Ehrenhaus v. Baker, 2008 NCBC 20 (N.C. Super. Ct. Dec. 5, 2008)

The Court denied a motion for preliminary injunction in this litigation involving the merger of Wachovia and Wells Fargo.

The principal holdings of the decision were  that (1) the Wachovia Board of Directors, in approving the merger deal, satisfied its obligations under the Business Judgment Rule in light of the dire economic circumstances and lack of alternatives faced by the Board, (2) the Board complied with North Carolina law in the issuance of new shares of stock to Wells Fargo which gave it 39.9% of the voting control over Wachovia, and (3) the grant of this voting bloc was not coercive to Wachovia's shareholders. 

The Court also found, however, that the continuation of Wells Fargo's right to vote these shares for an 18 month period if the Wachovia shareholders were to reject the merger was invalid. 

There's a more complete summary of the Court's opinion here.

Full Opinion

 

Brief in Support of Motion for Preliminary Injunction

Wachovia Brief in Opposition to Motion for Preliminary Injunction

Wells Fargo Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

Wachovia Sur-Reply in Opposition fo Motion for Preliminary Injunction

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Ehrenhaus v. Baker, 2008 NCBC 19 (N.C. Super. Ct. November 3, 2008)(Diaz)

The Court denied a Motion for Expedited Discovery in a shareholder class action seeking injunctive relief against the merger of two national banks, finding that the facts necessary to decide the motion were already publicly known.

The Court considered several different tests for when expedited discovery should be allowed, including:

Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 151, 152 (E.D.N.C. 1993), in which the court held that the plaintiff should be required “to demonstrate (1) irreparable injury, (2) some probability of success on the merits, (3) some connection between the expedited discovery and the avoidance of the irreparable injury, and (4) some evidence that the injury that will result without expedited discovery looms greater than the injury that the defendant will suffer if the expedited relief is granted.”

Dimension Data N. America, Inc. v. NetStar-1, Inc., 226 F.R.D. 528, 531 (E.D.N.C. 2005), requiring a showing of reasonableness and good cause for the expedited discovery, "taking into account the totality of the circumstances."

Marie Raymond Revocable Trust v. MAT Five LLC, 2008 Del. Ch. LEXIS 77, at * 6 (June 26, 2008), requiring a plaintiff to “articulate a sufficiently colorable claim and shoe a sufficient possibility of a threatened irreparable injury to justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited . . . proceeding.”

The Court did not endorse any particular test.

Full Opinion

Plaintiff's Brief In Support of Expedited Discovery

Defendant's Brief in Opposition to Expedited Discovery

Plaintiff's Reply Brief in Support of Expedited Discovery 

 

Some Meaty (But Not North Carolina) Court Decisions On Business Issues

This post is about three significant business decisions from courts in other jurisdictions.  They involve an issue of attorney-client privilege for limited liability companies, whether an LLC member can waive his statutory right to seek dissolution of an LLC, and board duties in a merger context.

First, if there's litigation between a member-manager of an LLC and the LLC, does the LLC have an attorney-client privilege to assert against its own member-manager? This issue hasn't arisen in any case before the North Carolina Business Court, but it undoubtedly will. 

A federal court in Nevada confronted that question recently and held in Montgomery v. eTreppid Technologies, LLC, 2008 WL 1826818 (D. Nev. 2008), that the LLC should be treated, for privilege purposes, like a corporation.  It determined that the privilege belonged to the entity alone, and that the plaintiff was not entitled to discovery of privileged information even though he was a member of the LLC and a former manager.  Thanks to Peter Mahler and his New York Business Divorce Blog, where I read about this case.

Second, can a member of an LLC waive his or her right to dissolution by an anti-dissolution provision in the Operating Agreement?  The answer is yes, at least under Delaware law, as held by the Delaware Court of Chancery last week in R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del.Ch., Aug. 19, 2008).  You can read the summary of the case, from the Delaware Corporate and Commercial Litigation Blog, here.  The Court rejected the argument that a member's agreement not to seek dissolution violated the public policy of Delaware, stressing instead the freedom of contract afforded those forming a limited liability company.

