Lusk v. Life Time Fitness, Inc. et al

Filing 224

ORDER granting 160 Defendants' Motion for Judgment on the Pleadings; granting 166 Defendants' Motion for Judgment on the Pleadings(Written Opinion) Signed by Chief Judge John R. Tunheim on August 6, 2017. (JMK)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
MATTHEW LUSK and ST. CLAIR
EMPLOYEES’ RETIREMENT SYSTEM,
individually and on behalf of all others
similarly situated,
Plaintiffs,
v.
BAHRAM AKRADI, GILES H. BATEMAN,
JACK W. EUGSTER, GUY C. JACKSON,
JOHN K. LLOYD, MARTHA A. MORFITT,
JOHN B. RICHARDS, and JOSEPH S.
VASSALLUZZO,

Civil No. 15-1911 (JRT/BRT)

MEMORANDUM OPINION AND
ORDER GRANTING
DEFENDANTS’ MOTIONS FOR
JUDGMENT ON THE
PLEADINGS

Defendants.

David T. Wissbroecker, ROBBINS GELLER RUDMAN & DOWD
LLP, 665 West Broadway, Suite 1900, San Diego, CA 92101; Kai H.
Richter, NICHOLS KASTER, PLLP, 80 South Eighth Street, Suite 4600,
Minneapolis, MN 55402; Jeffrey C. Block and Jacob A. Walker, BLOCK
& LEVITON LLP, 155 Federal Street, Suite 400, Boston, MA 02110, for
plaintiffs Matthew Lusk and St. Clair Employees’ Retirement System.
Thomas P. Swigert, DORSEY & WHITNEY LLP, 50 South Sixth Street,
Suite 1500, Minneapolis, MN 55402, for defendant Bahram Akradi.
Matthew B. Kilby, FAEGRE BAKER DANIELS LLP, 90 South Seventh
Street, Suite 2200, Minneapolis, MN 55402, for defendants Giles H.
Bateman, Jack W. Eugster, Guy C. Jackson, John K. Lloyd, Martha A.
Morfitt, John B. Richards, and Joseph S. Vassalluzzo.

Plaintiffs Matthew Lusk and St. Clair Employees’ Retirement System (collectively
“Plaintiffs”) are former shareholders of Life Time Fitness, Inc. (“Life Time”). Plaintiffs
bring this action individually and as a class action on behalf of all other similarly situated

35

former Life Time shareholders regarding the 2015 merger of Life Time with a group of
private equity firms.

Plaintiffs’ sole remaining claim in this case is for breach of

fiduciary duty against the former directors of Life Time’s board.
Because Plaintiffs did not plead a non-exculpated breach of fiduciary duty claim
against the former Life Time board, and because Life Time’s shareholders ratified the
transaction pursuant to Minn. Stat. § 302A.255, the Court will grant the defendants’
motions for judgment on the pleadings.
BACKGROUND 1
I.

MERGER
Life Time is a Minnesota corporation that operates a chain of health fitness

centers. (Am. Compl. ¶¶ 2, 12, Aug. 31, 2015, Docket No. 87.) Defendant Bahram
Akradi founded Life Time in 1992, and he acted as its “Chairman of the Board, President
and CEO.” (Id. ¶ 13.) Defendants Giles H. Bateman, Jack W. Eugster, Guy C. Jackson,
John K. Lloyd, Martha A. Morfitt, John B. Richards, and Joseph S. Vassalluzzo were
members of Life Time’s board of directors (hereinafter the “Board,” and together with
Akradi, the “Defendants”). (Id. ¶¶ 14-20.) Plaintiffs held Life Time stock prior to the
merger at issue. (Id. ¶¶ 10-11.)
1

The Court will consider the facts as pleaded in the amended complaint, as well as the
facts discussed in the proxy statement (the “Proxy”) – a matter of public record referenced
numerous times in the amended complaint. See Deerbrook Pavilion, LLC v. Shalala, 235 F.3d
1100, 1102 (8th Cir. 2000) (“On a motion to dismiss, a court must primarily consider the
allegations contained in the complaint, although matters of public and administrative record
referenced in the complaint may also be taken into account.”); (see Decl. of Matthew B. Kilby,
Ex. D (“Proxy”), Oct. 5, 2015, Docket No. 119). All citations to the Proxy refer to internal
pagination rather than CM/ECF pagination.

