact that one was appointed by a[n alleged]
controller’ does not . . . overcome the presumption of director independence.” (citation
omitted)), aff’d, 285 A.3d 1204 (Del. 2022) (TABLE).
166
See In re NYMEX S’holder Litig., 2009 WL 3206051, at *6 (Del. Ch. Sept. 30, 2009)
(“That directors acquiesce in, or endorse actions by, a chairman of the board . . . does not,
without more, support an inference of domination by the chairman or the absence of
directorial will.”).
167
Compl. ¶¶ 471, 477.
168
Robotti & Co., 2010 WL 157474, at *15.
169
See id.; see also Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *23 (Del. Ch.
Mar. 26, 2018).
36
appointments.170 This is bare speculation on motives, which cannot excuse

demand.171 Appointing individuals from within one’s professional or social network

does not suggest a lack of independence.172

d. Brandt

The plaintiff attempts to classify Tamara Brandt as a “de facto” employee of

B. Riley because she served as the Chief Legal Officer of FaZeClan—a company

that merged with a B. Riley affiliate in 2022 to form FaZe Holdings.173 The plaintiff

argues that Brandt’s compensation from FaZe Holdings was effectively paid by B.

Riley, making her indebted to Riley and stripping her of independence under

NASDAQ rules. 174

170
Compl. ¶¶ 451-52, 477-78 (arguing that Walters acquiesced to Riley by “consistently
nominat[ing]” his “friends and business associates” to the board, even though “thousands
of [] qualified” individuals could have done so).
171
Tilden v. Cunningham, 2018 WL 5307706, at *12 (Del. Ch. Oct. 26, 2018)
(“Speculation on motives for undertaking corporate action [is] wholly insufficient to
establish a case of demand excusal.”).
172
See Beam, 845 A.2d at 1052.
173
Compl. ¶¶ 453-58.
174
Id. ¶ 463 (arguing that Brandt’s status as a “de facto employee” violates NASDAQ’s
definition of director independence); id. ¶ 465 (indicating that $3 million worth of
payments to Brandt, from the post-merger company, were instead made by B. Riley).
37
These allegations ignore basic principles of corporate separateness.175 Brandt

was an executive of FaZe Holdings, not B. Riley.176 The Complaint relies on the

fact that a B. Riley affiliate held a minority stake in FaZe Holdings. 177 But the

plaintiff pleads no facts suggesting that B. Riley—let alone Bryant Riley

personally—controlled FaZe Holdings, dictated Brandt’s employment, or set her

salary. Nor does the Complaint allege that Brandt assumed or discharged the duties

of an office at B. Riley, which is required to establish “de facto” employee status.178

Even if the plaintiff had established that B. Riley influenced Brandt’s compensation

at FaZe Holdings, the claim would fail because he does not allege that the

compensation was material to her.179

175
See Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038 (Del. Ch. 2006)
(“[O]ur corporation law is largely built on the idea that the separate legal existence of
corporate entities should be respected—even when those separate corporate entities are
under common ownership and control.”); see also In re Aearo Techs., LLC, 346 A.3d 584,
596 n.77 (Del. 2025).
176
Nor has the plaintiff suggested that such payments were material to Brandt. Carr,
2018 WL 1472336, at *23.
177
Compl. ¶¶ 462-63.
178
See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 48 (Del. 2006) (defining a “de
facto officer” as “one who actually assumes possession of an office . . . and who is actually
discharging the duties of that office, but for some legal reason lacks de jure legal title to
that office”).
179
See In re Ltd., Inc., 2002 WL 537692, at *4 (Del. Ch. Mar. 27, 2002) (finding standard
director compensation insufficient to excuse demand); Carr, 2018 WL 1472336, at *23
(holding that the plaintiff had not pleaded “facts such that it would be reasonable to infer
that [the directors’ total compensation] . . . w[as] material to them so as to taint their
decision-making”).
38
e. D’Agostino

Robert D’Agostino joined the Board in 2015 and serves on the Audit

Committee.180 The plaintiff alleges that he lacks independence based on his 20-year

personal and professional relationship with Riley.181 The Complaint notes that the

two attended Lehigh University, belonged to the same fraternity, and “meet

socially,” as acknowledged in a D&O questionnaire. 182 The plaintiff also cites

D’Agostino’s receipt of $665,896 in ordinary course director compensation, his past

service on other boards with Riley, and B. Riley’s role as the exclusive financial

advisor to Q-Mation, Inc., where D’Agostino serves as President. 183

These allegations of a “longstanding . . . professional and personal

relationship” are insufficient to defeat independence. 184 As the Supreme Court noted

in Beam v. Stewart, “[m]ere allegations that [directors] move in the same business

and social circles, or a characterization that they are close friends, is not enough to

