Manti Holdings, LLC v. The Carlyle Group Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MANTI HOLDINGS, LLC, MALONE )
MITCHELL, WINN INTERESTS, LTD., )
EQUINOX I. A TX, GREG PIPKIN, )
CRAIG JOHNSTONE, TRI-C )
AUTHENTIX, LTD., TRI-C )
AUTHENTIX PREFERRED, LTD., )
DAVID MOXAM, JON LAL PEARCE )
and JIM RITTENBURG, )
)
Plaintiffs,
)
v. ) C.A. No. 2020-0657-SG
)
THE CARLYLE GROUP INC., )
CARLYLE U.S. GROWTH FUND III, )
L.P., CARLYLE U.S. GROWTH FUND )
III AUTHENTIX HOLDINGS, L.P., )
CARLYLE INVESTMENT )
MANAGEMENT L.L.C., TCG )
VENTURES III, L.P., BERNARD C. )
BAILEY, STEPHEN W. BAILEY and )
MICHAEL G. GOZYCKI, )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: June 20, 2024
Date Decided: January 7, 2025

Rolin P. Bissell, Paul J. Loughman, and Alberto E. Chávez, YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Jonathan
R. Mureen, D. Patrick Long, John Tancabel, and Margaret Booz, SQUIRE PATTON
BOGGS (US) LLP, Dallas, Texas, Attorneys for Plaintiffs.

Albert H. Manwaring IV and Kirsten Zeberkiewicz, MORRIS JAMES LLP,
Wilmington, Delaware; OF COUNSEL: Robert A. Van Kirk, Sarah F. Kirkpatrick,
Matthew W. Lachman, Patrick C. Bradley, and Cole T. Wintheiser, WILLIAMS &
CONNOLLY LLP, Washington, D.C., Attorneys for Defendants.

GLASSCOCK, Vice Chancellor
This matter concerns the sale of Authentix Acquisition Company, Inc.

(“Authentix” or the “Company”) in 2017. Authentix, originally Isotag Technology,

Inc. (“Isotag”), was in the business of preventing fraud and counterfeiting by

applying “tracers” to products, through which they could be readily authenticated.

Its product was innovative, but the Company was hampered by the fact that its client

base was small and disproportionately included foreign governments, and thus was

subject to a high level of uncertainty in ongoing demand.

The largest equity holder in Authentix was The Carlyle Group Inc. and its

affiliates (collectively, “Carlyle”), which operated a private equity fund that invested

in Authentix, among other entities. The fund’s partnership agreement provided for

a fund life of ten years, although that term has been extended after the sale of

Authentix. The original fund term expired in 2017, although that did not impose a

contractual obligation to exit any particular investment at that time.

The board of directors of Authentix (“Authentix’ Board”) began a wide-

ranging sales process in 2016, culminating in a sale in late 2017 to Blue Water

Energy LLP. Authentix as a business faced several challenges around the time of

the sale, allegedly suppressing the price achieved. Plaintiffs are minority

stockholders of Authentix. Their claim is simple: Carlyle is a controller; Carlyle’s

business model required it to sell Authentix in 2017, regardless of price; accordingly,

it caused Authentix’ Board to run a sales process that was unfair to the stockholders,

1
but from which Carlyle extracted a unique benefit, a timely exit from Authentix for

Carlyle’s investors’ interest in the private equity fund. Accordingly, per Plaintiffs,

entire fairness applies, and the damages are represented by the higher price

Authentix should have brought, absent the fire-sale nature of the proceedings.

On the Defendants’ Motion to Dismiss, I found that Carlyle was a controller,

that the Complaint adequately pled that it had acted to achieve a non-ratable benefit

denied to Plaintiffs in the sale of Authentix, and that the Complaint therefore states

a claim. Trial ensued.

Post trial, I conclude that Carlyle wanted the sale to go forward in 2017, but

that its interest was the same as the minority stockholders—to maximize the value

of its investment. It did not need Authentix to be sold 2017, it did not force a fire

sale, and it did not extract a non-ratable benefit from the sale. Although Carlyle’s

investors had expectations of monetizing their investments around the ten-year

mark, Carlyle’s fund was a bog-standard equity-fund investment vehicle, and there

was no “pressure” for a quick exit beyond that inherent in the business model itself.

Carlyle did not extract a non-ratable benefit, and the sale to Blue Water Energy was

arms-length. Business judgment therefore applies to the sale, and I find for

Defendants, accordingly. My rationale follows.

2
I. BACKGROUND

A. Factual Background1

1. The Parties and Relevant Non-Parties

Plaintiff Manti Holdings, LLC (“Manti”) is a Delaware limited liability

company.2 Manti and its related companies own and operate oil and gas exploration

interests.3 Manti was an investor in Authentix, originally investing in its

predecessor, Isotag, in 1996.4 Manti owned both common and preferred stock in

Authentix.5 Non-party Lee Barberito was Manti’s representative on Authentix’

Board.6

Plaintiff Malone Mitchell was a common and preferred stockholder of

Authentix from April 2008 until Authentix’ sale on September 13, 2017.7

1
This Memorandum Opinion only contains facts necessary to my analysis. Citations to the parties’
joint trial exhibits are referred to by the numbers provided by the parties and cited as “JX__”. See
Stipulation and [Proposed] Joint Pretrial Ord., Ex. A, Dkt. No. 284. Citations to the parties’
stipulated pre-trial order are cited as “PTO ¶ __”. Granted (Stipulation and [Proposed] Joint
Pretrial Ord.), Dkt. No. 317. References to the trial transcripts are cited as “Tr. (Witness Name)
__:__”. Trial Tr.–Vol. I–dated 01-22-2024, Dkt. No. 327; Trial Tr.–Vol. II–dated 01-23-2024,
Dkt. No. 328; Trial Tr.–Vol. III–dated 01-24-2024, Dkt. No. 329; Trial Tr.–Vol. IV–dated 01-25-
2024, Dkt. No. 330; Trial Tr.–Vol. V–dated 1-26-2024, Dkt. No. 331; Trial Tr.–Vol. VI–dated 1-
29-2024, Dkt. No. 332; Trial Tr.–Vol. VII–dated 1-30-2024, Dkt. No. 333.
2
PTO ¶ 12.
3
Id.
4
Id.
5
Id.
6
Id.
7
Id. ¶ 13.
3
Plaintiff Winn Interests, Ltd. is a Texas limited liability company that was a

common and preferred stockholder of Authentix from April 2008 until Authentix’

sale on September 13, 2017.8

Plaintiff Equinox I. A TX is a Texas partnership that was a common and

preferred stockholder of Authentix from April 2008 until Authentix’ sale on

September 13, 2017.9

Plaintiff Greg Pipkin was a common stockholder of Authentix from April

2008 until Authentix’ sale on September 13, 2017.10

Plaintiff Craig Johnstone was a common and preferred stockholder of

Authentix from April 2008 until Authentix’ sale on September 13, 2017.11

Plaintiff Tri-C Authentix, Ltd. is a Texas limited partnership that was a

common stockholder of Authentix from April 2008 until Authentix’ sale on

September 13, 2017.12

Plaintiff Tri-C Authentix Preferred, Ltd. is a Texas limited partnership that

was a common stockholder of Authentix from April 2008 until Authentix’ sale on

September 13, 2017.13

8
Id. ¶ 14.
9
Id. ¶ 15.
10
Id. ¶ 16.
11
Id. ¶ 17.
12
Id. ¶ 18.
13
Id. ¶ 19.
4
Plaintiff David Moxam served as Chairman and CEO of Authentix’

predecessor, Isotag, and then of Authentix from 2002 until October 2012.14 Since

departing Authentix, Moxam has worked with Manti or its affiliates.15 Moxam was

also a common and preferred stockholder of Authentix from April 2008 until

Authentix’ sale on September 13, 2017.16

Plaintiff Jon Lal Pearce was a common and preferred stockholder of Authentix

from April 2008 until Authentix’ sale on September 13, 2017.17 Pearce previously

served as Vice President of Sales and Marketing for Isotag from 2000 to 2003 and

then for Authentix from 2003 until 2014.18

Plaintiff James “Jim” Rittenburg was a common and preferred stockholder of

Authentix from April 2008 until Authentix’ sale on September 13, 2017.19

Rittenburg served as a Vice President of Technology for Biocode Inc., another

predecessor to Authentix, from 1994 to 2003 and then as Vice President of

Healthcare and Pharmaceuticals for Authentix from 2003 to 2014.20

Defendant The Carlyle Group Inc. (“Carlyle Group”) is the successor entity

for liability purposes to The Carlyle Group L.P., which, during the relevant period,

14
Id. ¶ 20.
15
Id.
16
Id.
17
Id. ¶ 21.
18
Id.
19
Id. ¶ 22.
20
Id.
5
was an owner, through several different tiers of entities, of other defendant entities

listed below.21

Defendant Carlyle U.S. Growth Fund III, L.P. (“CUSGF III”), which is also

commonly referred to as “CGP III” in internal correspondence, is the private equity

fund that purchased common and preferred stock in Authentix between April 2008

and 2013.22 At its formation in May 2006, CUSGF III was named Carlyle Venture

Partners III, L.P., which was changed to its current form in August 2009.23

Defendant Carlyle U.S. Growth Fund III Authentix Holdings, L.P.

(“Authentix Holdings”) was formed in 2011 to take ownership of the Authentix

stock purchased by CUSGF III.24 As of the sale date of Authentix on September 13,

2017, Authentix Holdings owned 70% of Authentix’ preferred stock and 52% of its

common stock.25

Defendant Carlyle Investment Management L.L.C. (“Carlyle Investment”)

was the investment advisor for CUSGF III.26

Defendant TCG Ventures III, L.P. (“TCG”) is the general partner of CUSGF

III.27 The general partner of TCG is TCG Ventures III, L.L.C.28 The relationships

21
Id. ¶ 24.
22
Id. ¶ 25.
23
Id. I refer to this fund only as CUSGF III for clarity.
24
Id. ¶ 26.
25
Id.
26
Id. ¶ 27.
27
Id. ¶ 28.
28
Id.
6
between Carlyle Group, CUSGF III, Authentix Holdings, Carlyle Investment, and

TCG are depicted in Figure One.29

29
Ex. 1–3 to Stipulation and [Proposed] Joint Pretrial Ord., Dkt. No. 284. This simplified diagram
only includes the relationships between entities pertinent to my analysis and does not include the
numerous other entities legally connected to these entities in Carlyle’s complex organizational
structure.
7
Figure One. Simplified structure of the pertinent Carlyle entities.

8
Defendant Bernard C. Bailey became a member of Authentix’ Board in

October 2011.30 From October 2012 to May 2018, he served as Chairman of the

Board and CEO of Authentix.31 I refer to this Defendant as “B. Bailey” throughout,

for the sake of clarity.

Defendant Stephen (“Steve”) W. Bailey is a Partner and Managing Director

at Carlyle Group.32 He served on Authentix’ Board as designee of CUSGF III and

then Authentix Holdings from April 2008 to September 13, 2017, the date of the sale

of Authentix.33 I refer to this Defendant as “S. Bailey” throughout, for the sake of

clarity.

Defendant Michael G. Gozycki was a Managing Director at Carlyle Group

from 2016 to 2022.34 He served on the Carlyle deal team for Authentix from 2008

to September 13, 2017, the date of the sale of Authentix, and was a Vice President

before his promotion to Managing Director.35 He served on Authentix’ Board as the

designee of Authentix Holdings from March 2013 to September 13, 2017.36

Non-party J.H. Whitney & Company (“Whitney”) is a private equity firm that

invested in Authentix in 2008 through a fund called Whitney VI.37 As of Authentix’

30
PTO ¶ 29.
31
Id.
32
Id. ¶ 30.
33
Id. ¶¶ 30, 54.
34
Id. ¶ 31.
35
Id. ¶¶ 31, 54.
36
Id. ¶ 31.
37
Id. ¶ 42.
9
sale date (September 13, 2017), Whitney owned 25% of Authentix’ preferred stock

and 16% of its common stock.38

Non-party Robert W. Baird & Co. (“Baird”) is the investment bank retained

by Authentix on January 8, 2016, to broker the sale of Authentix.39

Non-party Paul Vigano served on Authentix’ Board from April 2008 until

September 13, 2017, as Whitney’s representative.40

I refer to Gozycki, S. Bailey, and B. Bailey collectively as the “Director

Defendants.” I refer to S. Bailey, B. Bailey, Gozycki, Vigano, and Barberito as the

“Board.”41

2. Authentix’ Business and Customer Concentration

Authentix provides authentication technologies that are used by customers to

ensure the integrity of their products and by governments to prevent illicit trade.42

Authentix has three major divisions: (1) downstream oil and gas, (2) currency and

tax stamps, and (3) brands and pharmaceuticals.43 Authentix’ largest business

38
Id.
39
Id. ¶ 36.
40
Id. ¶ 43.
41
From April 2008 to October 2011, there were four members on Authentix’ Board: David Moxam
(Authentix’ then-CEO), Lee Barberito, Paul Vigano, and S. Bailey. Id. ¶ 57(d). In October 2011,
Carlyle designated B. Bailey to Authentix’ Board as the fifth director. Id. ¶ 58. In October 2012,
David Moxam left Authentix’ Board, and B. Bailey became CEO and Chairman of Authentix’
Board. Id. ¶ 59. From March 2013 through September 13, 2017, Authentix’ Board included B.
Bailey, S. Bailey, Gozycki, Vigano, and Barberito. Id. ¶ 60.
42
Id. ¶ 32.
43
Id.
10
segment is its oil and gas business, which is dominated by contracts with

governments of oil-producing countries.44 These governments of oil-producing

countries are volatile business partners due to the exposure to geopolitical risk.45