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In response to pressure from a Life Time shareholder, on July 21, 2014, Life Time
hired Wells Fargo Securities, LLC (“Wells Fargo”), (Am. Compl. ¶¶ 32, 35; Decl. of
Matthew B. Kilby, Ex. D (“Proxy”) at 7, Oct. 5, 2015, Docket No. 119), to consider
“various financing and strategic alternatives available to Life Time to maximize longterm shareholder value, including but not limited to the evaluation of a [real estate
investment trust (“REIT”)] conversion transaction,” (Proxy at 35-36). The concept of
unlocking Life Time’s real estate value through a REIT transaction also prompted an
unsolicited acquisition proposal from Party A on July 30, 2014, for over $60.00 a share at
a time when Life Time had a $40.57 per share closing price. (Am. Compl. ¶ 35; Proxy at
36.) In response, the Board also engaged Guggenheim Securities, LLC (“Guggenheim”)
to review and assess various financial alternatives to maximize shareholder value. (Am.
Compl. ¶ 36; Proxy at 6, 36.)
On September 23, 2014, Party A increased its unsolicited acquisition proposal to
$70.00 per share. (Am. Compl. ¶ 40; Proxy at 36.) At a September 25, 2014 meeting,
“the Board decided to allow Akradi and Life Time’s financial advisors to begin
contacting potential bidders . . . . Akradi was heavily involved in these communications
and personally contacted certain bidders with whom he had a pre-existing relationship.”
(Am. Compl. ¶ 40.) As Akradi and the Board continued to consider strategic alternatives,
on January 16, 2015, Party A reaffirmed its offer of $70.00 per share, and a group of

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private equity firms (the “Buyout Group”) 2 offered $65.00 to $69.00 per share. (Id. ¶ 41;
Proxy at 37-38.)
On March 3, 2015, the Board established a Special Committee “consisting entirely
of independent and disinterested directors,” (Proxy at 6), which “discussed various
strategies and tactics for seeking to obtain the highest per-share cash bids for Life Time”
and also considered a “REIT [c]onversion [e]xploration.” (Proxy at 40; see also Am.
Compl. ¶ 43.) The Special Committee “discussed their beliefs that potential bidders were
more likely to submit the highest bids possible if they were permitted to discuss potential
arrangements with senior members of Life Time’s management team and that such
discussions could be helpful in connection with arranging financing for a transaction.”
(Proxy at 40.) The Special Committee allegedly “permitted Akradi to negotiate the terms
of a rollover investment and his continued employment at the surviving company with
potential buyers.” (Am. Compl. ¶ 43.)
On March 11, 2015, the Buyout Group offered $70.50 per share and a rollover of
Akradi’s equity in Life Time. (Am. Compl. ¶ 46; Proxy at 42.) Party A again indicated
that it offered $70.00 per share. (Am. Compl. ¶ 45; Proxy at 41- 42.) Plaintiffs suggest
that Akradi recognized a sale to the Buyout Group was his only chance to invest in the
surviving company, and thus “quickly tipped the sales process in the Buyout Group’s
favor.” (Am. Compl. ¶ 47.) On March 13, 2015, the Special Committee met with the
financial advisors Wells Fargo and Guggenheim to discuss the two proposals as well as a

2

The Buyout Group includes Leonard Green & Partners, L.P., TPG Capital, L.P, and
LKN Partners. (Am. Compl. ¶ 1.)

