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noting that "the defendants abandon[ed] their transaction and thereby moot[ed] the plaintiff's claims"
Summary of this case from Feldman v. AS Roma SPV GP, LLCOpinion
Civil Action No. 054-N.
Submitted: November 11, 2004.
Decided: December 29, 2004.
Michael Hanrahan, Paul A. Fioravanti, Jr., Prickett, Jones Elliott, P.A., Wilmington, DE.
Charles F. Richards, Jr., Richards, Layton Finger, Wilmington, DE.
Dear Counsel:
Plaintiff's counsel filed a petition for an award of fees in this action on September 9, 2004. After carefully considering the briefs and supporting affidavits, I have concluded that oral argument is not necessary and that plaintiff's counsel is not entitled to an award of fees in this case at this time. Accordingly, the petition is denied.
This action was filed on November 10, 2003, asserting claims for breach of fiduciary duty and noncompliance with certain provisions of the Delaware General Corporation Law ("DGCL") in connection with a Plan of Dissolution previously approved by shareholders and a going-private transaction proposed by certain directors. Fab's shareholders approved a Plan of Dissolution on May 30, 2002, but a Certificate of Dissolution has not yet been filed with the Delaware Secretary of State. The going-private transaction was proposed by a group led by defendant Samson Bitensky ("Bitensky"), Chairman and Chief Executive Officer of Fab Industries, Inc. ("Fab"), and received by Fab's board of directors on October 23, 2003. On November 26, 2003, Fab announced that Bitensky's offer had been withdrawn. Plaintiff's counsel's fee petition also refers to an offer made by a different management-led group made between March and August 2004, which did not result in a binding offer. As the complaint does not address the later offer, I will not address it in the context of the fee application. Plaintiff's counsel have now asserted that the claims asserted in the complaint are moot as a result of the defendants' withdrawal of the proposed transactions, and that they are entitled to an award of fees under the "common corporate benefit" doctrine.
See Ex. D to Fee Petition; Compl. ¶¶ 14-17; Fee Petition at 3.
Ex. D to Fee Petition.
Ex. C to Fee Petition.
Ex. D to Fee Petition.
Plaintiff never amended the complaint nor sought leave to do so.
The "common corporate benefit" doctrine recognizes that "a litigant who confers a common monetary benefit upon an ascertainable stockholder class is entitled to an award of counsel fees and expenses for its efforts in creating the benefit. . . ." In order to demonstrate that the litigant has conferred this common monetary benefit, the fee applicant must show that: "(1) the suit was meritorious when filed; (2) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit." When the defendants abandon their transaction and thereby moot the plaintiff's claims, the defendants have the burden to show that "no causal connection existed between the initiation of the suit and any later benefit to the shareholders."
United Vanguard Fund v. Takecare, Inc., 693 A.2d 1076, 1079 (Del. 1997); see Cal-Maine Foods v. Pyles, 858 A.2d 927, 928-29 (Del. 2004).
United Vanguard Fund, 693 A.2d at 1079; see Cal-Maine Foods, 858 A.2d at 929.
United Vanguard Fund, 693 A.2d at 1080; see Cal-Maine Foods, 858 A.2d at 929.
Defendants here have challenged the fee application on the first and last prong of the above test, arguing that plaintiff's claims were not meritorious when filed and that the litigation conferred no benefit upon Fab and its shareholders.
Counts I and II of the complaint purport to state claims for breach of fiduciary duty. Count I alleges that the defendants breached their fiduciary duties by "determining to effect the management buy-out." In his brief, plaintiff has argued that Count I states a claim because Fab did not reject Bitensky's buyout offer ab initio. According to plaintiff, it was a breach of fiduciary duty for Fab's board to establish a special committee to evaluate the bid because the terms of the offer were so egregiously unfair that the board should never have even considered the bid, but should have immediately rejected it.
Compl. ¶ 43. Count I also refers to aspects of the Bitensky amendment that is the subject of Count II, so I will address those allegations in that context.
Even if the complaint read as plaintiff has argued in his brief, there is no legal authority for the assertion that a board of a company whose shareholders previously approved a plan of dissolution has a fiduciary obligation to reject a bid without formally considering it because it appears to be at an unfairly low price. Should plaintiff prevail on this claim, it would place boards of directors and special committees in an untenable position — reject the bid outright and, in all likelihood, close the door to further negotiations or discussions with that bidder while risking liability for not adequately working with the bidder to obtain an appropriate price — or, appoint a special committee to review the bid and be found in breach of your fiduciary duties for failing to reject an offer that a court, post hoc, will find to be untenably low such that it should have been rejected ab initio. The absurdity of this position is clear. Defendants were under no duty to reject the Bitensky offer ab initio. Plaintiff's attempts to attack the Bitensky offer under the entire fairness standard are unavailing, as Fab never accepted the Bitensky offer. The Special Committee had not recommended any transaction to Fab's board. As such, Count I was premature and not ripe to the extent it challenged the entire fairness of the not yet nascent "transaction."