3. CUSGF III Invests in Authentix

In April 2008, Carlyle, through CUSGF III, bought $40 million in Authentix’

Series A convertible preferred stock.46 Whitney also bought $15 million in Series A

convertible preferred stock.47 As a result of Carlyle’s investment and Whitney’s

investment, Whitney and Carlyle gained a majority interest in Authentix.48

In connection with the investments, on April 18, 2008, the stockholders of

Authentix entered into a stockholders agreement (the “Stockholders Agreement”)

that included a drag-along provision that stated that:

In the event that . . . a Company Sale is approved by the Board and . . .
the holders of at least fifty percent (50%) of the then-outstanding Shares
or . . . the Carlyle Majority, each Other Holder shall consent to and raise
no objections against such transaction . . . .49

In my Memorandum Opinion dated February 14, 2022, I found that the

language in the Stockholders Agreement did not constitute a waiver of Plaintiffs’

44
JX54 at 51, 60; see JX784 at 31:18–32:8.
45
Tr. (Pearce) 168:5–173:23 (explaining that doing contract work with developing countries
exposes Authentix to risks from economic stability, corruption, and local politics).
46
PTO ¶ 49.
47
Id.
48
Id. ¶ 50.
49
Id.; JX13 § 3(e).
11
right to bring a post-closing damages action challenging alleged breaches of

fiduciary duty in connection with the sale of Authentix.50

CUSGF III is a private equity fund within the family of investment vehicles

managed by Carlyle.51 CUSGF III is structured as a limited partnership by and

among TCG (an affiliate of Carlyle), as general partner, TCG Ventures Investment

Holdings III, L.P. (an affiliate of Carlyle), as initial limited partner,52 and the limited

partners (i.e., investors in the fund).53 CUSGF III’s limited partnership agreement

(the “Limited Partnership Agreement”) provides for a ten-year fund life,54 which is

the lifecycle typical of most private equity funds.55 During the first few years of a

fund launch, in the “fundraising period,” the fund’s focus is on raising capital from

investors.56 Then, the fund will turn to investing in companies in the “investment

period,” and working with the companies’ management teams to create value in the

“holding period.”57 After the fund has a “fully invested portfolio,” it will begin

looking for exit opportunities and to monetize its investments (e.g., selling an asset

50
Manti Hldgs., LLC v. Carlyle Gp. Inc., 2022 WL 444272, at *1 (Del. Ch. Feb. 14, 2022) (“Feb.
Mem. Op.”).
51
Tr. (S. Bailey) 1113:17–1114:18.
52
JX1 (“Limited Partnership Agreement”) at 5. TCG Ventures Investment Holdings III, L.P. is
also the Investment Limited Partner of CUSGF III and an affiliate of the general partner, TCG. Id.
at 15.
53
Id. at 5, 14–15.
54
Id. § 2.7.
55
Tr. (Timmins) 734:6–14, 737:17–20.
56
Tr. (Coburn) 1680:10–1681:11; JX819 at 11–12.
57
JX819 at 11–12.
12
like Authentix);58 the invested capital and a portion of the proceeds are then

distributed to a fund’s limited partners and a portion of the proceeds (called “carried

interest”) to its general partner, or in the case of CUSGF III, to its Investment

Limited Partner, which is an affiliate of CUSGF III’s general partner, TCG.59

Private equity funds prefer to exit before or around the ten-year mark of its

lifecycle, but it is not typically mandatory to exit at that time.60 The preference to

exit around the ten-year mark exists because when a fund reaches the end of its term,

it can no longer obtain additional capital from its investors and thus, cannot make

further investments in portfolio companies.61 However, a fund can continue to hold

and manage its remaining portfolio companies after its term ends (even without the

general partner of the fund seeking an extension of the fund life).62 Alternatively,

the general partner of the fund can seek an extension of the fund life, by requesting

permission from an advisory board of the largest investors in the fund (i.e., the

investor advisory committee or “IAC”), or the majority of the underlying limited

58
Tr. (Coburn) 1680:18–1681:11; see also JX819 at 12.
59
Limited Partnership Agreement at 9, 14–15; id. §§ 3.4–3.5.
60
Tr. (Coburn) 1681:12–22, 1691:19–1692:7 (explaining that the tenure life of the fund is “not a
forcing function,” instead the fund assesses each portfolio company on a case-by-case basis to see
if the asset will appreciate, depreciate, or remain static); Tr. (Timmins) 737:1–7 (agreeing that
funds are not required to immediately sell remaining assets upon reaching the end of its fund life).
61
Tr. (Coburn) 1688:23–1690:4; Tr. (Gozycki) 1794:22–1795:17.
62
Tr. (Coburn) 1684:15–1687:16, 1688:8–1690:4; see also Tr. (Gozycki) 1794:22–1795:5.
13
partners of the fund; if granted, the fund can continue to invest capital to support its

portfolio companies.63

CUSGF III’s ten-year term did not impose a deadline for selling its portfolio

of companies.64 The initial fund term for CUSGF III lasted until September 30,

2017,65 and CUSGF III planned to exit Authentix in 2017.66 However, Carlyle has

had funds where they continued to hold investments after term expiration.67 The

terms of Carlyle’s funds, including CUSGF III, can also be extended (in the manner

discussed above),68 which would allow the funds to continue investing in their

portfolio companies.69

63
Tr. (Coburn) 1683:13–1684:2, 1685:11–15, 1689:4–18; Limited Partnership Agreement § 2.7.
64
Tr. (Coburn) 1681:12–1688:7; Limited Partnership Agreement § 2.7.
65
JX3 (amending the “Final Closing Date” in the Limited Partnership Agreement to “September
30, 2007”); Limited Partnership Agreement § 2.7 (stating that the partnership “shall continue in
business through the close of business on the ten-year anniversary of the Final Closing Date”).
Ten years after September 30, 2007, which was amended to replace “Final Closing Date” is
September 30, 2017.
66
See, e.g., JX318.
67
See, e.g., Tr. (S. Bailey) 1113:17–1115:1, 1116:18–1117:3, 1117:10–15; Tr. (Coburn) 1684:15–
1685:10.
68
Limited Partnership Agreement § 2.7; Tr. (Coburn) 1683:13–1684:2.
69
Tr. (Coburn) 1683:13–1684:2, 1685:11–15, 1689:4–18. For CUSGF III specifically, its Limited
Partnership Agreement states “the General Partner in its discretion may with the consent of the
Investor Advisory Committee or a Majority in Interest of the Combined Limited Partners extend
the term of the Partnership for successive one-year periods up to a maximum of two years.”
Limited Partnership Agreement § 2.7.
14
4. CUSGF III Distributes Proceeds of its Investments in a Waterfall
Distribution

For CUSGF III, investment proceeds from portfolio companies are distributed

in line with a distribution “waterfall” set out in the Limited Partnership Agreement.70

CUSGF III must first return 100% of invested capital (and provide a preferred 7%

per annum cumulative compounded internal rate of return on the limited partners’

capital) to limited partners.71 Only after the preferred return to limited partners has

been met, will carried interest distributions, which is Carlyle’s portion of the

proceeds received through the Investment Limited Partner,72 be made from the

additional investment proceeds.73 The additional investment proceeds are further

split between the Investment Limited Partner and the limited partners of the fund

according to the specific terms of the “waterfall.”74 Investment proceeds are

distributed through the “waterfall” on an ongoing basis; as a result, the carried

interest distributions may be (in fact, have been) made prior to the disposition of all

portfolio companies.75

If the Investment Limited Partner receives more than its fair share of proceeds

through the carried interest distributions, a clawback provision will trigger and

70
Id. § 3.5 (“Amounts and Priority of Distributions”).
71
Id. § 3.5(i)–(ii).
72
Id. at 9, 14–15.
73
Id. § 3.5.
74
Id. § 3.5.
75
Id. §§ 3.4(c), 3.5.
15
require Carlyle and its deal team to return excess distributions to the limited partners

of CUSGF III.76 As a simplified example, if CUSGF III fails to meet the 100%

invested capital and 7% preferred return obligation (annually compounded) for any

period of time for its investments when it makes a distribution, Carlyle and its deal

team, through the Investment Limited Partner, may have to return excess carried

interest from previous distributions to make up for the shortfall in the preferred

return for that period of time.77 Importantly, the limited partners of CUSGF III are

entitled to the 7% preferred return only on capital that is still deployed in the fund’s

remaining portfolio companies, which included Authentix until the time of its sale.78

When remaining portfolio companies are sold and the capital is returned to the

limited partners, the 7% preferred return per annum compounded ceases for that

capital.79 Plaintiffs argue that Carlyle was motivated to sell Authentix to cease the

7% preferred return and prevent clawback, as the proceeds from which Carlyle’s

carried interest was computed would then cease to be diminished by the 7% preferred

return.80

76
Tr. (Timmins) 724:4–8; Limited Partnership Agreement § 9.4.
77
Tr. (Timmins) 723:22–724:8; Limited Partnership Agreement § 9.4.
78
Tr. (Timmins) 722:7–723:8.
79
Id.
80
See Pls.’ Post-Trial Opening Br. 9–10, Dkt. No. 337 (“Pl. PTOB”).
16
5. Authentix’ Performance Declined After Carlyle’s Investment

After Carlyle’s investment, Authentix’ performance declined.81 In 2008,

Authentix’ largest contracts were with India and Malaysia.82 In 2009, India stopped

paying Authentix—even though it was contractually bound to do so,83 and in 2011,

Malaysia also stopped paying Authentix for services and products that Authentix

had already provided.84 Overall, Authentix’ revenues declined at annual rate of

approximately 7% from 2007 to 2012.85

Between 2009 and 2013, Authentix issued four additional rounds of

convertible preferred stock because of various issues with liquidity.86 Each round

was open to all existing investors on a pro rata basis,87 and Whitney and certain other

Plaintiffs (such as Manti) took the opportunity to invest as well.88 In total, Carlyle

invested $60.3 million in Authentix, with its initial investment of $40 million and an

additional $20.3 million across the four equity raises (which included additional

capital to make up for stockholders who did not purchase their proportionate

share).89 By 2013, CUSGF III was the majority owner of Authentix and by the time

81
JX54 at 50.
82
Id. at 53.
83
Tr. (Moxam) 113:14–114:3; Tr. (Pearce) 170:7–20; JX54 at 53.
84
Tr. (Moxam) 111:19–112:5; JX54 at 53.
85
JX54 at 50.
86
PTO ¶ 51; see, e.g., Tr. (Moxam) 109:12–15; Tr. (Gozycki) 1769:19–1770:7.
87
PTO ¶ 51.
88
Id.
89
Id. ¶¶ 49, 51.
17
of the sale of Authentix in September 2017, Authentix Holdings, which took

ownership of the Authentix stock from CUSGF III,90 owned 70% of Authentix’

preferred stock and 52% of Authentix’ common stock.91

6. David Moxam Leaves Authentix and B. Bailey is Appointed as
Authentix’ New CEO

Towards the end of the (financially-disappointing) 2008-2012 period,

Authentix’ CEO Moxam worked part-time.92 In reaction to Authentix’ performance,

Vigano and S. Bailey told Moxam that he could either resign or be fired, and Moxam

left Authentix in 2012.93 In October 2012, B. Bailey was appointed as Authentix’

new CEO.94 As part of B. Bailey’s employment agreement, the Company approved

a “special cash bonus” that provided B. Bailey was entitled to receive 10% of the

consideration received by Authentix in the event of a sale of Authentix in excess of

$50 million, up to $80 million, which amounts to a maximum of $3 million.95

In 2013, Authentix’ performance began to improve. In July 2013, Authentix

signed a contract with Saudi Aramco (“Aramco”) for a pilot program.96 After a

90
Id. ¶ 26.
91
Id. ¶¶ 26, 51.
92
Tr. (Moxam) 117:10–118:11.
93
Id. at 118:12–119:4.
94
PTO ¶ 59; JX48; JX50.
95
JX48 at 2–3 (employment agreement providing “[i]n connection with the first Change in Control
to occur following the Effective Date, the Executive [B. Bailey] will be eligible to receive a cash
bonus equal to ten percent (10%) of Total Consideration in excess of $50,000,000 and less than or
equal to $80,000,000”).
96
JX60.
18
successful pilot program, Authentix won a fuel-marking contract with Aramco in

June 2015.97 The Aramco contract contributed approximately $10 million in

revenue in 2014 and approximately $19 million in revenue in 2015, making it

Authentix’ largest contract.98 In 2014, Authentix began realizing significant revenue

from a 2012 tax-stamp contract with Ghana (“Ghana Tax”).99 Overall, Authentix

achieved $13 million in EBITDA in 2015 compared to the -$5.5 million in 2012

EBITDA.100

7. Authentix Considered a Partial Sale in 2014 and Commenced a
Sale Process for the Entire Company in October 2015

In 2014, the full Board explored divesting the brand and currency and tax

stamp businesses,101 and hired an investment bank, Imperial Capital, to assist.102