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REIT conversion. (Proxy at 42-43.) Guggenheim’s analysis suggested that a REIT
conversion would have resulted in a present value range of $64.50 to $84.50 per share,
(id. at 43), and Wells Fargo’s analysis suggested a range of $59.69 to $92.23 per share,
(id. at 43-44).

The Special Committee considered these analyses as well as the

“uncertainties and risks associated” with a REIT conversion. (Id. at 44.)
Negotiation over the transaction agreements continued over the next few days.
(Id. at 44-45; Am. Compl. ¶ 49.) On March 15, 2015, Party A delivered a revised
proposal with an offer of $72.00 per share, but did not provide a rollover investment or
continued employment for Akradi. (Am. Compl. ¶ 49; Proxy at 45.) The Buyout Group
also submitted a bid of $72.10 per share and requested Akradi roll over $125 million in
equity. (Am. Compl. ¶ 50; Proxy at 46.)
On March 15, 2015, the Special Committee and the Board both unanimously
approved the merger with the Buyout Group. (Proxy at 48.) Life Time filed the Proxy
with the Securities and Exchange Commission (“SEC”) on April 30, 2015, and it was
disseminated to Life Time shareholders in advance of the shareholder vote on the merger
on June 4, 2015. (Am. Compl. ¶ 63; Proxy at 2.) The 233-page Proxy discussed the
background of the merger, the Board’s analyses and recommendations, the financial
advisors’ fairness opinions, key terms of the merger agreement, disclosed Akradi’s
rollover interest, and the Board’s entitlement to stock options at the consummation of the
merger. (See Proxy at 7-8, 27, 35-75.) In recommending Life Time’s shareholders vote
in favor of the merger, the Board and the Special Committee noted that Guggenheim and
Wells Fargo opined the price of $72.10 was fair to shareholders. (Proxy at 48-49.) Not
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including the Defendants’ shares, the Life Time shareholders approved the merger with
81.65% voting in favor on June 4, 2015. 3 Pursuant to the merger, Akradi rolled over
$125 million worth of his Life Time shares in exchange for shares in the surviving entity,
(Am. Compl. ¶ 50), and remained the CEO, (id. ¶¶ 57-58).

II.

PROCEDURAL BACKGROUND
On August 31, 2015, Plaintiffs filed an amended complaint alleging that Life Time

and the Defendants issued a false or misleading proxy statement prior to the merger in
violation of § 14(a) of the Securities Exchange Act and SEC Rule 14a-9, (id. ¶¶ 94-100),
the Defendants and the Buyout Group acted as controlling persons of Life Time in
violation of § 20(a) of the Securities Exchange Act, (id. ¶¶ 101-107), the Defendants
breached fiduciary duties owed to Life Time’s shareholders, (id. ¶¶ 108-112), and the
Buyout Group aided and abetted the Defendants’ breach of fiduciary duties, (id. ¶¶ 113115). All defendants moved to dismiss on October 5, 2015.
Subsequently, on September 30, 2016, the Court dismissed all claims except for
the breach of fiduciary duty claim against Akradi and the Board. Lusk v. Life Time
Fitness, Inc., 213 F. Supp. 3d 1119, 1137-38 (D. Minn. 2016).

The Court did not

dismiss the claim primarily because the Defendants raised additional arguments in their
reply memorandum, to which Plaintiffs were not given a chance to respond. Id. at 1133
3

As of the record date of the shareholder vote, 39,043,889 Life Time shares were
outstanding, and 34,597,042 shares, or 88.61%, voted for the merger. (Def. Board’s Answer,
Ex. C at 2, Oct. 28, 2016, Docket No. 158.) Akradi owned 2,499,928, or 6.4%, of outstanding
shares, and the Board owned a total of 218,564, or .56%, of outstanding shares. (Proxy at 116.)
Thus, not including the Defendants 6.96% of shares, the shareholders approved the merger with
81.65% voting in favor of the transaction. The parties do not dispute these calculations.