Third, also from Delaware, is a decision late last month about director duties in a merger context, Ryan v. Lyondell Chemical CoThe Court of Chancery held that a shareholder could proceed to trial against the directors of Lyondell on a claim for breach of fiduciary duty, even though the action challenged was the consummated sale of the company for a "blowout" market premium.  The Court found a "troubling board process," in the board's determination after only seven days to approve the sale of the company without any market check, without any post-agreement "go shop" period, and their approval of a merger agreement with strong deal protection measures and a substantial breakup fee. 

The Court said it was unable to find on the summary judgment record that that Board had satisfied its Revlon duties, or that the deal protection measures were reasonable and necessary to secure the offer per Unocal.  This case is also courtesy of the Delaware Corporate and Commercial Litigation Blog.

The picture of the Cook Out hamburger at the top of this post is by my daughter, Juliet, a sophmore at UNC-Chapel Hill.

I've been having trouble recently with the pictures and links on my blog, so if they are not working when you first read this please check back later.

Fliehr v. Storick, December 3, 2007 (Diaz)(unpublished)

A manager of an limited liability company may not, as a condition of the payment of consideration from a merger of the LLC, require that the member receiving the consideration execute a general release exonerating the manager and insiders from any misconduct.  Holding the consideration "hostage" in exchange for such a release might amount to willful and wanton conduct warranting punitive damages.

An LLC member pursuing a derivative claim must be a member of the LLC at the time the suit is filed.  Where the LLC no longer existed at the time the lawsuit was filed, Plaintiffs lacked standing to bring their claim.  Plaintiff's claim for mismanagement was a "classic derivative claim," which was also barred by their lack of standing. 

The Court also dismissed Plaintiffs' unfair and deceptive practices claim, because "misconduct arising from a merger of business entities is not the type of 'regular, day-to-day' business activity that is the principal focus of North Carolina's Unfair and Deceptive Trade Practices Act."

Full Opinion

Whitney v. Winston, June 20, 2007 (Jolly)(unpublished)

Plaintiff sought to enjoin a merger. He alleged that the defendants, directors of the company to be acquired, had breached their fiduciary duties by failing to disclose pertinent information to the shareholders, failing to maximize shareholder value, and agreeing to a coercive and unreasonable termination fee.

The Court noted that it was uncertain whether plaintiff was entitled to make direct claims, as directors of a corporation owe their fiduciary duties to the company, as opposed to the shareholders, and a claim for breach of those duties belong to the corporation. North Carolina does not impose Revlon duties on directors.

It held that the directors here were entitled to rely on their advice of their counsel and their investment advisors, as provided for in N.C.G.S. §55-8-30, and denied the Motion.

Full Opinion

 

Levy Investments v. James River Group, Inc., September 19, 2007 (Tennille)(unpublished)

There were parallel actions challenging a merger, one in Delaware and one, filed first, in North Carolina. Defendant filed a motion to stay the North Carolina action. The Court identified twelve factors it would consider in such situations, including whether the issues should be settled in the corporation's state of incorporation, the convenience of parties and witnesses, and the significance, if any, of the first to file. The Court stayed the North Carolina action pending the Delaware Court's consideration of a proposed settlement.

Full Opinion

Wachovia Capital Partners, LLC v. Frank Harvey Investment Family Limited Partnership, 2007 NCBC 7 (N.C. Super. Ct. Mar. 5, 2007)(Tennille)

Defendant, via a counterclaim, sought damages as a result of a concluded merger involving a Delaware LLC. The Court held that the decision whether to merge belonged to the Management Committee of the LLC, and that it would review that decision pursuant to the Business Judgment Rule.

Defendant contended that company insiders "stood on both sides of the deal," and they were therefore conflicted in their ability to properly approve this merger. The Court rejected this contention. It held that "the mere presence of managers on both sides of a merger does not mean the transaction must fail due to a conflict of interest." The Court observed that the 95% of the company's shareholders had approved the merger, and that Delaware courts "have made clear that such a 'fully informed vote of stockholders approving a merger will extinguish a claim for breach of fiduciary duty.'"