However, Authentix halted the partial sale process after receiving “some inbound

attraction for the entire company.”103

In Fall 2015, the full Board (including Barberito, the Board representative for

Manti) supported the decision to begin a sale process for Authentix.104 In October

2015, Authentix invited five investment banks to compete for the opportunity to run

97
Id.; JX83 at 1; Tr. (B. Bailey) 1632:8–22.
98
JX565 (found on “O&G” tab of the financial spreadsheet).
99
Id. (found on the “C&TS” tab of the financial spreadsheet).
100
JX142 at 33.
101
Tr. (S. Bailey) 1143:6–20; JX79 at 71. The internal name for the partial sale process was
“Project Focus.” JX79 at 71.
102
Tr. (Barberito) 493:10–494:6; Tr. (B. Bailey) 1479:4–18; JX79 at 71.
103
Tr. (B. Bailey) 1479:19–1480:7.
104
Tr. (Barberito) 494:13–19; PTO ¶ 12.
19
a sale process.105 After each bank made a pitch presentation,106 which included

preliminary estimates on valuation that were based on a “limited set of

information,”107 The Board unanimously selected Baird to run the sale process.108

The preliminary valuation of the bankers ranged from $200 million to $275

million.109

Authentix expected the formal sale process to launch in the third quarter of

2016,110 which was to follow the “good news”111 of the anticipated Aramco contract

renewal in May 2016.112 However, such news was not forthcoming; in May 2016,

Aramco informed Authentix that it would only extend the program for two months

(from May to July) rather than the two-year renewal contemplated by the contract.113

Then, in August 2016, Aramco signaled that the contract would not be renewed on

its original terms by issuing only a seven-month extension (through the end of

105
Tr. (S. Bailey) 1154:4–20.
106
JX99–103 (including pitches by Credit Suisse, Deutsche Bank, Imperial Capital, Raymond
James, and Baird).
107
Tr. (S. Bailey) 1158:23–1159:21, 1161:10–19.
108
JX134; Tr. (S. Bailey) 1162:11–22.
109
JX99 at 18 (Credit Suisse reference range from $225 million to $275 million); JX100 at 20
(Deutsche Bank preliminary valuation in the $200 million to $275 million range); JX101 at 30
(Imperial Capital average valuation range between $145.6 million and $177.7 million and 2016
average only range between $208.4 million and $250.1 million); JX102 at 63 (Raymond James
preliminary valuation range between $225 million and $275 million); JX103 at 23 (Baird
preliminary valuation at an excess of $200 million).
110
Tr. (Barberito) 498:17–499:1.
111
Tr. (B. Bailey) 1483:24–1484:22.
112
JX146; JX148.
113
JX171 at 3–4; Tr. (S. Bailey) 1165:6–22.
20
February 2017) that discounted prices by 30%.114 In addition, Aramco planned on

opening the program to competitive rebidding.115

Baird and Authentix analyzed the potential impact of losing the Aramco

business on Authentix’ overall financials.116 The Board decided to launch the sale

process in September 2016 to evaluate whether buyers could appropriately value

Authentix.117 Baird’s recommendation in September 2016 was to proceed with a

“scoping” (not broad) process by approaching buyers in a customized manner to

market Authentix ahead of a regular sale in 2017.118 The scoping process was to

launch in the Fall of 2016 because the directors believed that the uncertainty

surrounding contract renewal (given Authentix’ volatile customer base) was unlikely

to improve.119 There was also a possibility that Authentix might lose Aramco to a

competitor altogether during the rebidding process.120 Baird did reduce its initial

114
JX192 at 6; Tr. (S. Bailey) 1168:1–23.
115
JX192 at 6; JX179; Tr. (B. Bailey) 1491:4–1492:12.
116
JX204; Tr. (B. Bailey) 1497:23–1499:20, 1500:13–16.
117
Tr. (B. Bailey) 1500:13–16, 1507:2–1508:8, 1509:15–1510:17; JX189 at 23; JX221.
118
Tr. (Renner) 1400:8–1402:6; Tr. (Atkins) 2100:8–2101:19; JX207 at 5; see also Tr. (B. Bailey)
1499:13–20.
119
Tr. (B. Bailey) 1499:13–20 (discussing how Baird advised Authentix to get started with the
sale process immediately because the “news may be good going forward; then it may not be good”
and that “there are ways to deal with this uncertainty”); Tr. (S. Bailey) 1184:21–1186:22
(discussing the volatility of Authentix given the “long list of issues with the contracts”); JX221;
JX207 at 5.
120
Tr. (S. Bailey) 1186:11–1187:4.
21
$200 million valuation estimate of Authentix,121 but it communicated to Authentix

that Authentix should test out the market through a scoping process.122

8. Authentix’ Scoping Process Begins in Fall 2016

In September 2016, Baird assembled a list of potential strategic buyers.123

Everyone on the Board had an opportunity to provide feedback to the list, and

Barberito suggested no additional names for the list.124 Baird began scoping calls

by September 21, 2016,125 and the entire Board, including Barberito, was advised of

that development.126 Baird started with strategic buyers, but ultimately contacted a

total of 127 potential buyers, including 27 financial buyers.127 During the outreach,

Baird’s talking points touched on the fact that Authentix faced certain challenges,

including that its largest contract (Aramco) had a pending contract renewal

milestone, in order to generate “credib[ility].”128 In addition, Baird referenced

Carlyle’s “hold period,”129 which is standard information that potential buyers

want.130

121
Compare JX103 at 23, with JX229 at 1.
122
JX207 at 5; Tr. (Renner) 1400:8–1402:6.
123
JX215; JX217 at 5–9.
124
JX221; Tr. (Barberito) 515:19–518:7.
125
JX221.
126
Id.
127
JX267; JX336 at 3–4, 9–10; JX217.
128
JX216; Tr. (Renner) 1425:17–1427:5 (stating “[y]ou can’t hide something like that and then
say, oh, by the way. Because then they’re going to be, like, you weren’t credible, and why didn’t
you tell me that?”).
129
JX215; JX216 at 1.
130
Tr. (S. Bailey) 1190:8–1191:6; Tr. (Renner) 1404:16–1405:1; Tr. (Gozycki) 1773:2–15.
22
Baird’s outreach yielded 18 potential buyers that attended “fireside chat

meetings.”131 Four potential buyers ultimately submitted initial indications of

interest to buy Authentix: Intertek Group PLC ($120 million); Innospec Inc. ($177

million with unspecified contingency for “Saudi [Aramco] contract”); OpSec

Security ($100 million plus “two equal installments of $22.5 million in December

2017 and December 2018 contingent on Authentix achieving at least 95% of Saudi

[Aramco] revenue and profitability targets in each respective year”); and Thyssen

Bornemiscza Group (“TBG”) ($207 to $248 million).132 Other potential buyers

declined to proceed because of: (1) large contract renewal risk; (2) foreign end

markets (geopolitical/Federal Corrupt Practices Act risk); (3) customer

concentration; (4) management transition; (5) long sales cycle and pipeline; (6)

alternative acquisitions; and (7) lack of strategic fit/limited synergies.133

9. Potential Buyers Proceed with Due Diligence

Authentix decided to move forward with all four potential buyers, Intertek,

Innospec, OpSec, and TBG, for due diligence to prepare for the submission of the

second round of indications of interest in February 2017.134 TBG dropped out of the

process altogether, citing that it was pursuing a different significant deal. 135 OpSec

131
JX336 at 4.
132
JX274 at 7.
133
Id. at 3.
134
Tr. (S. Bailey) 1207:10–1208:13; Tr. (B. Bailey) 1522:22–1523:8; see JX336 at 3, 9.
135
Tr. (B. Bailey) 1522:22–1523:19; JX336 at 5.
23
conducted due diligence, but decided to pass on the opportunity because of customer

concentration, contract renewal risks, and concerns about Authentix’ currency

business.136 Innospec maintained its $177 million topline indication of interest, but

specified that $100 million of its purchase price was contingent on obtaining three-

year contracts with Aramco, Ghana (for fuel, not tax), and Cameroon.137 Intertek

provided a $140 million indication of interest, with $55 million contingent on

Authentix renewing the Aramco and Ghana Tax contracts on existing terms.138

10. Barberito and Manti Join the Sale Process

In March 2017, Barberito approached S. Bailey to present a superior bid to

buy Authentix.139 Authentix gave Barberito access to the data room but S. Bailey

emphasized that Barberito needed to move fast because Authentix could lose other

buyers while Barberito caught up in the sales process.140 On March 15, 2017,

Barberito, acting through Manti, partnered with White Deer Energy (“WDE”) to

submit an indication of interest of $105 million to buy Authentix.141 Later, WDE

and Manti increased their bid to $107 million.142 Authentix offered WDE exclusivity

136
Tr. (B. Bailey) 1525:3–18; JX336 at 5.
137
Tr. (B. Bailey) 1526:3–12; JX336 at 5.
138
JX328; JX336 at 5.
139
JX344 at 2; Tr. (Barberito) 360:2–362:1; Tr. (S. Bailey) 1215:13–1216:5.
140
See, e.g., JX350 at 2; Tr. (Barberito) 550:22–551:16; Tr. (S. Bailey) 1216:6–1218:15; Tr. (B.
Bailey) 1530:13–1532:15; JX379.
141
JX363.
142
JX376; JX374 at 1–2.
24
on March 18, 2017,143 but the Manti-WDE partnership dropped out of the process

before the exclusivity period ended because WDE was not comfortable with

Authentix’ customer concentration “in dodgy places.”144 On April 1, 2017, Blue

Water Energy LLP (“BWE”), another private equity firm,145 joined with Manti to

submit an indication of interest for $107 million to buy Authentix.146 B. Bailey

spoke with BWE partner Tom Sikorski,147 during which conversation Sikorski told

B. Bailey that Manti was looking to reengage former management.148 B. Bailey

responded that he would not remain with the Company if the buyer reengaged former

management.149 Sikorski responded that BWE would not do a deal without B. Bailey

being a part of it.150 Subsequently, BWE decided to pursue a deal on its own, without

Manti.151 Barberito and Manti did not submit a bid to buy Authentix on their own.152

11. Authentix Negotiated with BWE and Intertek

On April 13, 2017, BWE had put in its solo bid for $107 million.153 Authentix

was able to negotiate Intertek up to a bid of $115 million,154 and in reaction, after S.

143
JX376; JX374 at 1–2.
144
Tr. (Tilney) 2065:23–2068:15; see JX405.
145
See JX419 at 1.
146
Id. at 2.
147
PTO ¶ 45.
148
Tr. (B. Bailey) 1541:20–1542:16.
149
Id.
150
Id. at 1542:21–1543:1.
151
JX476; JX493 at 236.
152
Tr. (Barberito) 578:2–16.
153
JX476; Tr. (S. Bailey) 1224:19–1225:20.
154
Tr. (S. Bailey) 1225:2–1226:1.
25
Bailey contacted Sikorski to negotiate a price increase, BWE increased its indication

of interest to $115 million.155 The BWE and Intertek proposals each had their

advantages: BWE agreed to drop a regulatory closing requirement, which meant

BWE would close the transaction even if the regulatory clearance had not been

obtained; Intertek, on the other hand, had completed more diligence.156 Authentix

awarded Intertek exclusivity on April 26, 2017.157

After Intertek conducted additional due diligence, on May 30, 2017, it reduced

its offer from $115 million to $85 million up-front cash plus $30 million contingent

on Authentix securing multi-year renewals of Aramco and Ghana Tax contracts and

achieving certain financial results in 2017.158 Because of Intertek’s reduced offer,

Authentix decided to return to BWE for a better sale price.159 BWE submitted an

updated indication of interest of $105 million on June 7, 2017.160 Authentix granted

BWE exclusivity until July 3, 2017 on the basis of that bid.161

12. BWE Conducts Due Diligence

In June 2017, after BWE received exclusivity, BWE’s extensive diligence

began.162 Prior to this point, BWE had conducted two weeks of “intensive” diligence

155
JX491; Tr. (S. Bailey) 1227:19–1230:3.
156
Tr. (S. Bailey) 1230:4–1231:23; see Tr. (Vigano) 1078:20–1080:7.
157
JX510.
158
JX517 at 1–2.
159
Tr. (S. Bailey) 1236:23–1237:6.
160
JX527 at 4–5.
161
JX548 at 2; Tr. (S. Bailey) 1241:17–1242:11.
162
Tr. (Sikorski) 2048:20–2049:7, 2051:24–2052:8.
26
at the time of its April 13, 2017 bid, but that had been in part focused on the

management team of Authentix and Manti itself.163 BWE also hired KPMG

accountants to do a quality of earnings assessment.164

BWE’s diligence revealed some issues with Authentix’ reported earnings,

including that Authentix’ accounting methods made the Ghana Tax contract appear

more profitable than it was.165 During BWE’s diligence process, B. Bailey indicated

to Sikorski that Authentix’ owners were content to hold the Company during the

period of uncertainty if BWE was not able to confirm their $105 million purchase

price.166 However, after weeks of diligence, BWE concluded that the fair upfront

price for Authentix was between $60 million and $70 million, significantly lower

than its April 2017 bid of $115 million and June 2017 bid of $105 million.167

13. Authentix Negotiates with BWE

During BWE’s diligence, Authentix won the Aramco technical trials in Spring

2017 in connection with Aramco’s competitive rebidding process, and Authentix

knew that success in getting the Aramco contract would turn on price.168 The Board

unanimously approved a bid for the Aramco contract with diminished terms, and

communicated the terms to BWE, noting its confidence in securing the contract on

163
JX493 at 236; Tr. (Sikorski) 2045:19–2047:24.
164
See, e.g., JX564 at 3.
165
Tr. (Gozycki) 1779:14–1782:1, 1784:15–1785:7.
166
JX557 at 1; Tr. (B. Bailey) 1571:21–1573:13.
167
JX571 at 2.
168
JX589 at 2; Tr. (Barberito) 454:11–24, 456:10–458:21.
27
that basis.169 In addition, Authentix received news that Ghana would agree to a plan

to come current on amounts due to Authentix for the Ghana Tax contract and extend

the contract for two years, which was also shared with BWE on July 16, 2017.170

With the above news, Authentix began negotiations with BWE. On July 21,

2017, BWE submitted a revised indication of interest at $85 million of up front

consideration, with another $20 million conditioned on Authentix achieving certain

financial metrics.171 On July 27, 2017, Authentix countered with a $10 million

increase in the up front consideration, and tied the earnout to one year performance

rather than three (but with a $10 million decrease in the amount of earnout).172 On