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n.7. On October 28, 2016, the Defendants moved for judgment on the pleadings to
dismiss the claim. (Def. Akradi’s Mot. for J. on the Pleadings, Oct. 28, 2016, Docket
No. 160; Def. Board’s Mot. for J. on the Pleadings, Oct. 28, 2016, Docket No. 166.)

DISCUSSION
I.

STANDARD OF REVIEW
Reviewing a motion for judgment on the pleadings pursuant to Rule 12(c) of the

Federal Rules of Civil Procedure, the Court applies the same standard as under a motion
to dismiss pursuant to Rule 12(b)(6). Clemons v. Crawford, 585 F.3d 1119, 1124 (8th Cir.
2009). Therefore, when considering a motion for judgment on the pleadings under
Rule 12(c), the Court is required to “‘accept as true all factual allegations set out in the
complaint’ and to ‘construe the complaint in the light most favorable to the plaintiff[],
drawing all inferences in [the plaintiff’s] favor.’” Ashley Cty. v. Pfizer, Inc., 552 F.3d
659, 665 (8th Cir. 2009) (quoting Wishnatsky v. Rovner, 433 F.3d 608, 610 (8th Cir.
2006)). Although a complaint need not contain “detailed factual allegations,” it must
contain sufficient factual allegations “to raise a right to relief above the speculative
level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In addition to the
pleadings, the Court may properly consider materials that are necessarily embraced by
the pleadings. Enervations, Inc. v. Minn. Mining & Mfg. Co., 380 F.3d 1066, 1069
(8th Cir. 2004).

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II.

BREACH OF FIDUCIARY DUTY
A.

Exculpated Breach of Fiduciary Duty Claims

The parties first dispute whether Plaintiffs’ allegations state a non-exculpated
breach of fiduciary duty claim against the Defendants. 4 Under Minnesota law, generally
“[a] director’s personal liability to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director may be eliminated or limited in the
articles [of incorporation].” Minn. Stat. § 302A.251, subd. 4.

There are, however,

exceptions to this rule. Relevant to this case, Minnesota law dictates that the articles
cannot limit a director’s liability for a breach of the “duty of loyalty,” “acts or omissions
not in good faith,” “intentional misconduct or a knowing violation of the law,” or “for
any transaction from which the director derived an improper personal benefit.” Id.,
subd. 4(a)-(e).

4

The amended complaint refers to Akradi as an “‘Individual Defendant[]’ or [member
of] the ‘Board.’” (Am. Compl. ¶ 24.) The amended complaint also repeatedly states it seeks to
hold Akradi accountable in his capacity as Life Time director – the pleading provides that the
action relates to “the Board’s breaches of fiduciary duty under Minnesota state law,” (id. ¶ 1),
was brought “against the members of Life Time’s Board of Directors,” (id.), and was filed “[a]s
a result of the Board’s breaches of fiduciary duty,” (id. ¶ 9). The amended complaint never
states that the breach of fiduciary duty claim against Akradi relates to his capacity as an officer
of Life Time. (See id. ¶¶ 108-112.) Moreover, although Plaintiffs’ responsive briefing states in
a conclusory manner that, “[n]o officer in Akradi’s position could have been influenced by an
honest desire to serve the interests of the Company and its shareholders,” (Pl.’s Mem. in Opp’n
at 27, Nov. 21, 2016, Docket No. 178), the briefing did not otherwise raise any argument
regarding Akradi’s liability as a Life Time officer. Instead, Plaintiffs rely upon director liability
cases to support their claim against Akradi. (Id. at 25.) The Court may reject an argument if
framed as a “conclusory assertion” lacking any “analysis of the relevant law or facts.” See
Vandenboom v. Barnhart, 421 F.3d 745, 750 (8th Cir. 2005). As Plaintiffs failed to provide any
legal argument regarding officer liability, the Court will only address the claim against Akradi in
his capacity as a Life Time director.

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Since at least July 2004, Life Time’s articles exculpated its directors to the fullest
extent permissible under Minnesota law.

