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Vardakas v. American DG Energy, Inc.

United States District Court, D. Massachusetts

November 16, 2018

LEE VARDAKAS, individually and on behalf of all others similarly situated, Plaintiff,
v.
AMERICAN DG ENERGY INC., JOHN N. HATSOPOULOS, GEORGE N. HATSOPOULOS, et al., Defendants.

          ORDER ON MOTION FOR JUDGMENT

          Leo T. Sorokin United States District Judge

         This class action case, brought by and on behalf of William Chase May[1] and other similarly situated holders (“the May class”) of the common stock of American DG Energy Inc. (“American DG”), arises out of the 2017 merger of American DG and Tecogen Inc. (“Tecogen”). Doc. No. 34. The case essentially alleges that the merger of American DG and Tecogen (“the merger”) was the result of a conflicted sales process that undervalued the common stock of American DG. See id. On March 2, 2018, the Court dismissed May's federal securities law claims. Doc. No. 55. Remaining are Counts III, IV, and V, which allege that the directors, co-CEOs, and certain controlling shareholders of American DG and Tecogen[2] breached their fiduciary duties in connection with the merger (Counts III and IV); and that George Hatsopoulos, former American DG chairperson and Tecogen director, and certain entities[3] aided and abetted in that breach (Count V). Doc. No. 34 ¶¶ 134-45. Now, the defendants have moved for judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil Procedure as to all remaining counts. Doc. No. 71. Plaintiffs have opposed. Doc. No. 77.

         I. FACTS[4]

         American DG and Tecogen are energy companies with complementary businesses. American DG distributes and operates on-site combined heat and power systems and natural gas powered cooling systems. Doc. No. 34 ¶ 24. Tecogen designs, manufactures, and sells combined heat and power systems. Id. ¶¶ 25, 50. Prior to the merger, the companies were “affiliated, ” id. ¶ 47; they shared co-founders, brothers John Hatsopoulos (“J. Hatsopoulos”) and George Hatsopoulos (“G. Hatsopoulos”); co-CEOs, John Hatsopoulos and Benjamin Locke; certain members of senior management, directors, and ownership; and office space. Id. ¶¶ 3, 27-28, 50. In 2014 and 2015, nearly 10 percent of Tecogen's total revenues came from sales of cogeneration parts and services to American DG. Id. ¶ 49.

         In July 2010, American DG established EuroSite Power (“EuroSite”), a subsidiary of American DG. Id. ¶ 72. As was the case with American DG and Tecogen, the leadership and ownership of American DG and EuroSite overlapped. Id. ¶¶ 72-73. Between 2011 and 2012, American DG issued convertible debentures to J. Hatsopoulos and two other owners of Tecogen common stock in an amount of $19.4 million, which remained outstanding until early 2016. Id. ¶ 75.

         Discussions of a merger between the two companies began in early 2016. Id. ¶ 63. The initial discussions took place informally and included J. Hatsopoulos, Benjamin Locke, and outside counsel for both companies, as well as the management teams of both companies. Id. ¶¶ 63-64. These initial meetings were not disclosed to either company's board of directors at the time that the meetings were ongoing. Id. In March 2016, J. Hatsopoulos and Locke informed the board of directors of each company of the merger discussions, leading each board to create a committee of independent directors to negotiate the merger. Id. ¶ 65. The committees were solely tasked with evaluating the Tecogen-American DG merger and did not run a competitive auction or otherwise explore other potential acquirors. Id. ¶ 68. During the first month after its formation, the American DG committee discussed on several occasions a transaction that would eliminate the American DG convertible debt. Id. ¶ 77. On April 25, 2016, following these discussions, the board of American DG approved a transaction in which the convertible debt of American DG was exchanged for shares of EuroSite with an exchange price of $0.575 per share of EuroSite stock used to calculate the number of EuroSite shares exchanged for the convertible debt. Id. ¶ 77-78. (At the time, the market price per share of EuroSite was $0.75 per share. Id. ¶ 78.)