July 31, 2017, BWE counteroffered with an increase of the up front consideration

from $85 million to $87.5 million, certain concessions on the earnout, and certain

below the line adjustments.173 Authentix countered again, with $90 million in up

front consideration and further working capital adjustments.174 Finally, BWE

responded with its final offer on August 4, 2017,175 keeping the upfront

consideration as $87.5 million, but agreeing to give $3.5 million in additional

consideration based on below-the-line adjustments.176

169
JX589; Tr. (Barberito) 458:10–21; JX591 at 1.
170
JX586.
171
JX563 at 2.
172
JX609 at 2; Tr. (S. Bailey) 1252:7–1253:7.
173
JX611; JX611 at 4; Tr. (S. Bailey) 1253:16–1254:3.
174
JX616 at 2; Tr. (S. Bailey) 1254:4–12.
175
JX619.
176
Id.; JX628 at 1.
28
On August 21, 2017, Authentix learned that Aramco had awarded the

Company a new contract on terms mirroring the Authentix bid.177 Authentix did not

attempt to re-negotiate with BWE because the new contract matched BWE’s

assumptions for its bid, based on the information Authentix had previously

communicated to BWE.178

14. Authentix Closed a Sale to BWE in September 2017

On September 12, 2017, the Board considered the sale to BWE.179 The

directors voted four to zero, with Barberito abstaining, to sell Authentix to BWE

based on the economic terms set forth in BWE’s August 4, 2017 letter for $87.5

million upfront and an opportunity to earn $17.5 million more based on the

achievement of certain 2018 financial metrics.180 B. Bailey, S. Bailey, Gozycki, and

Vigano all voted in favor of the sale.181 Barberito did not attend the Board meeting

to vote on the Authentix sale to BWE, but he did convey his strong opposition to the

sale in a letter.182 Barberito stated he saw Authentix’ upside,183 criticized the sales

process for failing to feature the potential that Authentix could launch new upstream

177
JX663; JX685.
178
Tr. (Sikorski) 2023:5–14; Tr. (S. Bailey) 1256:2–1257:9; Tr. (B. Bailey) 1585:21–1586:8.
179
JX714.
180
Id. at 4; see JX619 at 3.
181
JX714 at 4; Tr. (S. Bailey) 1260:2–16; Tr. (Vigano) 1391:1–5; Tr. (B. Bailey) 1593:23–1596:3;
Tr. (Gozycki) 1799:1–18.
182
Tr. (B. Bailey) 1593:2–20; JX711.
183
JX711 at 1.
29
processes,184 suggested that a twelve month deferral of the sales process would

increase shareholder value,185 and argued that BWE did not adequately value

Authentix.186

The sale of Authentix to BWE closed on September 13, 2017.187 Authentix’

stockholders received guaranteed consideration of $77.7 million.188 Up to $9.8

million of additional consideration would be paid out over time in the event

Authentix obtained payment on a receivable related to the Ghana Tax contract,

which was eventually paid.189 In addition, Authentix’ shareholders stood to earn an

additional $7.5 million if Authentix’ 2018 EBITDA met or exceeded $15 million,

and an additional $10 million if Authentix’ 2018 EBITDA met or exceeded $17

million.190 However, Authentix failed to meet those financial conditions, and

Authentix’ 2018 EBITDA was less than $10 million.191 As such, this earnout was

not paid.192

At the time of the sale of Authentix, B. Bailey owned 4.7% of Authentix

common stock.193 In the sale of Authentix to BWE, BWE granted B. Bailey “sweet

184
Id.
185
Id.
186
Id.
187
PTO ¶ 54.
188
Id.
189
Id.
190
JX625 at 3.
191
JX746 at 7.
192
PTO ¶ 54.
193
JX758 (Q43).
30
equity” (aka “M shares”) as a financial incentive for his continued role as an

executive after the acquisition of Authentix by BWE.194 The “M shares” are a form

of restricted stock award that would only pay out if BWE exits Authentix and the

common shareholders earn an 8% per annum return.195 In other words, the “M

shares” would not clear the restriction (i.e., would not be worth anything) in the

event of an exit transaction after five years by BWE’s management in which BWE’s

returns, as measured by multiple on invested capital, does not exceed 1.47x.196 BWE

granted B. Bailey 35.0% of the total “sweet equity pot.”197

15. CUSGF III Extended its Term After the Sale of Authentix

While the deal to sell Authentix closed on September 13, 2017, ahead of the

fund term of September 30, 2017, CUSGF III’s IAC approved a two-year extension

to CUSGF III’s term.198 CUSGF III had considered a term extension since August

2017 because of the possibility that CUSGF III would want to continue investments

in Catapult Learning, one of two portfolio companies that the fund then held and

continued to hold after the Authentix sale.199 Of the three investments remaining at

194
JX707 at 8; JX720 at 7; Tr. (B. Bailey) 1676:3–18.
195
JX720 at 7 & n.1; JX707 at 8.
196
JX720 at 7.
197
JX707 at 8; Tr. (B. Bailey) 1676:3–18. The total sweet equity pot was agreed at 15.5% of the
returns above the 8% return per annum to the common stockholders. JX707 at 8; JX720 at 7. The
total sweet equity pot is split between 18 executives, with the final allocation to be agreed upon
with B. Bailey. JX707 at 8. B. Bailey was allocated 35.0% of the total sweet equity pot. Id.
198
JX733; Tr. (Coburn) 1725:14–20; Tr. (Gozycki) 1795:18–19.
199
JX459; JX733; JX831; Tr. (Gozycki) 1794:3–1795:17; Tr. (Timmins) 718:10–24.
31
the time of Authentix’ sale, Authentix was the largest.200 As of June 30, 2017, before

exiting its investment in Authentix, CUSGF III had returned $840.2 million to its

investors, which is a 1.54x return on their investments.201 CUSGF III’s return on its

Authentix investment was 0.89x, meaning it lost money.202 As of December 31,

2021, CUSGF III remained open.203

B. Procedural History

On August 7, 2020, Plaintiffs Manti, Malone Mitchell, Winn Interests, Ltd.,

Equinox I. A TX, Greg Pipkin, Tri-C Authentix, Ltd., David Moxam, Jon Lal Pearce,

and Jim Rittenburg filed a verified complaint for breach of fiduciary duties against

Carlyle and the Director Defendants.204 Plaintiffs filed an amended complaint (the

“Complaint”) on November 3, 2020, against Defendants, with Craig Johnstone

joining the action as a Plaintiff.205

Defendants moved to dismiss the Complaint on November 17, 2020.206 One

issue raised in the motion to dismiss was whether the Stockholders Agreement,

referred to above, to which the parties were signatories, served to waive any

fiduciary duty claims in connection with the sale.207 I denied Defendants’ motion to

200
Tr. (Timmins) 718:10–24.
201
JX716 at 5.
202
JX705 at 2; Tr. (S. Bailey) 1260:17–1262:12, 1263:5–23.
203
JX751.
204
See Verified Compl. for breach of fiduciary duties, Dkt. No. 1.
205
See Verified Am. Compl., Dkt. No. 38 (“Compl.”).
206
See Defs.’ Mot. to Dismiss Pls.’ Verified Am. Compl., Dkt. No. 39.
207
See Defs. Opening Br. in Supp. of Mot. to Dismiss Am. Compl. 18, Dkt. No. 39.
32
dismiss in memorandum opinions dated February 14 and June 3, 2022. 208 I

determined that Plaintiffs had not waived the right to bring this action asserting

breaches of fiduciary duties related to the sale of Authentix.209 I also concluded that,

based on plaintiff-friendly inferences at the pleading stage, entire fairness

presumptively applied to the sale, precluding dismissal under Rule 12(b)(6).210 On

September 14, 2023, I granted Plaintiffs’ motion to add Tri-C Authentix Preferred,

Ltd. as a Plaintiff.211

I conducted a seven-day trial on January 22 through January 30, 2024.212

After trial, the parties submitted their respective post-trial briefs.213 I heard post-trial

oral argument on June 20, 2024, and consider the matter submitted as of that date.214

208
See Feb. Mem. Op.; Manti Hldgs., LLC v. Carlyle Gp. Inc., 2022 WL 1815759 (Del. Ch. June
3, 2022) (“June Mem. Op.”).
209
Feb. Mem. Op. at *4.
210
June Mem. Op. at *8–11.
211
See Granted ([Proposed] Ord. Granting Mot. for Permissive Joinder of Tri-C Authentix
Preferred, Ltd.), Dkt. No. 274.
212
See Judicial Action Form re Tr. before Vice Chancellor Sam Glasscock dated 1.22.24 through
1.30.24, Dkt. No. 319.
213
See Pl. PTOB; Defs.’ Post-Trial Br., Dkt. No. 342 (“Def. PTAB”); Pls.’ Post-Trial Reply Br.,
Dkt. No. 346 (“Pl. PTRB”).
214
See Judicial Action Form re Post Tr. Oral Arg. before Vice Chancellor Sam Glasscock dated
6.20.24, Dkt. No. 350.
33
II. ANALYSIS

Plaintiffs contend that Carlyle (Carlyle Group, CUSGF III, Authentix

Holdings, Carlyle Investment, and TCG) and the Director Defendants (B. Bailey, S.

Bailey, Gozycki) are liable for breaches of their fiduciary duty in connection with

the sale of Authentix.215 All other claims have been waived.216

I must address these allegations by applying, to the rather robust statement of

facts above, a rather simple template of the law of corporate fiduciaries. Carlyle,

like Plaintiffs, was a holder of Authentix preferred and common stock. I may assume

that a majority of the directors were not independent of Carlyle. Carlyle, as a

stockholder was owed fiduciary duties by the directors, and was free to sell its stock

for its own reasons and on its own timing. Of course, when acting as a controller,

Carlyle itself could owe fiduciary duties to the Company and its stockholders. For

instance, if it had stood on both sides of the transaction, Carlyle would be held to a

fiduciary standard, and be liable absent entire fairness. But as the facts recited above

215
Pl. PTOB 47–48.
216
Plaintiffs originally asserted a claim for breach of fiduciary duty and a claim for unjust
enrichment that survived the motion to dismiss stage. June Mem. Op. However, during post-trial
briefing and argument, Plaintiffs only pursued their claim for breach of fiduciary duty, thus the
unjust enrichment claim is waived. Frederick Hsu Living Trust v. Oak Hill Capital P’rs III, L.P.,
2020 WL 2111476 (Del. Ch. May 4, 2020) (holding that a claim for unjust enrichment was waived
because plaintiff bore the burden of proof on a claim for unjust enrichment and during post-trial
briefing and argument, the plaintiff only pursued his claim for breach of fiduciary duty); see
Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed
waived.”).
34
indicate, the transaction was at arms’ length and was the result of rather vigorous

negotiation.

Carlyle could also be liable if it used its corporate control to compete with the

majority for consideration. But the facts here show that consideration paid by BWE

was distributed ratably.

Plaintiffs’ theory is adjacent to the model just stated. Plaintiffs aver that

Carlyle controlled Authentix throughout the sales process and Carlyle had conflicts

of interest that resulted from pursuing a “different form of consideration” than

minority stockholders, by which they “extract[ed] something uniquely valuable.”217

As such, Plaintiffs argue that the entire fairness standard applies because they have

established a conflicted controller transaction.218 Their argument runs as follows:

Carlyle needed to sell in 2017 at the latest, to meet its investors’ expectations. This

business necessity, per Plaintiffs, caused Carlyle and the Board to sell to BWE in

2017, when it was crystal-clear that if Authentix had put off the sale until 2018, the

stockholders would have received more than twice the consideration paid by

BWE.219 So overweening was Carlyle’s need, apparently, that it left more than

$100,000,000 of value behind, of which more than 50% would have flowed to

Carlyle.

217
Pl. PTOB 47–48, 53.
218
Id. at 53.
219
Pl. PTRB 47.
35
If it proved true that Carlyle thought it necessary to sell immediately,

consequences (and price) be damned, that would create a conflicted controller

transaction, and Carlyle would be liable, absent entire fairness.220 Plaintiffs aver that

Director Defendants are also subject to entire fairness review because they lack

independence from the controller, Carlyle, which (as just explained) is conflicted.221

In other words, a simple predicate step must control my analysis. Have

Plaintiffs met their burden to show that Carlyle’s inclination to support a sale was in

reality an imperative, such that the sale was not for the good of the entity and its

owners, but instead was timed to drive a unique benefit to Carlyle? Only if Plaintiffs

have met this burden must I address whether the resulting transaction was entirely

fair.