(Def. Board’s Answer, Ex. B at Art. IX,

Oct. 28, 2016, Docket No. 158.) As the merger occurred after Life Time adopted the
exculpatory provision, any breach of fiduciary claim against the Defendants sounding in
“negligence or even gross negligence” arising from the merger fails as a matter of law
because “such allegations would constitute only a breach of the exculpated duty of care.”
Kococinski v. Collins, 935 F. Supp. 2d 909, 917-18 (D. Minn. 2013). Plaintiffs argue
they pleaded non-exculpated breach of loyalty and good faith claims against the Board
and Akradi. 5 The Court will first analyze the claims against the Board, and then the
claims against Akradi.

B.

The Board
1.

Duty of Loyalty

Under Minnesota law, the fiduciary duty of loyalty prohibits directors from
serving “[their] own personal interests at the expense of the corporation and its
stockholders.”

Bartholomew v. Avalon Capital Grp., Inc., No. 09-1279, 2010 WL

3033727, at *3 (D. Minn. July 27, 2010) (quoting Diedrick v. Helm, 14 N.W.2d 913, 919
5

Plaintiffs also assert that the Board breached a non-exculpable duty of acting in
knowing violation of law pursuant to Minn. Stat. § 302A.251, subd. 4(b), because the Board
allegedly failed to promptly form the Special Committee pursuant to § 302A.673, subd. 1(d)(1).
However, Plaintiffs failed explain how § 302A.673, subd. 1(d)(1) applies to the instant action as
Plaintiffs never alleged a person or entity was an “interested shareholder” for purposes of that
statutory provision. Id., subd. 1 (providing an issuing public corporation may not engage in any
business combination with an “interested shareholder” unless approved by a special committee
pursuant to the provisions of subdivision 1(d)). The Court therefore declines to address it.
Barnhart, 421 F.3d at 750 (providing a Court may reject an argument when it lacks any “analysis
of the relevant law.”).

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(Minn. 1944)). Plaintiffs’ sole allegation that supports such a claim is that the Board was
entitled to “accelerated vesting of their stock options as a result of the change of control
that took place as a result of the Buyout.” (Am. Compl. ¶ 61.) Plaintiffs explained that
“[f]or example, outstanding shares of restricted stock, . . . entitled the holder to receive an
amount of cash equal to the per-share merger consideration in accordance with the same
terms and conditions as applied to holders of Life Time common stock generally.” (Id.)
However, Plaintiffs’ allegations support a finding that the Board’s interest aligned
rather than conflicted with Life Time’s shareholders, as the Board was entitled to merger
consideration with the “same terms and conditions as applied to holders of Life Time
common stock.” (Id.) Indeed, Delaware courts repeatedly hold that vesting of stock
options during a merger is not a breach of the directors’ duty of loyalty. 6 See In re
BioClinica, Inc. S’holder Litig., No. 8272-VCG, 2013 WL 5631233, at *5, (Del. Ch.
Oct. 16, 2013) (“Plaintiffs’ contention that the vesting of stock options in a change of
control transaction implicates the duty of loyalty is frivolous. Delaware courts recognize
that stock ownership by decision-makers aligns those decision-makers’ interests with
stockholder interests; maximizing price.”); see also Globis Partners, L.P. v. Plumtree
Software, Inc., No. 1577-VCP, 2007 WL 4292024, at *9 (Del. Ch. Nov. 30, 2007) (noting

6

There are very few Minnesota cases that interpret corporate fiduciary duties of loyalty
or good faith, and generally Delaware decisions on pleading exculpated claims are persuasive.
See, e.g., Markewich ex rel. Medtronic, Inc. v. Collins, 622 F. Supp. 2d 802, 809 (D. Minn.
2009) (citing Delaware cases for the proposition that plaintiffs have “the more difficult burden of
pleading a non-exculpated claim to avoid dismissal”); Rupp v. Thompson, No. C5-03-347, 2005
WL 2757129, at *6-8 (Minn. Dist. Ct. Jan. 12, 2005) (discussing several Delaware cases
regarding duty of loyalty and good faith). Thus, when relevant, this Court will also consider
Delaware law.