The remainder of the Court's opinion dealt with defendant's Motion to Compel, which sought information regarding the details of plaintiff's contracts with its teachers with whom it did business. The Court discussed the broad scope of relevancy, and the distinction between relevance for discovery purposes and relevancy at trial, and denied the Motion. It found that the information sought was not relevant, and that it involved confidential business information and information potentially subject to attorney-client privilege.

Full Opinion

Marcoux v. Prim, 2004 NCBC 5 (N.C. Super. Ct. Apr. 16, 2004)(Tennille)

This action sought to enjoin a merger involving a publicly traded company. The Court addressed whether the action was derivative or direct under Delaware law. If it was derivative, the Court held that the complaint suffered from three flaws: it was not verified, the corporation had not been joined as a party, and there were no allegations with respect to demand futility as required by North Carolina law.

The Court held, under Delaware precedent, that a shareholder claiming that the merger price is the product of a breach of the directors' duty of loyalty, as a result of the directors being conflicted or acting in bad faith, is entitled to make a direct claim. The Court further held that a Revlon claim is a direct claim, because the injury results from the diminished value that a shareholder receives in the merger process. As the Court put it, "the treasury of the shareholder is depleted, not the treasury of the corporation."

The Court discussed the analysis to be followed when a shareholder seeks to enjoin a merger. It held that if there is no competing offer, the shareholder must make "a particularly strong showing on the merits" in order to obtain the injunction because of the potential loss of the merger premium.

Plaintiff contended that the Special Committee of the company's board, which had approved the merger, was not independent because the members of the board sat on the boards of each others' companies, and that they vacationed together. The Court found that these challenges to directorial independence were merely personal and business relationships. One director had served as outside counsel to the company, and had been paid legal fees. The Court held that "the receipt of legal fees by a director's law firm does not, by itself, demonstrate that director's lack of independence."

The Court further found that the board was not required to conduct an auction. It had conducted a market check. Nor were the directors required to disclose the benefit of merger synergies or to obtain a study which quantified the synergies. Nor were the directors required to disclose the existence of derivative lawsuits pending against the company in the merger proxy, and that those claims would be extinguished as a result of the merger. There furthermore was no diversion of the merger consideration to the company's president, who sold property to the buyer and obtained a new employment contract as a result of the merger.

The Court noted that the plaintiff had failed to make a statutory inspection request under Delaware law before filing its complaint, and that he had not waited for the merger proxy to be filed before he filed suit.

Full Opinion

In re Quintiles Transnational Corp. Shareholders Litigation, 2003 NCBC 11 (N.C. Super. Ct. Dec. 19, 2003)(Tennille)

This opinion on attorneys' fees was issued in tandem with the opinion in In re Wachovia Shareholders Litigation. Lawsuits had filed over a tender offer for the company, which led the Board of Directors to conduct an auction process which led to a higher price per share. Thereafter, class counsel and the defendant had agreed to permit the Court to set the fee, not to exceed $450,000, and the defendant had agreed not to object.

The Court considered, as it would have if there had been an objection: (1) whether the action was meritorious at the time it was filed, (2) whether there was an ascertainable benefit received by the class, and (3) whether there was a causal connection between the action and the benefit. The Court approved a fee of $450,000, although it found that there were some "close questions," particularly whether the filing of the lawsuit had been a direct cause of the increase in price paid for the company.

The Court noted that an award of fees acts as a check on management. The Court has an obligation "to balance the need for incentives for shareholders to protect their interest with the need to keep litigation costs at a level which does not inhibit merger activity."

The Court discussed, on a prospective basis, whether the law firm which did not become appointed as lead counsel could be compensated for its work. It noted that the decision of the law firm to be lead counsel would not ordinarily turn on which firm was the first to file.

It discussed the importance of making a shareholder inspection request under the North Carolina statute before rushing to the courthouse, cited substantial Delaware precedent on this point, and held that "failure to use inspection of books and records may result in a finding that the suit was not meritorious when filed."

