In a story right out of the movies, complete with “poison pills” and “white squires,” the SEC announced on March 13, 2014 that motion picture company Lions Gate Entertainment Corporation settled charges that it failed to disclose to investors a set of “extraordinary” corporate transactions designed to thwart takeover efforts by investor Carl Icahn.
The tale of intrigue and midnight board meetings can be traced to Icahn’s efforts, beginning in 2008, to acquire control of Lions Gate. Despite his eventually gaining beneficial ownership of nearly 40 percent of Lions Gate’s outstanding shares, the company rejected various demands from Icahn over the years, including a demand to appoint five of the twelve seats on the Board of Directors. In March, 2010, Icahn made a tender offer with a premium over the market price to entice shareholders to sell. To thwart Icahn’s tender offer, Lions Gate adopted a poison pill and began to look for ways to keep the company out of Icahn’s hands. Read More
Last Friday, Judge Kleinberg of the California Superior Court, County of Santa Clara, dismissed two shareholder class actions against the former directors of Actel Corporation and Applied Signal Technology, Inc. for breach of fiduciary duties arising out of the sales of Actel and Applied Signal to third-party buyers. In doing so, Judge Kleinberg stated that, under California law, damages claims brought by shareholders of California corporations against directors for breach of fiduciary duties in connection with the approval of a merger are derivative, not direct. Thus, because a plaintiff in a shareholder’s derivative suit must maintain continuous stock ownership throughout the pendency of the litigation, and the plaintiffs ceased to be stockholders of Actel and Applied Signal by reason of a merger, Judge Kleinberg held that they lacked standing to continue the litigation.
In holding that post-merger claims against directors of California acquired corporations are derivative, Judge Kleinberg relied on the pre-Tooley rationale (which is no longer controlling in Delaware and has been questioned in California) that a harm suffered equally by all shareholders in proportion to their pro rata ownership of the company is a derivative harm. Judge Kleinberg rejected the plaintiffs’ argument that Delaware’s Tooley standard for determining whether a claim was direct or derivative was adopted by the California Court of Appeal in Bader v. Andersen, 179 Cal. App. 4th 775 (2009). According to Judge Kleinberg, in stating that California and Delaware law were “not inconsistent,” the Bader court was merely observing that the results of applying California versus Delaware law in that case were not inconsistent; it was not saying that California and Delaware law are the same on the direct versus derivative issue.
Judge Kleinberg’s holding is a victory for the defense bar, as it means that merger litigation involving California incorporated targets will be susceptible to dismissal by demurrer or summary judgment following the preliminary injunction stage.
On April 25, 2012, Cornerstone Research released an interesting report entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions—March 2012 Update.” The report notes that the incidence of litigation in connection with mergers valued at $500 million or greater rose from 57% in 2007 to 96% in 2011. This observation has already caught the attention of the Delaware Chancery Court where Vice Chancellor Laster commented in a teleconferenced ruling, “I don’t think for a moment that 90%—or based on recent numbers—95% of deals are the result of a breach of fiduciary duty. I think there are market imbalances here and externalities that are being exploited. What this means is that the Court needs to think carefully about balancing.”
The report also shows that the number of lawsuits per litigated deal increased from an average of 2.8 in 2007 to 6.2 in 2011. The absolute count of lawsuits involving deals with values of $500 million or greater also nearly doubled from 289 in 2007 to 502 in 2011. The report also noted that as of March 2012, 67 lawsuits have already been reported for 13 out of 17 deals announced during January and February.