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although “the acceleration of unvested options could be viewed as an inducement to
effectuate the Merger,” it “does not create a conflict of interest because the interests of
the shareholders and directors are aligned in obtaining the highest price”); Krim v.
ProNet, Inc., 744 A.2d 523, 528 n.16 (Del. Ch. 1999) (noting that a higher merger price
“benefits the option-holding directors as much as, if not more than, the regular
stockholders”).
Similarly, the Board here had an incentive by virtue of their stock options to
obtain the maximum merger consideration. Such an incentive aligns with the shareholder
interest, especially as the Board considered financial analyses and discussed the benefits
and risks of a REIT transaction before favoring the merger. There is no other evidence
the Board sought to further their own personal interests at the expense of Life Time
shareholders. Thus, the Court finds the facts alleged do not support a breach of the duty
of loyalty claim against the Board.

2.

Duty of Good Faith

The Court must next determine whether Plaintiffs’ allegations that the Board
allowed Akradi to control the merger and that the Board ignored the value of the real
estate assets breached the Board’s fiduciary duty of good faith.
Under Minnesota law, “‘[g]ood faith’ means honesty in fact in the conduct of the
act or transaction concerned.” Minn. Stat. § 302A.011, subd. 13; see also Augustine v.
Arizant Inc., 751 N.W.2d 95, 100 (Minn. 2008). “In fact, ‘only a sustained or systematic
failure of the board to exercise oversight – such as an utter failure to attempt to assure a

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reasonable information and reporting system exists – will establish the lack of good faith
that is a necessary condition to liability.’” Markewich ex rel. Medtronic, Inc. v. Collins,
622 F. Supp. 2d 802, 810-11 (D. Minn. 2009) (quoting In re Caremark Int'l Inc.
Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996)). Breach of the duty of good faith is
based “on a showing that the directors were conscious of the fact that they were not doing
their jobs.” Id. at 811 (quoting Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003)).
Plaintiffs never pleaded that the Board acted dishonestly or that their actions rose
to the level of conscious disregard of their duties. Instead, Plaintiffs allege that the Board
acted inappropriately by: failing to allow a bidding war between Party A and the Buyout
Group; failing to consider REIT analyses; abdicating the sales process to Akradi; and
agreeing to deal protection devices with the Buyout Group.
With respect to Plaintiffs’ allegations that the Board failed to allow a bidding war
or consider REIT analyses, the law is clear that the Board is not liable for failing to carry
out a perfect process, which would at most lead to an exculpated duty of care claim. In re
BJ’s Wholesale Club, Inc. S’holders Litig., No. 6623-VCN, 2013 WL 396202, at *7 (Del.
Ch. Jan. 31, 2013) (“[A]llegations that the Board should have done more, even if
supported by well-pleaded facts, would, at best, only support a duty of care claim.”). The
Proxy states that the Board sought highest and best offers from Party A and the Buyout
Group, Party A indicated that its best and final offer was $72.00 per share, (Proxy at 46),
and the Board relied on financial analyses that indicated $72.10 was fair merger
consideration, (id. at 48-49). Plaintiffs’ allegation that the Board ignored the value of
Life Time’s real estate is conflicts with the Proxy’s statement that the Board met with the
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financial advisors Wells Fargo and Guggenheim to discuss the two merger proposals as
well as a REIT conversion, (id. at 43), and considered the REIT analyses as well as the
“uncertainties and risks associated” with a REIT conversion, (id. at 44).
Moreover, the Board did not breach the duty of good faith by allowing Akradi to
privately negotiate terms with bidders. First, “it is appropriate for a board to enlist the
efforts of management in negotiating a sale of control,” Wayne Cty. Emps.’ Ret. Sys. v.
Corti, No. 3534-CC, 2009 WL 2219260, at *13 (Del. Ch. July 24, 2009), and “[i]t is well
within the business judgment of the Board to determine how merger negotiations will be
conducted, and to delegate the task of negotiating to the Chairman and the Chief
Executive Officer,” In re NYMEX S’holder Litig., Nos. 3621-VCN, 3835-VCN, 2009 WL
3206051, at *7 (Del. Ch. Sept. 30, 2009). Moreover, Plaintiffs’ allegations demonstrate
that the Board established a Special Committee which, before deciding to approve the
merger, engaged in discussions with financial advisors, evaluated financial reports and
analyses, weighed the risks of a REIT transaction, and chose the timeframe and
procedures for the merger. (See Am. Compl. ¶¶ 43-53; Proxy 40-47.) Such facts do not
support a finding that the Board consciously disregarded its duties rising to a breach of
good faith.
Finally, Plaintiffs assert that the Defendants improperly adopted devices such as a
no-solicitation provision, a matching rights provision, and a termination fee.
Nonetheless, “[t]he mere inclusion of such routine [deal protection] terms does not
amount to a breach of fiduciary duty . . . . Delaware courts have recognized that these
provisions are common in merger agreements, and may sometimes be necessary to secure
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a strong bid.” In re Novell, Inc. S’holder Litig., No. 6032-VCN, 2013 WL 322560, at *10
(Del. Ch. Jan. 3, 2013). The Court agrees that adopting deal protection devices alone is
not enough to rise to a level of “sustained or systematic failure of the board to exercise
oversight” to satisfy a breach of good faith claim. Collins, 622 F. Supp. 2d at 810-11
(quoting In re Caremark Int’l, 698 A.2d at 971).
Thus, as Plaintiffs’ pleading fails as a matter of law to support a nonexculpated
breach of good faith claim or breach of loyalty claim against the Board, the Court will
grant the Board’s motion for judgment on the pleadings. The remaining issue is whether
Akradi breached a fiduciary duty of loyalty or good faith to the shareholders.