I find that Carlyle does not have conflicts of interest that trigger entire fairness

in connection to the sale of Authentix to BWE.222 Accordingly, the business

220
See, e.g., New Jersey Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888 (Del.
Ch. Sept. 30, 2011) (holding there was a viable disabling liquidity need where an interested
stockholder owed $12 million in settlement payments and $13 million in loans, had no sources of
cash inflow, had recently paid out $4.4 million, and started a new business venture); McMullin v.
Beran, 765 A.2d 910 (Del. 2000) (describing a sale process where a 80% controller proposed to
sell entire company in an all-cash transaction, allegedly to satisfy need for cash to fund a separate
acquisition, conducted the negotiations itself, and placed its own cash restrictions on potential
bidders); In re Morton’s Rest. Gp., Inc. S’holder Litig., 74 A.3d 656 (Del. Ch. 2013) (reasoning
that a private equity fund’s relatively common desire to raise a new fund was not an unusual crisis
requiring a fire sale and that private equity funds are naturally disincentivized to hastily seek
below-market merger consideration to avoid alienating past investors).
221
Pl. PTOB 48, 50–52.
222
The parties disagree strenuously which Carlyle-related entities, named party-Defendants here,
may have liabilities as co-controllers. See supra Figure One. Because I find that business
judgement applies, I need not wade into this morass; instead, I may skirt it, dry-shod.
36
judgment rule applies, and I decline to review the transaction for breaches of

fiduciary duty. My analysis follows.

A. Carlyle Exercised Control Over Authentix and Director Defendants
Lacked Independence from Carlyle

I note that Carlyle exercised control over Authentix. I find that CUSGF III

(which owned Authentix stock through Authentix Holdings) and Authentix

Holdings, on their own, had sufficient voting control of Authentix to make them

controllers. A stockholder is considered a controller under Delaware law where the

stockholder: “(1) owns more than 50% of the voting power of a corporation or (2)

owns less than 50% of the voting power of the corporation but ‘exercises

control over the business affairs of the corporation.’”223 “A controlling stockholder

need not be a single person or entity. A group of stockholders may be deemed a

‘control group’ and considered a controlling stockholder such that ‘its members owe

fiduciary duties to their fellow shareholders.’”224 CUSGF III owned Authentix stock

through Authentix Holdings,225 and Authentix Holdings owned the majority of the

preferred (70%) and common stock (52%) of Authentix.226 With the majority of

both the preferred and common stock by percentage, I find that CUSGF III and

223
In re KKR Fin. Hldgs. LLC S'holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014) (quoting Kahn
v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994)), aff'd sub nom, Corwin v. KKR
Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
224
In re Hansen Medical, Inc. S’holders Litig., 2018 WL 3025525, at *5 (Del. Ch. June 18, 2018)
(quoting In re Nine Sys. Corp. S'holder Litig., 2014 WL 4383127, at *24 (Del. Ch. Sept. 4, 2014)).
225
PTO ¶ 26.
226
Id.
37
Authentix Holdings had sufficient voting control of Authentix (over 50% of both the

preferred and common stock) and thus, were controllers of Authentix.

I now turn to whether the Director Defendants lacked independence from

Carlyle.227 Plaintiffs argue that S. Bailey, Gozycki, and B. Bailey were all not

independent of Carlyle.228 I agree. S. Bailey was a Partner and Managing Director

at Carlyle Group while he was on Authentix’ Board as a designee of Carlyle.229

Gozycki served on the Carlyle deal team for Authentix from 2008 to September 13,

2017 and was a Vice President before his promotion to Managing Director at

Carlyle; he also served on Authentix’ Board as the designee of Authentix Holdings

from March 2013 to September 13, 2017.230 As dual fiduciaries of Carlyle and

Authentix, S. Bailey and Gozycki face “inherent conflicts of interest” if “Carlyle’s

interests diverged from the common stockholders with respect to the [s]ale.”231 In

addition, B. Bailey was designated to Authentix’ Board by Carlyle as the fifth

director232 and later became the CEO of Authentix.233 As a senior corporate officer

of Authentix, B. Bailey lacked independence from Carlyle.234 This is supported by

227
See June Mem. Op., at *11.
228
Pl. PTOB 50–53.
229
PTO ¶ 30.
230
Id. ¶ 31.
231
June Mem. Op., at *11 (citation omitted).
232
PTO ¶ 58.
233
Id. ¶ 59.
234
See June Mem. Op., at *11 (quoting Berteau v. Glazek, 2021 WL 2711678, at *20 (Del. Ch.
June 30, 2021)) (“Under the great weight of Delaware precedent, senior corporate officers
38
S. Bailey’s description of B. Bailey as a “good soldier”235 and “a great friend[] of

Carlyle”236 who “would do anything for [Carlyle].”237

In summary, CUSGF III and Authentix Holdings, at least, were controllers of

Authentix. In addition, the Director Defendants did lack independence from Carlyle.

However, I find below that Carlyle did not have conflicts of interests that trigger

entire fairness review of the transaction.

B. Carlyle Did Not Have Conflicts of Interest That Triggered Entire
Fairness

Carlyle favored the sale of Authentix, but did not stand on both sides of the

transaction; the ultimate sale to BWE was at arms-length. That does not end the

fiduciary duty analysis, however. Under Delaware law, one category of a conflicted

controller transaction that implicates the entire fairness standard is “transactions

where the controller competes with the common stockholders for consideration.”238

A controller competes with common stockholders for consideration when it: “(i)

‘receives greater monetary consideration for its shares than the minority

generally lack independence for purposes of evaluating matters that implicate the interests of a
controller.”).
235
JX393 (email from S. Bailey to Coburn stating “[B. Bailey] was planning to exit and White
Deer/Manti was going to bring Moxam in. So poor [B. Bailey] is being a good soldier to discuss
staying with them”).
236
JX445 (email from S. Bailey stating “[B. Bailey], an incredible Chairman and CEO of a Carlyle
portfolio company, please meet John Gammage, who covers Carlyle for JP Morgan. You are both
great friends of Carlyle”).
237
JX378 (email from S. Bailey to Coburn stating “He’s awesome. He would do anything for
CARLYLE”).
238
In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *12 (Del. Ch. Oct. 24,
2014).
39
stockholders,’ (ii) ‘takes a different form of consideration than the minority

stockholders,’ or (iii) extracts ‘something uniquely valuable to the controller, even

if the controller nominally receives the same consideration as all other

stockholders.’”239 Plaintiffs do not contend that Carlyle received differential

consideration implicating prongs (i) or (ii) above; they assert that entire fairness

applies because a timely exit from Authentix was uniquely valuable to Carlyle,

triggering entire fairness. Under entire fairness review, if proved, the burden would

shift to the Defendants to prove the fairness of the sale process and price.240

Plaintiffs argue that Defendants’ exercise of control over the sale of Authentix

to BWE was tainted by Carlyle’s “liquidity-driven conflict,” caused by end of

CUSGF III’s fund-life.241 Accordingly, Plaintiffs aver that the sale of Authentix is

a conflicted controller transaction that triggers entire fairness.242

Plaintiffs argue that Carlyle had liquidity-based conflicts from fund-life and

clawback provisions; considerations that drove them to sacrifice fair value for speed.

The evidence at trial does not support this hypothesis, however. In addition, I find

that Carlyle’s preferred shares of Authentix did not cause a conflict of interest from

239
June Mem. Op., at *8 (quoting In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 810 (Del.
Ch. 2022)).
240
See Delman v. GigAcquisitions3, LLC, 288 A.3d 692, 722 (Del. Ch. 2023).
241
Pl. PTOB 57; Pl. PTRB 31–32. Plaintiffs also alleged in their Complaint that Carlyle was
entitled to preferential payment of its rights as a preferred stockholder, and thus did not care about
receiving a fair price for its common stock. Compl. ¶¶ 1, 2, 106. This unlikely theory is addressed
below. See discussion infra Section II.B.2.
242
Pl. PTOB 58.
40
the minority stockholders such that entire fairness is triggered.243 Accordingly, I

find that the business judgment rule applies.

1. Carlyle Was Not Operating Under a Liquidity-Based Conflict from
Fund Life and Clawback Concerns

Plaintiffs argue that Carlyle had a liquidity-based conflict in that Carlyle

needed to sell off Authentix when it did due to the “time pressure” that Plaintiffs

aver Carlyle was facing. This time pressure related to the end of the fund term of

CUSGF III, and to clawback concerns.244

[T]here are very narrow circumstances in which a controlling
stockholder's immediate need for liquidity could constitute a disabling
conflict of interest irrespective of pro rata treatment. Those
circumstances would have to involve a crisis, fire sale where the
controller, in order to satisfy an exigent need (such as a margin call or
default in a larger investment) agreed to a sale of the corporation
without any effort to make logical buyers aware of the chance to sell,
give them a chance to do due diligence, and to raise the financing

243
Plaintiffs argue that the facts established at trial include facts that prove the allegations in the
Complaint that this Court found to create a reasonable inference of a disabling conflict. Id. at 53–
54. The highlighted allegations are that:

Steve Bailey’s statement that he was under pressure from Carlyle to close the Sale quickly
so that Carlyle could close its applicable fund, together with the nonratable benefit Carlyle
received from its preferred stock holdings, and the Director Defendants’ decision to cut the
lone dissenting stockholder, Barberito, out of the deliberations, gives rise to a reasonable
inference that Carlyle derived a unique benefit from the timing of the Sale not shared with
other common stockholders, rendering it conflicted.

June Mem. Op., at *9. At this post-trial stage and in consideration of the entire factual record—
and absent the plaintiff-friendly inferences that previously obtained—I find that Plaintiffs have
failed to meet their burden to demonstrate that Carlyle had a conflict of interest from liquidity
pressure or its preferred shares.
244
Pl. PTOB 9–11, 53–58.
41
necessary to make a bid that would reflect the genuine fair market
value of the corporation.245

I find that, at this post-trial stage and given the entire factual record, Plaintiffs

have failed to prove that Carlyle had a disabling liquidity-based conflict of interest

that triggers entire fairness. The factual record does not demonstrate that Defendants

were operating under such time pressure (from CUSGF III’s fund term and investor

expectations or otherwise) to sell Authentix so that they were willing to do a fire sale

of the Company, accepting less than the fair value of their shares in return for an

immediate sale.

a. CUSGF III’s Term and Investor’s Expectations

Plaintiffs argue that Authentix was the last “needle moving deal” remaining

in CUSGF III at the end of its fund life, so this created “enormous pressure” on

Carlyle to sell Authentix to meet investor expectations and Carlyle acted consistently

with that pressure.246 Defendants point out that, as Authentix’ largest stockholder,

Carlyle had a direct financial incentive to maximize the value of the Company. They

argue that while Carlyle wanted to sell Authentix in 2017, it did not need to sell

Authentix; the sale was not liquidity-driven, but rather in the shared interest of the

stockholders for financial reasons.247 I find that the factual record demonstrates that

245
In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1036 (Del. Ch. 2012).
246
Pl. PTOB 5.
247
Def. PTAB 62–70.
42
the sale of Authentix was not a fire sale driven by Carlyle acting under time pressure

or liquidity pressure from the end of CUSGF III’s fund life, in conflict to the

minority stockholders’ interests. While the facts certainly demonstrate that Carlyle

wanted to exit its investment in Authentix in 2017, the facts do not demonstrate that

Carlyle needed to exit its investment in Authentix or that Carlyle was otherwise

driven by time pressure to exit that would cause it to accept less than fair value for

Authentix shares, for itself as well as the minority stockholders.

First, CUSGF III was the largest owner of both preferred and common

shares.248 As the largest stockholder, CUSGF III had “an inherent economic

incentive ‘to negotiate a transaction that [would] result in the largest return for all

shareholders.’”249 Second, the fact that a controlling stockholder wants to sell their

stake in a company is not, standing alone, a conflict that triggers entire fairness

review. Unlike with, for interest, a need to sell stock to address a pressing liquidity

crisis (i.e., a fire sale), the fact that a controller supports a sale does not demonstrate

that the controlling stockholder was willing to accept less than fair value of their

shares or was willing to cause the Board to deprive other stockholders of the fair

value of their shares.250 Here, CUSGF III’s fund life was set to end on September

248
PTO ¶ 26.
249
Firefighters’ Pension Sys. City of Kansas City v. Presidio, Inc., 251 A.3d 212, 255 (Del. Ch.
2021) (quoting Orman v. Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002)).
250
See Flannery v. Genomic Health, Inc., 2021 WL 3615540, at *18 (Del. Ch. Aug. 16, 2021).
43
30, 2017, but CUSGF III’s ten-year term did not impose a deadline for selling its

portfolio of companies.251 Instead, Carlyle’s funds can continue to hold investments

after term expiration (and Carlyle’s funds have done this before).252 CUSGF III’s

term can also be extended to permit additional investment in portfolio companies

(and Carlyle’s funds have also done this before).253 As such, even though Carlyle

wanted to sell off its assets prior to the term expiration, there was nothing in the

Limited Partnership Agreement that required it to sell off its assets or drove it to

conduct a self-injuring fire sale.