Full Opinion

In re Wachovia Shareholders Litigation, 2003 NCBC 10 (N.C. Super. Ct. Dec. 19, 2003)(Tennille)

The Court considered an award of attorneys fees following its determination that certain termination provisions of a merger agreement were invalid. This opinion was issued in tandem with opinion in In re Quintiles Transnational Shareholders Litigation.

Fee applications were made by attorneys representing a class of shareholders, as well as attorneys representing a derivative plaintiff. The Court observed that the derivative action did not fit well in the "fast paced" context of litigation over a merger. It stated that such claims were more suited to being litigated as shareholder rights claims as opposed to corporate (derivative) claims for breach of fiduciary duty.

The Court refused to award attorneys fees in the derivative action, observing that it "was filed solely to get a piece of the litigation fee pie." It was also critical of the failure of the derivative plaintiff to seek a shortening of the statutory 90 day waiting period. Finally, the derivative action was moot, as the merger it sought to challenge had already occurred.

The Court observed, in dicta, that "the hourly rate claimed by New York counsel is astonishingly out of line with market rates."

On the class action claims, the Court determined that it could award fees, even though the litigation had not created a common fund. It then analyzed the fee request and discussed the level of specificity it expected in fee applications.

Full Opinion

First Union Corp. v. Suntrust Banks, Inc., 2001 NCBC 9 (N.C. Super. Ct. July 20, 2001)(Tennille)

The Court, faced with significant litigation over the proposed merger of two major banks and the validity of deal protection provisions in the approved merger agreement, engaged in a thorough discussion of the underpinnings and evolution of the business judgment rule as well as the development of Delaware law in the area of corporate change of control.  The Court articulated the standard it would apply in reviewing the validity of such provisions.

At the heart of the Court's discussion is an analysis of the tension between the degree of freedom which corporate boards should have to make decisions, and the level of review which a Court should apply to such decisions.

The Court held that "our system requires: (a) that directors have the power and authority to plan, develop, design, negotiate and contract for mergers and other acquisitions fundamental to the corporation's business strategy, (b) that shareholders have the right to vote on any such fundamental changes in corporate structure and (c) that their vote results in a free, uncoerced and informed valuation of the proposed corporate action. Exposing a transaction to valuation in the marketplace is the best test of its worth. When corporate law adopts a review process that insures that these structural requirements are met, it promotes corporate value."

The Court held that directors of North Carolina corporations do not have Revlon duties, based on the amendment of N.C.G.S. Sec. 55-8-30(d), which provides that "the duties of a director weighing a change in control situation shall not be any different, nor the standard of care any higher, than otherwise provided in this section."  It determined that the policy of North Carolina demanded deference to the strategic decisions of directors, but at the same time a vigorous preservation of the voting rights of shareholders. 

The Court held that it would apply the following standard in cases seeking injunctive relief against deal protection devices in a stock for stock merger:

In reviewing deal protection measures in a stock-for-stock merger subject to shareholder approval, the court will first review the transaction, including the adoption of deal protection measures, to determine if the directors have complied with their statutory duty of care under N.C.G.S. § 55-8-30. The burden is upon the shareholder challenging their actions to prove that a breach of duty has occurred. If no breach of duty is proven, the action of the directors is entitled to a strong presumption of reasonableness and validity, including noncoercion, and the court should not intervene unless the shareholder can rebut that presumption by clear and convincing evidence that the deal protection provisions were actionably coercive, or that the deal protection provisions prevented the directors from performing their statutory duties. If a breach of duty is established, the burden shifts to the directors to prove that their actions were reasonable and that it is in the best interests of the shareholders that they be permitted to vote on the transaction, and, if at issue, that the deal protection measures were not actionably coercive and did not prevent the directors from performing their statutory duties. Where the court finds that the deal protection measures are coercive or require directors to breach their statutory duties, the court must then weigh the harm to the shareholders in enjoining either the deal protection measures, the vote on the transaction or the merger, if the transaction is approved, against the harm resulting from not entering injunctive relief.