C.

Akradi

Plaintiffs allege Akradi had a conflict of interest with Life Time’s shareholders
because, instead of pursuing a REIT transaction, Akradi forced an undervalued sale to his
favored bidder to ensure his continuing interest in the surviving company. Although
Plaintiffs assert these allegations support both a breach of loyalty and good faith claim,
the claim is properly classified solely as a breach of loyalty claim. 7

7

The duty of loyalty prohibits a director from serving “personal interests at the expense
of the corporation and its stockholders,” Bartholomew, 2010 WL 3033727, at *3 (quoting
Diedrick, 14 N.W.2d at 919). Akradi’s purported conflict of interest appears to fall within such a
claim. On the other hand, a breach of the duty of good faith requires dishonest conduct or a
conscious disregard of performing director duties. See Minn. Stat. § 302A.011, subd. 13;
Collins, 622 F. Supp. 2d at 810-11. Plaintiffs did not explain how Akradi’s alleged conflict of
interest also qualifies as dishonest conduct or a conscious disregard of his duties, and the Board
authorized Akradi to negotiate terms with the bidding companies and his surviving interest in the
company was disclosed to the shareholders in the Proxy. (See Proxy at 7-8, 40-43.)

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The Court finds that, pursuant to Minn. Stat. § 302A.255, the disinterested Life
Time shareholders ratified the transaction, precluding a breach of loyalty claim against
Akradi. See Holdahl v. BioErgonomics, Inc., No. 27-CV-10-24236, 2012 Minn. Dist.
LEXIS 241, *34-35 (Minn. Dist. Ct. Feb. 8, 2012) (“The Director Defendants complied
with the [Minn. Stat. § 302A.255] procedures for an interested director transaction and
this Court may not, consistent with Minnesota law, second-guess the Special
Committee’s decision. Therefore, summary judgment must be granted on the breach of
duty of loyalty claim for all of the Defendant Directors.”), aff’d, No. A12-1495, 2013
Minn. App. Unpub. LEXIS 105 (Minn. Ct. App. Feb. 4, 2013).
Minnesota Statute § 302A.255, subd. 1, provides that “[a] contract . . . between a
corporation and an organization in or of which one or more of its directors . . . have a
material financial interest, is not void or voidable because the director or directors or the
other organizations are parties” if the “material facts” of the transaction and the director’s
interest are “fully disclosed” and the transaction is approved by an affirmative vote by
two-thirds of disinterested shareholders entitled to vote.
Here, the parties do not dispute that the disinterested Life Time shareholders –
excluding Akradi’s and the Board’s shares – approved the transaction, with 81.65%
voting in favor. Instead, Plaintiffs argue that the Life Time shareholders were not
provided the “material facts” regarding the transaction for purposes of the statute. The
only omissions Plaintiffs alleged to be “material” were the nondisclosure of Akradi’s
rollover agreement terms and the omission of the market value of Life Time’s real estate