Third, Authentix was not the only remaining asset in CUSGF III.254 In fact,

CUSGF III had considered a term extension since August 2017 (prior to the sale of

Authentix) because of the possibility that CUSGF III would want to continue

investing in Catapult Learning, one of two portfolio companies that the fund then

held and continued to hold after the Authentix sale.255 This indicates that regardless

of whether the sale of Authentix occurred prior to the end of CUSGF III’s term, the

fund may have needed an extension for other investments. As such, I find that

Carlyle was not under compelling pressure to sell Authentix prior to the end of

251
JX3; Limited Partnership Agreement § 2.7; Tr. (Coburn) 1681:12–1688:2.
252
Tr. (S. Bailey) 1113:17–1115:1; Tr. (Coburn) 1684:15–1685:10.
253
Limited Partnership Agreement § 2.7; Tr. (Coburn) 1683:13–1684:2; Tr. (S. Bailey) 1116:18–
1117:3, 1117:10–15.
254
JX459; JX733; JX831; Tr. (Gozycki) 1794:3–1795:17.
255
JX459; JX733; JX831; Tr. (Gozycki) 1794:3–1795:17.
44
CUSGF III’s term, such that its self-interest, shared with the minority, to maximize

value was overborne.

Plaintiffs point to the fact that Authentix was the largest of the three remaining

investments in CUSGF III at the time of Authentix’ sale256 to demonstrate that the

sale of Authentix was a “needle moving deal” that investors cared about.257 Plaintiffs

argue that Carlyle was thus driven by investor pressures and expectations to sell

Authentix as soon as possible and not wait for a value-maximizing transaction that

would benefit all stockholders.258 I find this argument unpersuasive, based on the

evidence developed at trial. Plaintiffs failed to submit evidence that indicates

Carlyle’s investors were pressuring Carlyle to sell Authentix as soon as possible.259

Instead, Plaintiffs equate investor requests for updates on fund performance and

potential exit timing as pressure for immediate liquidation of CUSGF III.260 For

example, Plaintiffs point to an email from an investor of CUSGF III (and multiple

other Carlyle funds) to inquire about “upcoming liquidity in [their] portfolio,” “real

needle moving deals” in each of the funds, and the expected final returns from each

of the funds.261 In addition, Plaintiffs point to an email from a Carlyle employee that

states that there are two “recurring requests” for either quarterly, weekly, or monthly

256
Tr. (Timmins) 718:10–24.
257
Pl. PTOB 5, 7.
258
Id.
259
See Pl. PTOB; Pl. PTRB.
260
See, e.g., Pl. PTOB 6 n.17 (citing JX826); Pl. PTOB 6 n.16 (citing JX640).
261
JX640.
45
reports on fund performance for a number of funds, including CUSGF III.262

However, these emails do not demonstrate investor pressure for Carlyle to liquidate

CUSGF III as soon as possible, as the investors are simply requesting information

about their investments (which they are owed).263 What is missing is any direct

indication that limited partners were insisting on a quick sale. I find no investor

pressure demonstrated in this record that could show that Carlyle had a need for a

quick exit through a fire sale sufficient to deviate its interests from the minority.

Plaintiffs point to an email where, after Authentix was sold and CUSGF III’s

term was extended by its IAC, an investor stated “Our new CIO just has a very firm

view that agreed upon terms should be adhered to and that funds should liquidate in

the agreed upon time. I am pleased that the fund term got extended and I very much

appreciate the management fee concessions granted.”264 This investor had opposed

Carlyle’s request to extend CUSGF III’s term, but Carlyle received support from the

majority of the IAC and the extension was granted.265 First and foremost, this email

concerned matters after the sale of Authentix, and does not demonstrate investor

262
JX826. In the email, a Carlyle employee states “[t]here are also two recurring requests that we
provide: [REDACTED] (quarterly) and [REDACTED] (monthly/weekly).” Id. In a follow-up, the
same Carlyle employee provides a detailed list of the information that various investors are
requesting in reports, including information on capital calls and distributions for certain funds. Id.
In the email, CUSGF III is referred to as CGP III. Id.
263
JX640. In fact, the investor in this email qualified their request by stating it was “to gain a
better understanding of upcoming liquidity in [their] portfolio, along with the expected return for
some of [their] more mature funds.” Id.
264
JX732.
265
Id.
46
pressure concerning specifically the sale of Authentix. Even if this evidence was

extrapolated to demonstrate general investor sentiment regarding fund terms, I find

that it has the opposite effect. CUSGF III received support from the majority of the

IAC (compromised of major investors),266 demonstrating that investors were not

exerting “enormous pressure”267 on Carlyle to liquidate CUSGF III sufficient for

Carlyle to have an incentive to accept less than fair value for its investments,

including Authentix.

Plaintiffs instead argue that pressure on Carlyle to sell Authentix by

September 2017 arose from the fund investors’ “well-understood expectations.”268

To support this argument based on investors’ general expectations, Plaintiffs point

to expert testimony from Jim Timmins and textbooks that discuss the private equity

industry generally.269 For example, Plaintiffs cite expert testimony from Timmins

stating that in private equity, “[l]imited partners always want to know where they

stand vis-a-vis liquidity”270 and “not returning funds on a timely basis . . . can be a

black mark. . . to secure commitments for a new PE fund”271 while returning capital

on a timely basis is “a five-star rating.”272 In addition, Plaintiffs point to a private

266
Id.; Tr. (Coburn) 1683:13–1684:2, 1689:4–18.
267
Pl. PTOB 5.
268
Id. at 8.
269
Id. at 5–8.
270
Tr. (Timmins) 678:8–9.
271
Id. at 683:20–22.
272
Id. at 684:1–4.
47
equity textbook that states “[a] fund's fixed life cycle generally provides some

structure over the expected cadence of realizations to LPs,”273 and “[a] PE firm’s

ability to achieve timely and profitable exits reliably across multiple funds is a key

measure of success applied by financial market players; it allows the PE firm . . . to

approach . . . institutional investors again for future fundraising.”274

I take from this evidence that which is obvious; a standard ten-year fund life

indicates an intent to exit investments, profitably, on that general time-frame. I find

this insufficient to demonstrate specifically CUSGF III’s investors’ expectations

were such that Carlyle caused the Board to run a fire sale. To prove a liquidity-

driven conflict of a controller, it is not enough to show a general interest in investors

that a fund adhere to a timeline; a plaintiff must show sufficient evidence “of a cash

need” that explains why “rational economic actors have chosen to short-change

themselves.”275 “[S]weeping characterizations” of the “industry writ large” are

insufficient.276 And the private equity lifecycle “is not so formulaic and structured

that the cycle itself [can] support an inference of a liquidity-based conflict.”277 The

273
JX819 at 30 (emphasis added). Plaintiffs point out that this passage was written by Marco De
Benedetti, who, at the time of writing the passage, was the Managing Director and Co-Head of
European Buyouts at The Carlyle Group. Id. at 29. However, this passage is written for a private
equity textbook generally, and not specific to CUSGF III and the sale of Authentix; thus it is only
generally relevant here.
274
Id. at 21.
275
See Larkin v. Shah, 2016 WL 4485447, at **16, 17 (Del. Ch. Aug. 25, 2016).
276
See id. at *17.
277
Firefighters’ Pension, 251 A.3d at 257.
48
testimony from the expert witness and the excerpts from the private equity textbook

that Plaintiffs point to do not indicate that Carlyle and CUSGF III specifically faced

investor pressures for exiting Authentix prior to the end of CUSGF III’s term such

that they would take an immediate sale at a loss, but rather states generalized industry

and textbook explanations of private equity, including how fund lifecycles generally

operate. None of this evidence is specific to Carlyle and CUSGF III. And, as I found

above, Plaintiffs fail to point to any facts that demonstrate that the investors of

CUSGF III themselves were pressuring Carlyle to liquidate as soon as possible.

Finally, the comprehensive marketing and sales process of Authentix is

evidence against liquidity pressure.278 The process took a full year.279 Baird

ultimately contacted a total of 127 potential buyers, including 27 financial buyers.280

Baird’s outreach yielded 18 fireside chats with potential buyers.281 When Barberito

expressed interest, on behalf of Manti, to submit a bid for Authentix, the Board

accommodated Barberito and gave Barberito access to the data room for him to catch

up in the sales process.282 There is no indication that Carlyle caused Authentix or

278
See, e.g., Morton’s, 74 A.3d at 668 (nine-month process); Synthes, 50 A.3d at 1037 (seven-
month process).
279
See JX221 (email from B. Bailey on September 21, 2016 stating that “Baird has begun initiating
scoping calls on Project Affirm”); PTO ¶¶ 1, 54 (sale of Authentix to BWE closed on September
13, 2017).
280
JX336 at 4.
281
Id.
282
JX350 at 2; Tr. (Barberito) 550:22–551:16; Tr. (S. Bailey) 1216:6–1217:1; Tr. (B. Bailey)
1530:13–1532:15.
49
Baird to fail to contact logical buyers, contact too few buyers, or refused to work

with any particular buyer.283 As such, while it is not dispositive, the comprehensive

sales process that took a full year is indicative that Carlyle was not driven by a

liquidity pressure to sell off Authentix for less than fair value. 284 In addition, as I

discuss further in the clawback provision analysis below, I find that the record

demonstrates that Carlyle was interested in moving quickly because of the volatility

of Authentix’ business rather than due to liquidity pressure because of the fund

life.285

Plaintiffs point to evidence that the Board should have known that extending

the process would have increased value, bolstering their assertion that Carlyle did

not care about price, only timing. They point to Barberito, who sat on the Board on

behalf of Manti, and expressed the opinion in 2017 that a higher present value for

Authentix would likely be achieved by suspending the sales process for a year, over

which time the Company’s prospects would improve.286 Perhaps. Or perhaps, as

the Board with the exception of Barberito, testified was their fear, the momentum of

283
See Morton’s, 74 A.3d at 659 n.6, 667; see also Synthes, 50 A.3d at 1037.
284
I note that the sales process began in September 2016 when Baird launched scoping calls and
lasted until September 13, 2017 when the sale of Authentix closed—a full year—excluding the
preparation time with Baird that began after Baird was hired on January 8, 2016. JX221; PTO ¶¶
1, 36.
285
See discussion infra Section II.B.1.b.
286
JX711 at 1.
50
Authentix growth over the past four years would be lost, decreasing value.287 There

are of course risks with either course of action, as well as real costs for failing to

consummate a long running sales process only to restart it a few months later.

Authentix’ susceptibility to customer instability would remain in either case. In any

event, the case for delay is not of sufficient weight to cause me to conclude that a

“fire sale” must have occurred, in light of the other evidence. To sell now or wait

for a better opportunity later? Absent a showing of a conflicted transaction, this is

the very stuff of which business judgment is made.

Accordingly, I find that Plaintiffs have failed to prove that Defendants were

driven by a liquidity-based conflict from the “time pressure” from the end of the

CUSGF III’s term and investor’s expectations to conduct a fire sale.

b. The Clawback Provision

Plaintiffs also argue that Carlyle’s deal team pushed for a quick sale to avoid

the clawback mechanism, rather than waiting for the potential to earn more money

by selling off Authentix in the future.288 In other words, because certain Carlyle

affiliates faced a potential disgorgement of funds, Defendants drove a sale in 2017,

to the detriment of the minority and Carlyle itself. The record, to my mind, does not

support such a finding.

287
Tr. (S. Bailey) 1245:23–1247:1; Tr. (Vigano) 1340:5–16; Tr. (B. Bailey) 1592:1–6; Tr.
(Gozycki) 1797:20–1798:13.
288
Pl. PTOB 9–11.
51
Plaintiffs point to certain communications from Carlyle deal team members

(including S. Bailey) that discussed the clawback provision to support their

argument.289 This evidence does not persuade me that the transaction was conflicted.

First, some of the emails that Plaintiffs point to are simply Carlyle deal team

members discussing the possibility of CUSGF III entering clawback and the effects

of such on personal distributions.290 These emails are just general discussions of the

clawback provision and do not indicate any “personal pressure” to avoid a clawback.

The emails do not discuss selling off portfolio companies of CUSGF III, including

Authentix, to avoid clawback specifically. Accordingly, I find that these emails do

not indicate that Carlyle deal team members were so concerned with avoiding a

clawback that it was a “potent motivator that colored their judgment.”291

In addition, I find that the clawback provision has an incentive structure that

does not place pressure on Carlyle’s deal team members to sell portfolio companies

at less than fair value in a fire sale. If Authentix was growing faster, in terms of

proceeds, than the 7% preferred return (compounded annually), then CUSGF III

289
See, e.g., JX487 (email from S. Bailey including a table of distributions subject to clawback
that is “personal for printing”); JX573 (email from a Carlyle employee to S. Bailey discussing how
a clawback in a fund affects S. Bailey’s distributions); JX572 (email thread discussing CUSGF III
and the risk of the fund entering clawback); JX68 (email stating “The key, as you’d expect, is the
Authentix sale, obviously the price but also the speed”); JX67 (email from Brooke Coburn to
Carlyle deal team members discussing CUSGF III slipping into clawback and stating “we really
need to execute on the pending exits” for Authentix and another portfolio company).
290
See JX487; JX573.
291
Pl. PTOB 10.
52
would not be at risk of clawback, as there would be no shortfall in the preferred

return for which carried interest distributions would need to account for.292 On the

other hand, if Authentix was declining in proceeds, then CUSGF III would be at risk

of clawback if it could not meet the 7% preferred return on the investment capital

still outstanding in Authentix prior to its sale. As such, the clawback incentivizes

the Carlyle deal team to: (1) hold onto portfolio companies that are growing in

proceeds, which generally protects against a clawback and increases overall

proceeds for the fund (including its limited partners and the Investment Limited

Partner) and (2) sell portfolio companies that are more likely to decline than grow in

proceeds, which returns the capital to the limited partners293 and benefits all

shareholders of the company through a sale prior to further decline. Accordingly,

the incentive structure is not indicative that Carlyle’s deal team conducted a fire sale

to avoid a clawback, but instead implies that the Carlyle deal team was interested in

selling Authentix because it may decline in value; and that it would be best for all

shareholders, regardless of the clawback, to sell before the value further declined.