Applying this standard, the Court found no breach of duty on the part of the Wachovia directors.  They had acted with due care, and were entitled in their determination to rely upon the advice of legal counsel, investment bankers, and other professionals in managing the business of the corporation.  They had negotiated a higher price than initially offered, and had obtained a fiduciary out to the no-shop provision in the merger agreement.  In response to SunTrust's argument that the directors did not fully understand the economic impact of a cross-option agreement which they had approved, the Court held that it made no difference that the directors did not understand the intricacies of the break up fee resulting from that agreement.  The directors understood the bottom line, which was $780 million, and the Court found that sufficient.

The Court found that the deal protection measures before it were not coercive.  It held "they do not force management's preferred alternative on the shareholders.  There is no preordained result or any structural or situational coercion.  Wachovia shareholders can vote their economic interests.  The Court is convinced that those shareholders have an unfettered, fully informed opportunity to exercise their right to approve or disapprove of the merger their board has proposed to them, and that is the market test our system prefers."

The Court found invalid, however, a provision in the merger agreement which kept the merger agreement in place for five months past the date scheduled for the shareholders meeting at which the merger was to be presented for approval.  It referred to this as "numb hands" for the Wachovia board, and an "impermissible abrogation" of their duties.  The Court held that if the merger were not approved, "this board has impermissibly tied its hand and cannot do the very thing the Delaware Supreme Court found to be of fundamental importance to the shareholders -- 'negotiating a possible sale of the corporation.'"

Full Opinion







Winters v. First Union Corp., 2001 NCBC 8 (N.C. Super. Ct. July 13, 2001)(Tennille)

Plaintiff was not entitled to proceed on its derivative action seeking to enjoin a merger because it had not waited for the 90 day period required by N.C.G.S. §55-7-42. Plaintiff failed to sufficiently plead irreparable harm, which might have excused it from waiting the 90 day period.

It was not irreparable harm that the company's shareholders would be called upon to vote on the merger transaction before the expiration of the 90 day period, because there was an absolute statutory right to vote on the merger absent a showing of breach of fiduciary duty by the company's directors, and plaintiff could present its position through a proxy fight if it desired.

Plaintiff's rote allegations regarding a breach of fiduciary duty were insufficient to survive a motion to dismiss or to overcome the presumption of the business judgment rule.

Full Opinion

First Union Corp. v. Suntrust Banks, Inc., 2001 NCBC 7 (N.C. Super. Ct. June 26, 2001)(Tennille)

The challenge to the provisions of a merger agreement by a spurned acquiror would be governed by the law of North Carolina, because that was the place of execution of the merger agreement at issue and therefore the place of the last act causing injury, and also because North Carolina was the state having the most significant relationship to the controversy.

There was no unfair and deceptive practices claim to be made because the transaction involved securities.

Full Opinion

Smith v. NC Motor Speedway, 1997 NCBC 5 (N.C. Super. Ct. Nov. 12, 1997)(Tennille), aff'd, 132 N.C.App. 132, 516 S.E.2d 921, disc. rev. denied, 350 N.C. 310, 534 S.E.2d 596 (1999)

A majority shareholder has no fiduciary duty to minority shareholders to "auction off" the company or otherwise obtain the highest possible value for their interests once the majority shareholder decides to sell its controlling interest or engage in a cash out merger. The duties of a shareholder are distinct from those of a director under Revlon.

Under these circumstances, the remedy of the minority shareholders is exclusive, and limited to dissent and appraisal, unless the transaction is unlawful or fraudulent.

Assuming that the test of "entire fairness" must be met, it was met where the price per share was above the range determined to be appropriate by the investment advisor to the company's special committee.

An injunction against the merger was not appropriate.

Full Opinion

Frazier v. Beard, 1996 NCBC 1 (N.C. Super. Ct. Oct. 24, 1996)(Tennille), aff'd, 130 N.C.App. 484, 506 S.E.2d 298 (1998)

Plaintiffs sold their stock in Citizens Savings Bank, and the stock increased in value significantly after Citizens merged with BB&T. Plaintiffs claimed that the various buyers of the stock had been unjustly enriched. The court granted summary judgment, because the buyer had no knowledge of the merger transaction and because Plaintiffs had already recovered a significant settlement from a bank officer who misled them as to the status of merger negotiations.

Full Opinion