180
Compl. ¶ 60.
181
Id. ¶¶ 438-40.
182
Id. ¶¶ 438-39.
183
Id. ¶¶ 433-34, 441.
184
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 980-81 (Del. Ch. 2000) (holding
that an allegation of “long-standing 15-year professional and personal relationship” was
insufficient to defeat independence); Benerofe v. Cha, 1998 WL 83081, at *2-3 (Del. Ch.
Feb. 20, 1998) (concluding that an “allegation that [a director] is a long-time friend of [the
interested party], without more, fails to raise a reasonable doubt that [the director] would
be able to exercise independent judgment”).
39
negate a director’s independence[.]” 185 Going to the same college two decades ago,

shared fraternity membership, and casual social meetings do not suggest the type of

bias-producing relationship that would sterilize a director’s discretion. 186 Similarly,

past service on outside boards or being nominated by an interested party does not

impugn a director’s current independence.187

The plaintiff’s financial allegations fare no better. The assertion regarding

Q-Mation is illogical: if B. Riley served as the financial advisor to D’Agostino’s

company, the reasonable inference is that B. Riley was beholden to D’Agostino for

185
Beam, 845 A.2d at 1051-52; see also Sandys, 152 A.3d at 130 (explaining that a casual
social friendship is not “suggestive of the type of very close personal relationship that, like
family ties, one would expect to heavily influence a human’s ability to exercise impartial
judgment”).
186
See Cal. Pub. Empls.’ Ret. Sys. v. Coulter, 2002 WL 31888343, at *7, *9 (Del. Ch.
Dec. 18, 2002) (noting that “personal friendships,” such as being “lifelong friends” with
an interested party, are, without more, “insufficient to raise a reasonable doubt of a
director’s ability to exercise independent business judgment”); Teamsters Loc. 237
Additional Sec. Benefit Fund v. Caruso, 2021 WL 3883932, at *18 (Del. Ch.
Aug. 31, 2021) (rejecting “thin social-circle friendship allegations” that directors “are
members of the same country club” and “in social proximity” as insufficient to support a
lack of independence); Jacobs v. Yang, 2004 WL 1728521, at *7 (Del. Ch. Aug. 2, 2004)
(observing “it is well settled that social and business ties alone do not give rise to a lack
of independence”), aff’d, 867 A.2d 902 (Del. 2005) (TABLE); In re BGC P’rs, Inc. Deriv.
Litig., 2021 WL 4271788, at *7 (Del. Ch. Sept. 20, 2021) (holding that a director’s past
ties to a college where the interested party was a major donor did not compromise her
independence).
187
See Singer, 2006 WL 741939, at *5 (rejecting “conclusory allegations” that the directors
were dominated by the interested party because they served together on boards of
unaffiliated companies).
40
the engagement, not the reverse.188 Finally, as with the other directors, the plaintiff

has not pleaded particularized facts demonstrating that D’Agostino’s ordinary

course director fees were material to him. 189

* * *

The Complaint lacks particularized facts showing that five of the nine Board

members—Brandt, Walters, Sheldon, D’Agostino, and LaBran—face a substantial

likelihood of liability or lack independence. Demand is therefore not excused under

Rule 23.1. I decline to address the remaining four directors.

B. Failure to State a Claim

The defendants also argue that the plaintiff’s claims should be dismissed

under Court of Chancery Rule 12(b)(6) for failure to state a claim.190 Because

demand is not excused under Rule 23.1, the Board retains control over this litigation

asset. I need not conduct a further analysis of the merits.191

188
See B. Riley Defs.’ Opening Br. 50.
189
E.g., Simons, 2022 WL 223464, at *15 (“Delaware law recognizes that directors will be
paid a fair and reasonable amount. For that reason, when director fees are not excessive,
mere allegations of payment of director fees are insufficient to create a reasonable doubt
as to the director’s independence.”).
190
B. Riley Defs.’ Opening Br. 52.
191
See, e.g., Harrison Metal Cap. III, L.P. v. Mathé, 2024 WL 1299579, at *6 (Del. Ch.
Mar. 27, 2024) (“The court concludes that the [complaint] must be dismissed under Rule
23.1 for failure to plead demand futility, and, therefore, does not reach the Rule 12(b)(6)
argument.”); Karp, 349 A.3d at 1182 (describing the “Rule 23.1 motion” as “dispositive”).
41
III. CONCLUSION

For the above reasons, the defendants’ motions to dismiss are granted under

Court of Chancery Rule 23.1. The Complaint is dismissed in full.

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