assets from the Proxy. (Am. Compl. ¶¶ 75-84, 108.)
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Although Minn. Stat. § 302A.255 does not define or explain what it means to fully
disclose a material fact for purposes of shareholder ratification, Minnesota courts
addressing materiality for breach of fiduciary duty claims have turned to federal law. See
Berreman v. West Publ’g Co., 615 N.W.2d 363, 371 (Minn. Ct. App. 2000) (discussing
federal securities standard to determine materiality of undisclosed facts for plaintiff’s
breach of fiduciary duty claim against shareholders in close corporation); Weiner v.
Naegele, No. 11-855, 2012 WL 2906299, at *5-6 (D. Minn. July 16, 2012) (applying
federal standard to state law claim for breach of duty to disclose material facts brought
against member of closely-held company); Gottlieb v. Willis, No. 12-2637, 2012 WL
5439274, at *3 (declining to hold that “Minnesota would impose a common-law duty to
disclose information in a proxy statement beyond what is required by federal securities
laws or relevant state statutes.”) Plaintiffs have not offered – and the Court is not aware –
of any Minnesota case suggesting a greater duty to disclose than that required by federal
securities law.
The Court has already addressed and dismissed Plaintiffs’ federal securities law
claim that the Proxy allegedly omitted the full terms of Akradi’s rollover agreement. The
Court found that the “[s]hareholders had substantial information about Akradi’s Rollover
Agreement . . . and the proxy painted a ‘sufficiently accurate picture so as not to
mislead.’” Lusk, 213 F. Supp. 3d at 1132-33 (quoting Lane v. Page, 581 F. Supp. 2d
1094, 1121 (D.N.M. 2008)). Thus, paralleling federal securities law, the Court finds that
by virtue of the Proxy, the shareholders were duly informed about Akradi’s conflict of
interest for purposes of Minn. Stat. § 302A.255. As the Court previously explained,
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“Plaintiffs have not explained how a disclosure of the actual market value of Life Time’s
real estate would have substantially altered the total mix of information available.
Indeed, shareholders were specifically apprised of potential outcomes of a REIT
conversion transaction.” Id. at 1131.
Therefore, as the shareholders’ vote extinguishes the breach of the fiduciary duty
of loyalty claim against Akradi pursuant to Minn. Stat. § 302A.255, the Court will grant
Akradi’s motion for judgment on the pleadings.

ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1.

Defendants Giles H. Bateman, Jack W. Eugster, Guy C. Jackson, John K.

Lloyd, Martha A. Morfitt, John B. Richards, and Joseph S. Vassalluzzo’s Motion for
Judgment on the Pleadings [Docket No. 166] is GRANTED.
2.

Defendant Bahram Akradi’s Motion for Judgment on the Pleadings [Docket

No. 160] is GRANTED.
3.

Plaintiffs’ claims are DISMISSED with prejudice.

DATED: August 6, 2017
at Minneapolis, Minnesota.

_____________s/John R. Tunheim_________
JOHN R. TUNHEIM
Chief Judge
United States District Court

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