The cases plaintiff cites are very clearly distinguishable because in those cases, the boards of directors had actually approved the transactions in question. See Fee Petition at 9-10.
Plaintiff's other argument is that Count I was designed to protect the voting rights of Fab's shareholders. Plaintiff contends that Bitensky intended to complete his buyout without a shareholder vote. Even if this were the case, the claim is still unripe for the same reasons. The Special Committee did not make a recommendation to the Fab board that the transaction should occur as put forth in the Bitensky offer. As such, no transaction was on the table that would occur without a shareholder vote, and Count I was premature, and an award of fees based on Count I would not be appropriate. Because Count I was premature and not ripe, Count I was not meritorious when filed.
Count II alleges that the defendants breached their fiduciary duties by approving the "Bitensky Amendment," which consisted of an amendment to Bitensky's employment agreement relating to consulting payments upon termination, and the transfer of certain life insurance policies to Bitensky that Fab held on his life. As to the consulting payments, although the change from a series of payments to a lump sum did result in a charge to earnings (an accounting change), there was no economic change to Fab or Bitensky. By providing for payment of the consulting payments on a lump sum, discounted to present value basis, Fab was merely making explicit what, in all likelihood, may have been the reality of the consulting payments if they were triggered. The discounted present value of those payments, when paid as a lump sum, by definition, is worth exactly the same as an annuity of $250,000 paid annually for five years. As such, Fab could not have transferred any assets or value to Bitensky through this amendment to his employment agreement and, to that extent, Count II was not meritorious when filed.
The transfer of certain life insurance policies from Fab to Bitensky, however, is a different matter. Although the complaint alleges that Fab received "no consideration" for the transfer of these policies, the Form 10-Q for the quarter ended August 30, 2003, to which the complaint references in making these allegations, makes clear that the life insurance policies were transferred to Bitensky in exchange for Bitensky's "relinquish[ing] his right under the terms of the original agreement to require the Company to purchase upon his death approximately $10,000,000 of shares of Common Stock from his estate." Some consideration was given to Fab by Bitensky in exchange for the life insurance policies.
Ex. K to Aff. of Charles F. Richards, Jr.
Indeed, Bitensky was 83 years old when the complaint was filed, so relieving Fab of the obligation to purchase $10,000,000 in stock upon his death may not have been inconsequential consideration. See compl. ¶ 4.
Based upon the scarce record at this time, the Court cannot determine that this claim was not meritorious when filed. Nevertheless, plaintiff is not entitled to an award of fees at this time based on Count II because Count II, reading the complaint in the light most favorable to plaintiff, is not moot. If Bitensky engaged in a self-dealing transaction with Fab, he and other defendants may still be liable to Fab for engaging in that transaction, notwithstanding the fact that Bitensky's offer to purchase Fab was later withdrawn. Because Count II is not moot as to the transfer of the life insurance policies from Fab to Bitensky, the fee petition as to that claim is denied at this time.
Count III was not meritorious when filed for the same reasons as Count I and, at the same time, it is not yet moot, as was the case with part of Count II. Fab had not approved a transaction by which it would sell all or substantially all of its assets. There was no transaction, therefore, for which plaintiff and other Fab shareholders were denied their right to vote. The board's receipt of Bitensky's offer is insufficient to create in plaintiff a vested voting right before any particular transaction is recommended or approved by a special committee or the board of directors. In that respect, Count III was unripe and, therefore, not meritorious when filed. To the extent that Count III seeks a declaration from this Court that the May 30, 2002 Plan of Dissolution "is invalid and in violation of the DGCL," Bitensky's withdrawal of his offer does not prevent this Court from making the declaration prayed for in the complaint. An award of fees as to Count III, therefore, is inappropriate because it was, in part, not meritorious when filed, and the remainder of Count III is not yet moot.
Compl. ¶ 56D.
Count IV was also unripe when filed and is also not yet moot for the same reasons as Count III. To the extent that the defendants had planned to dispose of Fab's assets under the plan, there was no action on the part of the board or any special committee thereof to approve of a disposal of assets under the plan, making the claim unripe and not meritorious when filed. If plaintiff seeks a declaration that the Plan of Dissolution is statutorily invalid because Fab has not yet executed, acknowledged, and filed a Certificate of Dissolution with the Delaware Secretary of State, that, however, remains a live controversy. Indeed, it is an increasingly important one as May 30, 2005, draws nearer both for potential bidders and for Fab, as it is the Court's understanding that Fab intends to place itself into a liquidating trust on that date pursuant to the Plan if a buyer cannot be found. Count IV, like Count III, therefore, is unripe and not meritorious when filed, and also not yet moot, making an award of fees inappropriate at this time.
In conclusion, the fee petition must be denied, as Counts I through IV were not meritorious when filed, and to the extent that Counts II through IV may have been meritorious when filed, those counts are not yet moot.
IT IS SO ORDERED.