292
See discussion supra Section I.A.4; Tr. (Timmins) 778:5–12.
293
I acknowledge that, by returning the capital out for Authentix back to the limited partners after
the sale of Authentix, the 7% preferred return ceases as well. See discussion supra I.A.4. This
inherently protects against further clawback as the deal team does not have to return more
distributions of carried interest to make up for shortfall of the 7% preferred return for a longer
period of time. This is, essentially, Plaintiffs’ argument that clawback encouraged a fire sale. But,
as I discuss above, selling a company that is in decline also maximizes value for all shareholders
(as further decline would be harmful to all shareholders), which I find to be Carlyle’s deal teams’
interest in selling the Company.
53
While not dispositive, this is further supported by the fact that CUSGF III continued

to hold onto Catapult Learning, another portfolio company, after its fund term ended,

because the deal team believed Catapult Learning still had some further appreciation

left.294 I note that Plaintiffs’ “clawback scenario”—that Carlyle personnel wanted

to sell because Authentix was declining in proceeds, putting their own finances at

risk—is directly converse to Plaintiffs “timing pressure” scenario—that Carlyle

wanted to sell quickly despite knowing that the market would not in 2017 recognize

the fact that Authentix was poised for growth.

In line with the above, Defendants argue that Carlyle’s deal team was

interested in selling Authentix quickly because the Company was not appreciating

in value anymore (rather than any pressure from the fund life or the clawback

provision).295 S. Bailey testified at trial in response to one of the email

communications,296 the “best way . . . to both avoid clawback and generate more

carry” is to “build value in your companies”; “selling something quickly doesn’t

help you unless that asset” is depreciating.297 In addition, the Board, with the

exception of Barberito, all testified that they believed Authentix was more likely to

294
See, e.g., Tr. (Gozycki) 1798:18–24 (“Because at this time we believed there was more room
to run. We thought there was some further appreciation left in Catapult [Learning].”).
295
Def. PTAB 77–80.
296
JX67.
297
Tr. (S. Bailey) 1245:5–1247:1.
54
decline further financially than grow.298 I find this testimony credible in light of the

performance of Authentix. In 2017, Authentix was facing a year-over-year decline

in revenue and EBITDA.299 In addition, even after Authentix won the contract for

Aramco in 2017 after the rebidding process,300 it was on diminished terms.301 And

even given the contract renewals for Ghana Tax and Aramco,302 the Company faced

volatility in their customer base,303 which was concerning to the bidders during

Authentix’ sale process.304

I find that Carlyle’s deal team was not driven to conduct a fire sale by the

“pressure” to avoid a clawback provision.

c. Internal and External Communications

Plaintiffs argue that consistent with the time pressure the fund life and

clawback concerns created, Carlyle had a number of internal and external

communications that “proclaimed this time pressure.”305 For the sake of

completeness, I discuss these below. I have examined these communications

carefully, and to my mind, they indicate nothing other than a general intent to exit

298
Tr. (S. Bailey) 1245:23–1247:1; Tr. (Vigano) 1340:5–16; Tr. (B. Bailey) 1592:1–6; Tr.
(Gozycki) 1797:20–1798:13.
299
Tr. (S. Bailey) 1240:11–1241:2; Tr. (Gozycki) 1790:11–23; JX846 at 8. Authentix’ EBITDA
dropped by approximately 33% from 2016 to 2017. JX337 at 2; JX746 at 7.
300
JX663; JX685; JX192 at 6; JX179; Tr. (B. Bailey) 1491:4–1492:12.
301
JX589; JX591 at 1.
302
JX586; JX663; JX685.
303
See, e.g., Tr. (Pearce) 168:5–173:23.
304
See JX274 at 3.
305
Pl. PTOB 11.
55
Authentix, and not that Carlyle had a need to sacrifice value for an immediate sale.

I find that, even in considering these communications, Plaintiffs have failed to prove

that Carlyle had a liquidity-based conflict.

First, Plaintiffs point to a number of Carlyle “internal deliberations” that

Plaintiffs interpret as Carlyle being willing to sell Authentix at less than fair value

to liquidate CUSGF III.306 I do not find this interpretation persuasive. These

communications demonstrate that Carlyle preferred to sell off Authentix, especially

given the Company’s struggles, but not that Carlyle needed to sell Authentix even if

306
Pl. PTOB 11–15. See, e.g., JX157 at 9 (a presentation for an April 4, 2016 CUSGF III IAC
meeting with an Authentix valuation overview that states an anticipated exit of December 2016);
JX92 at 8 (a presentation for a September 17, 2015 CUSGF III IAC meeting with an Authentix
valuation overview that states an anticipated exit of December 2016); JX81 at 27 (a presentation
for an April 2, 2015 CUSGF III IAC meeting with an Authentix valuation overview that stated an
anticipated exit of December 2015); JX168 (email thread between Coburn and S. Bailey on May
16, 2016 discussing the Aramco situation and Coburn stating “Wondering if we should just go
now and structure Saudi as an earnout or similar? Waiting 2 months not the end of the world, but
a Sept launch will make it hard to do a deal this year” and “I do think our bias should be to sell
this year [2016]”); JX202 (email on September 13, 2016 from Coburn to S. Bailey, Gozycki, and
another Carlyle individual in preparation for a September 14, 2016 IAC meeting that states they
should do a “detailed update for each of the remaining companies with an emphasis on our liquidity
plan”); JX211 (email on September 15, 2016 from Coburn to S. Bailey stating that Coburn would
like to be looped in for the sales process discussions of Authentix because it is “so important to
the fund, and has huge carry implications for the firm”); JX231 (email on October 12, 2016 from
Coburn to S. Bailey and other Carlyle individuals stating that for the secondary sale process “[o]ur
goal is to monetize the remaining CVP II and/or CGP III stub assets by year-end.”); JX260 (email
thread in late November 2016 to early December 2016 with Carlyle employees discussing how the
secondary sale process bids were “disappointing;” Coburn stated that the “[g]oal is to have this all
wrapped up in ’17, if possible” and that the most likely outcome “is that we will sell Authentix in
1H’17 at somewhere between 1.25-1.5x”); JX318 (email on February 9, 2017 in which Thomas
Fousse, a Carlyle affiliate, asked Coburn for an update on the sale processes for the remaining
assets in CUSGF III and stated “[w]ould be nice if there was closure on this fund”); JX317 (email
thread from February 8–9, 2017 in which S. Bailey gave Coburn a “discouraging” update on the
Authentix sale process, Coburn stated that they were “struggling” in the “hottest seller’s market of
all time” and “I have to think there’s a way to monetize [Authentix] . . . this year,” S. Bailey replied
with “I agree with getting out asap,” and Coburn replied with “I won’t force you to sell anything”).
56
it meant sacrificing fair value.307 In addition, CUSGF III had two additional

portfolio companies at the time of Authentix’ sale, so the fund could not be

liquidated even after the sale of Authentix.308

Second, Plaintiffs point to a number of communications within Baird and

between Carlyle and Baird to show that Carlyle’s communications to Baird focused

exclusively on fund life considerations.309 Plaintiffs argue that these

307
For example, in an email on August 4, 2016 from Coburn to two individuals requesting for
senior contacts at Aramco, Coburn stated the following:

We are in the late stages of preparing to launch a sale of Authentix, but their
annual contract with Aramco recently came up for renewal and, given the changes
at Aramco, is now caught in a cycle of month-to-month extensions. This puts us
in a fairly awkward position, as the contract is material. We could potentially
defer the exit a year or two, but its very possible Aramco will be in the same
position next year. Additionally, this is one of the last remaining assets in an
older fund that we are hoping to liquidate soon.

JX185 (emphasis added).
308
JX459; JX733; JX831; Tr. (Gozycki) 1794:20–1795:17; Tr. (Timmins) 718:10–24.
309
Pl. PTOB 15–17. See, e.g., JX169 (email on May 17, 2016 between Trisha Renner and other
Baird affiliates in which Renner states “my big question will be around Carlyle goals? Is it 2016
or are they prepared to hold longer if that maximizes valuation?”); JX177 (email on June 30, 2016
from Trisha Renner to other Baird affiliates stating “I should have been less direct on Steve’s
response to timeline but [it’s] getting old”); JX210 (email on September 15, 2016 from Trisha
Renner to other Baird affiliates stating “suggest we let Bernard do his work and then we 1:1 get
[S]teve Bailey one more time. I don’t know wha[t] else to say to him without sounding negative,
not sure he understands”); JX229 (an October 12, 2016 internal Baird memo with a bullet point
that states “We advised Carlyle not to launch at this time given the uncertainty around the contract
extension and early stages of diversification, but they asked us to execute a scoping process given
their hold period ends in mid-2017 and we have all the marketing materials completed”); JX228
(an email thread on October 11, 2016 between Trisha Renner, B. Bailey, and other Carlyle and
Baird team members that discusses how the Aramco contract award is not expected till April 2017
and B. Bailey stated “April is a good deal more problematic in light of our timeline”); JX680
(internal email thread to Baird dated August 30, 2017 in which Trisha Renner stated “Talked to
[B. Bailey], targeting sign 9/6 working on NWC, escrow, mgmt agreements. We discussed it is
odd that we are not involved and he said that is Carlyle/Bailey approach and Bailey is hell bent on
getting this done by 9/6 so no reflection on us”); JX543 (email from Trisha Renner to other Baird
57
communications demonstrate that Baird detected Carlyle’s inclination to sacrifice

value for timing’s sake.310 I do not find this argument persuasive. The record

demonstrates that, contrary to Plaintiffs’ argument, Baird did not recommend that

Authentix stop its sales process because of timing issues. As Trisha Renner (a

member of Baird’s team working on the sale of Authentix) testified at trial, credibly,

in my view, Baird recommended Authentix begin the scoping process in Fall 2016

in advance of a broad sales process in 2017.311 As such, Baird’s advice during the

sale process does not indicate that Baird believed that Carlyle was sacrificing value

for timing pressures, even if Baird did believe that Carlyle preferred to sell Authentix

and “wanted out.”

Third, Plaintiffs argue that Barberito objected to the sale process because a

number of communications between Carlyle and Barberito made him believe the

sale was driven by pressure to exit by September 2017 (for fund life

considerations).312 I believe that Barberito believes that the sale was conflicted. I

affiliates on June 12, 2017 stating “I don’t remember who asked last week about pulling the plug
but I don’t think in the category of good client service we can do that. This situation continues to
be challenging whether it is continued degradation of the financials, lack of contract renewals, geo-
political situations out of the Company’s hands. Our CEO is challenging and Carlyle seems to
simply want out”).
310
Pl. PTOB 16.
311
Tr. (Renner) 1400:1–23 (clarifying the JX229 Baird internal memorandum that states “We
advised Carlyle not to launch at this time given the uncertainty around the contract extension and
early stages of diversification. . . .”).
312
Pl. PTOB 17–18. First, Plaintiffs point to a March 2017 Board meeting where Barberito was
“dismayed” to learn Carlyle was willing to sell Authentix to Intertek for below expectations and
according to Barberito’s testimony and journal notes, S. Bailey explained at that meeting that
Carlyle needed sale proceeds by September 2017. Pl. PTOB 17 (citing JX76 at 62; Tr. (Barberito)
58
do not find Barberito’s testimony313 and “journal notes”314 persuasive, however,

given the lack of evidence of investor and fund life pressure. Plaintiffs argue that S.

Bailey’s contemporaneous communications corroborate Barberito’s testimony.315

However, the sole communication that Plaintiffs cite is an email from S. Bailey to

Baird and B. Bailey discussing how “[Barberito] also threw out the idea of delaying

the whole process to see if [Aramco] comes in” and how “[S. Bailey] obviously told

[Barberito] we ran a process we are where we are and are trying to get any buyer to

close asap.”316 To my mind, this communication indicates Carlyle’s preference to

conclude the ongoing sale process (a very public process that had proceeded over a

span of months) but does not demonstrate that Carlyle’s reasoning is based its own

internal needs, for which it was willing to sacrifice value.