         The American DG and Tecogen independent committees continued to meet discuss, evaluate, and negotiate the merger of American DG and Tecogen until October 31, 2016 when a merger agreement was negotiated. See Doc. No. 73-3 at 102-109. The agreement reflected the committees ultimately negotiated purchase price of $0.38 per share of Tecogen, which the parties settle upon after discussing prices ranging from $0.29 to $0.41 per share. Id. Each committee of independent directors recommended the merger to their respective boards of directors. Id. at 108-09. Following these recommendations, each company's board of directors unanimously approved the merger. Id. at 109-10. On November 1, 2016, the agreement of merger was executed by American DG and Tecogen, and, on November 2, 2016, American DG and Tecogen announced their plan of merger, upon the consummation of which Merger Sub, a wholly owned subsidiary of Tecogen formed for the purpose of effecting the merger, merged with and into American DG, with American DG continuing as the surviving corporation as a wholly owned subsidiary of Tecogen. See Doc. No. 34 ¶ 2; 73-3 at 2.

         At the time the merger was announced, co-founders J. and G. Hatsopoulos each had leadership roles in the companies. J. Hatsopoulos was the co-CEO of both companies and served as director of each, while G. Hatsopoulos was a technical advisor to American DG and had previously served as chairperson of the board of directors for American DG and on the board of directors for Tecogen. Doc. No. 34 ¶ 4. The two brothers, together with their families, also beneficially owned or controlled more than 34 percent of American DG stock and more than 23 percent of Tecogen common stock. Id. ¶ 5. As of March 9, 2017, the Hatsopoulos brothers collectively held 17.4 million shares of American DG common stock and 4.6 million shares of Tecogen common stock. Id. ¶ 51. By virtue of their ownership interests in American DG and Tecogen, the brothers, “with a small group of other major shareholders, ha[d] the ability to control various corporate decisions, including [the two companies'] direction and policies, the election of directors, the content of [the] charter and bylaws and the outcome of any other matter requiring shareholders' approval, including a merger.” Id. ¶¶ 54-55.

         The proxy statement issued to shareholders described the merger agreement negotiation process and the two companies' overlapping leadership and ownership. See Doc. No. 73-3 at 101-09, 112. Stockholders overwhelmingly voted in favor of the merger, and, on May 18, 2017, the merger was executed. Doc. No. 73-4.

         II. LEGAL STANDARD

         Rule 12(c) of the Federal Rules of Civil Procedure provides, “After the pleadings are closed-but early enough not to delay trial-a party may move for judgment on the pleadings.” Fed.R.Civ.P. 12(c). “The standard of review of a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) is the same as that for a motion to dismiss under Rule 12(b)(6).” Marrero-Gutierrez v. Molina, 491 F.3d 1, 5 (1st Cir. 2007). To survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Court “must take the allegations in the complaint as true and must make all reasonable inferences in favor of the plaintiff[].” Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993). “[F]actual allegations” must be separated from “conclusory statements in order to analyze whether the former, if taken as true, set forth a plausible, not merely a conceivable, case for relief.” Juarez v. Select Portfolio Servicing, Inc., 708 F.3d 269, 276 (1st Cir. 2013) (internal quotations omitted). This highly deferential standard of review “does not mean, however, that a court must (or should) accept every allegation made by the complainant, no matter how conclusory or generalized.” United States v. AVX Corp., 962 F.2d 108, 115 (1st Cir. 1992). Dismissal for failure to state a claim is appropriate when the pleadings fail to set forth “factual allegations, either direct or inferential, respecting each material element necessary to sustain recovery under some actionable legal theory.” Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 6 (1st Cir. 2005) (quoting Berner v. Delahanty, 129 F.3d 20, 25 (1st Cir. 1997)).

         III. DISCUSSION

         A. Breach of Fiduciary Duty against J. and G. Hatsopoulos in Their Capacity as Control Group

         Count IV alleges that J. and. G. Hatsopolous breached their common-law “fiduciary duties of loyalty, care, and good faith owed to [American DG's] unaffiliated shareholders by placing their personal interests ahead of the interests of” May and similarly situated shareholders “and foisting an unfair transaction, both in terms of process and price” on them. Doc. No. 34 ¶ 139. “Because they acted in concert as a control group and stood on both sides of the [m]erger, ” May claims that they ...


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