Fourth, Plaintiffs argue that the fact that Authentix’ potential buyers were

repeatedly told about the approaching end of Carlyle’s fund period proves that

Carlyle was in fact under “time pressure” and sacrificing value to achieve timing

356:3–10). Second, Plaintiffs point to a March 2017 phone call between Barberito and S. Bailey
when Barberito requested the opportunity to intervene to buy out Carlyle with other stockholders.
Pl. PTOB 17–18. At trial, Barberito testified that S. Bailey was “adamant” that a deal had to be
closed by September 2017 in the call, and Plaintiffs argue that Barberito’s contemporaneous
journal notes corroborates his testimony. Pl. PTOB 18 (citing Tr. (Barberito) 362:15–363:8; JX76
at 64). Third, Plaintiffs point to a June 2017 call between Barberito and S. Bailey; at trial, Barberito
testified that S. Bailey called him “[p]anicked that deal wouldn’t close by September 2017.” Pl.
PTOB 18 (citing Tr. (Barberito) 399:6–12, 400:4–9; JX76 at 113).
313
See, e.g., Tr. (Barberito) 353:6–354:15, 355:23–24, 356:3–10, 362:15–363:8, 378:11–13,
398:1–399:12, 399:6–12; 400:4–9, 536:1–18.
314
See, e.g., JX76 at 62, 64, 78, 113.
315
Pl. PTOB 18.
316
JX402.
59
objectives.317 I find this position untenable because merely mentioning Carlyle’s

“hold period” does not mean Carlyle was sacrificing value for timing objectives. As

S. Bailey testified at trial, referencing the hold period to buyers is “very standard”

because it is standard for buyers to ask, “who owns this company” and “how long

have they owned it.”318 In addition, S. Bailey also testified that discussing the “hold

period” conveys the seriousness of the seller in the transaction, which was necessary

for Baird to convey after Authentix had begun, then stopped, the sale process for a

317
Pl. PTOB 19–20. See, e.g., JX216 (September 18, 2016 script for scoping calls that states “[t]he
shareholders are planning to launch a full sale process next year after receiving the contract
extension, but given their extended hold period they are open to giving a small group an early
chance to acquire the business this year ahead of a full process”); JX245 (November 17, 2016
email that describes message from Baird to Intertek that “seller has reasonable value expectations
/ fair value for asset balancing their timing objectives.”); JX249 (November 21, 2016 Baird report
on discussion with another prospective buyer that states “Discussed process, he said why go now
if you have the renewal [for Aramco]. . . [I answered] Carlyle a seller, Bernard getting tired and
does want to give the right transition period, [w]e think you can deal with [Aramco] by structure”);
JX264 (December 16, 2016 internal Baird email that discusses how Baird told Intertek “expect the
client has reasonable value expectations for an asset with this type of growth considering their
fund life considerations”); JX298 at 2 ¶ 23 (notes from January 26, 2017 meeting with Innospec
that states “[t]iming for sale – Authentix is in Carlyle No2 fund of 14 companies, only 3 left, so
time to bale”); JX300 at 4 (internal Innospec presentation from January 30, 2017 that states
“Carlyle need to exit – fund closure”); JX341 at 3 (a script for a March 6, 2017 call between Baird
and Intertek that states “given shareholder dynamics/fund life considerations, cash up front is
critical” in regards to an earn out approach); JX435 at 2 (a script for a April 2017 call between
Baird and Intertek that states “[w]hat has become clear now, however is that Carlyle and JH
Whitney are going to sell the business now (by ‘now’ I mean in the next few months)”); JX493 at
257 (an internal April 2017 BWE post-due diligence report that states “Carlyle are a forced seller
as they have reached the end of the fund’s investment life and are required to exit by September
2017. They are selling at a sub-optimal time, given there is contract uncertainty”); JX735 at 32
(Baird contact summary for a prospective buyer who thought it was an “odd time to do a deal given
the Saudi renewal”) ; JX735 at 34 (Baird contact summary for a prospective buyer that states “Told
him no specific guidance, but seller has reasonable value expectations and fund life
considerations”); JX735 at 99–100 (Baird contact summary for Innospec in late January 2017
where Innospec asked “[w]hy is the Company for sale now?”).
318
Tr. (S. Bailey) 1190:21–1191:6.
60
portion of the Company years prior.319 I find S. Bailey’s testimony credible, as it is

also corroborated by Renner’s testimony. At trial, Renner testified that a financial

advisor will often have to explain how long a private equity fund has held a company

and why it is selling the company. Renner stated “you've got to explain one of two

things: if it's less than three years or if it's more than five. Those you have to explain,

because if it's less than three years, why are you doing a quick flip? If it's more than

five, why do you still own it?”320 Accordingly, I find that the references to “hold

period” to Authentix’ potential buyers are not indicative of Carlyle sacrificing value

for timing objectives.321

Fifth, Plaintiffs point to an email between an Authentix customer and B.

Bailey to argue that even Authentix’ customers were told that Carlyle was “under

time pressure to sell.”322 In the email, among other things, the customer stated,

“[w]hile you didn't state it specifically, I understood that Carlyle has a by-law that

requires sale of investments after 10 years. The 10 year cycle with Authentix is this

fall which is motivation to sell or requires an exception.”323 B. Bailey replied “[a]ll

of the points you have outlined in the note below are accurate.”324 I do not find this

319
Id. at 1191:10–1192:8.
320
Tr. (Renner) 1404:16–1405:1.
321
The “end of fund” pitch appears to be puffing of the “our loss is your gain!” variety beloved by
retailers.
322
Pl. PTOB 21.
323
JX578 at 1.
324
Id.
61
argument persuasive to demonstrate that Carlyle was in a fire sale. This email is in

line with what the record demonstrates – that Carlyle had a fund term for CUSGF

III of 10 years (“by-law”), that Carlyle can extend the fund term of CUSGF III (“an

exception”), and that Carlyle had a preference to sell off its portfolio companies, like

Authentix, within the 10-year period (“motivation to sell”). Once again, I find that

nothing in this email indicates Carlyle needed to sell Authentix; it indicates that

Carlyle wanted to sell Authentix. As I stated above, Carlyle simply wanting to sell

off Authentix prior to the end of the fund term is not sufficient to show that Carlyle

was willing to sacrifice fair value for its own stock or drive the Board to sacrifice

fair value for the stock of minority stockholders. As the holder of the majority of

Authentix’ stock, Carlyle’s motivation was to maximize value.

Finally, Plaintiffs point to communications internal to two private equity

firms, BWE and WDE, to indicate that Carlyle was under a disabling time pressure

from CUSGF III’s term.325 However, these communications were BWE and WDE’s

impressions of Carlyle’s situation and are not sufficient to demonstrate that Carlyle

indeed was operating under “time pressure” such that it would sacrifice value of

325
Pl. PTOB 21–22. See JX493 at 257 (internal BWE memorandum from April 20, 2017 that
states “Carlyle are a forced seller as they have reached the end of the fund’s investment life and
are required to exit by September 2017”); JX395 at 26, 33 (internal WDE memorandum from
March 27, 2017 that states “[b]ecause the Carlyle fund that Authentix is held in is nearing the end
of its fund life, Carlyle marketed the Company late last year despite two large customer contracts
being up for renewal” and “[t]his valuation [$107 million purchase price] is a result of Carlyle’s
end-of-fund life issue and the contingent bids received in the auction process due to the uncertainty
around the [Aramco] and Ghana contracts” respectively).
62
Authentix to achieve an immediate sale of Authentix. The communications do not

indicate that Carlyle was telling these private equity firms that Carlyle must sell off

the Company as quickly as possible. Plaintiffs do point to one communication

between Sikorski at BWE and S. Bailey in which Sikorski stated he was “sensitive

to [S. Bailey’s] time pressure and objectives.”326 I find this communication

unpersuasive as well. At trial, Sikorski testified that he does not remember

specifically what he and S. Bailey discussed, but that “they were pushing [BWE] for

a quick close”327 and he referred to “Carlyle’s timing objectives, which they had

indicated to [BWE] were short.”328 This, to my mind, does not prove that Carlyle

was seeking a fire sale (that would sacrifice value for speed) for fund life or investor

expectation reasons, just that Carlyle was interested in moving quickly to

consummate a deal process that had been ongoing for months, and in light of

volatility in Carlyle’s customer base.

In other words, the record does demonstrate that Authentix and Carlyle were

motivated to sell. The same record is insufficient, in my mind, to amount to proof

of a need or intent to sacrifice maximized present value for an immediate sale. The

very length and breadth of the sale process demonstrate otherwise. Accordingly, I

find that these communications, in totality, do not sufficiently demonstrate that

326
JX507.
327
Tr. (Sikorski) 2038:15–16.
328
Id. at 2039:6–7.
63
Carlyle was acting under time pressure from the fund life and clawback provisions

and was sacrificing value in turn. Instead, these communications are consistent with

the record that demonstrates Carlyle wanted to sell off Authentix and wanted to

move quickly in the sale process. This is not, in my view, a conflict with the minority

that invokes entire fairness.

2. Carlyle’s Receipt of Consideration for its Preferred Stock Does Not
Constitute a Non-Ratable Benefit That Triggers Entire Fairness

Plaintiffs argue that Defendants received a non-ratable benefit from the sale,

because it owned preferred shares.329 I find that, without a showing that Carlyle had

a unique need for liquidity that constitutes a disabling conflict, Carlyle’s receipt of

consideration for its preferred shares does not constitute a non-ratable benefit that

triggers entire fairness.

The order of payout in the event of a sale of Authentix was as follows:

[T]o Series D, until a senior liquidation preference was paid out at
1.75x the amount invested plus a running dividend of 8.50% that
began to accrue on the second anniversary of the investment;

[T]o Series A and Series B, pari passu, until their liquidation
preferences were paid out at 1.00x the amounts invested; and

[T]o common stock, plus participation by Series D, and in-the-money
stock options[,] any money that remained.330

329
Pl. PTOB 57–58; Pl. PTRB 31–32.
330
PTO ¶ 53.
64
Based on the liquidation preferences, from the sale of Authentix where $87.5

million was eventually paid out,331 approximately $70 million was first distributed

to preferred stockholders from the Series A, B, and D investments (after all expenses

were paid and excluding participation of Series D for common stock value in the last

order of payout in the waterfall distribution).332 CUSGF III received approximately

$48.6 million from holding 70% of the preferred shares (excluding participation of

Series D for common stock value in the last order of payout in the waterfall

distribution).333

Without evidence that Carlyle had a unique need for liquidity from fund life

considerations, Carlyle’s interests were aligned with the common stockholders as

the largest common stockholder of Authentix.334 Carlyle held 52% of the common

shares.335 Whether the sale of Authentix was for $87.5 million or $200 million

(based on Plaintiffs’ valuation),336 Carlyle had the most to gain from a higher sale

value from distributions for its common shares, as the distributions for the preferred

shares would remain as approximately the first $70 million in consideration, either

331
Id. ¶ 54.
332
JX758. Approximately $69,033,862 was distributed to preferred stockholders and $803,081
was distributed for Series D dividends (excluding participation of Series D for common stock value
in the last order of payout in the waterfall distribution). Id.
333
PTO ¶ 26; JX758.
334
PTO ¶ 26.
335
Id.
336
Pl. PTRB 47.
65
way,337 and for every dollar over $70 million, approximately $0.50 went to

Carlyle.338

To recapitulate, Carlyle is a controller. It did not stand on both sides of the

transaction. As the largest stockholder, Carlyle’s interest was in maximizing value.

Absent a need for a quick sale that overrode this interest in value, Carlyle’s interests

were aligned with the minority, and entire fairness is not invoked.

I find, after trial, that Plaintiffs have failed to rebut the business judgment rule

because there is no conflicted controller transaction. As discussed above, the

Director Defendants’ decisions are only reviewed under entire fairness if they lack

independence from a conflicted controller such that they themselves have a conflict

of interest with the minority stockholders. Here, Carlyle is a controller but does not

have a disabling conflict of interest that triggers entire fairness. As such, the

controller-affiliated Director Defendants were not incentivized to sell Authentix at a

less-than-fair price to the special benefit of Carlyle, as no such benefit is

demonstrated in the record. The business judgment rule applies.

C. B. Bailey’s Alleged Conflict is Not Pertinent

Plaintiffs also aver that B. Bailey had his own interests that diverged from the

337
JX758. Of the approximate $70 million, Carlyle’s portion would remain as approximately $48.6
million. Id.
338
Tr. (Timmins) 779:7–21. It is not $0.52 because Series D stock had a participation feature as
well. Id.
66
other stockholders.339 Plaintiffs point to B. Bailey’s “special cash bonus”340 and

BWE’s grant of “sweet equity” to B. Bailey341 as evidence of B. Bailey’s personal

conflicts of interest.342

Because I find that the interests of the controller were aligned with the

minority, the presence of a controller does not sterilize the business judgment of the

directors concerning the sale. Because B. Bailey is only one member of the Board,

the majority of which was not interested in the transaction, I need not consider his

conflict in approving the transaction further.

D. Business Judgment Rule

“When the business judgment rule applies, the board’s business decisions

‘will not be disturbed if they can be attributed to any rational business purpose. A

court under such circumstances will not substitute its own notions of what is or is

not sound business judgment’ for the board’s notions.”343 Accordingly, I defer to

the Board and decline to review the fairness of the transaction.

III. CONCLUSION

For the foregoing reasons, I find for the Defendants on Count I (breach of

fiduciary duty against Director Defendants) and Count II (breach of fiduciary duty

339
Pl. PTOB 58.
340
JX48 at 2–3.
341
JX707 at 8; Tr. (B. Bailey) 1676:3–18.
342
Pl. PTOB 58–60.
343
eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 40 (Del. Ch. 2010) (quoting Sinclair Oil
Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)).
67
against Carlyle). The parties should submit a form of order consistent with this

Memorandum Opinion.

68