Opinion
No. X08 CV09-6002152S
December 30, 2010
Memorandum of Decision on Motion to Strike (No. 125.00)
This action is brought by Capgrowth Partners ("plaintiff" or "Capgrowth") as a former shareholder of Odyssey Re Holdings, Corp., a Delaware corporation ("Odyssey Re") whose stock was the subject of a tender offer by the defendant Fairfax Investments USA Corp., a wholly-owned subsidiary of defendant Fairfax Financial Holdings, Ltd. (collectively "Fairfax") in October of 2009. Plaintiff brought this case as a class action on behalf of itself and all others similarly situated. The defendants in addition to Fairfax Financial Holdings, Ltd. and Fairfax Investments USA Corp. are ten individuals alleged to have been directors of Odyssey Re at all relevant times. The case was originally brought prior to the completion of the tender offer/merger seeking a temporary injunction to halt the proceedings because of alleged breaches of fiduciary duties of good faith, loyalty, fair dealing and due care against the individual defendants, alleged insufficiency of the disclosures made in connection with the tender offer, and an alleged claim against the Fairfax defendants for aiding and abetting the alleged breaches of the individual defendants. Following an evidentiary hearing the court (Karazin, J.) denied the request for temporary injunction on October 16, 2009 on the grounds of lack of irreparable harm and availability of an adequate remedy at law. The tender offer thereafter was approved by holders of about 89% of the minority (non-Fairfax) shares which were tendered to Fairfax Investment USA Corp. and the short-form merger of that entity into Odyssey Re took place on October 28, 2009. The plaintiff and certain others did not tender their shares. This action is therefore limited now to the plaintiff's claim for money damages.
Odyssey Re is described on its website as a leading underwriter of property and casualty treaty and facultative reinsurance. Prior to the tender offer Fairfax Financial Holdings, Ltd. had owned approximately 72.6% of the outstanding shares of Odyssey Re since its initial public offering in 2001. The tender offer contemplated the acquisition by Fairfax Investments USA Corp. of all the shares constituting the approximately 17.4% minority held by others, followed by the merger of Fairfax Investments USA Corp. into. Odyssey Re, with Odyssey Re being the surviving corporation to be wholly owned by Fairfax Financial Holdings, Ltd. The transaction has been described by the defendants as a "privatization of Odyssey Re by its majority shareholder, Fairfax, through a tender offer and short-form merger under Delaware law." (Reply Memorandum, p. 1.)
No motion to certify a plaintiff class has yet been filed. The action was also brought derivatively on behalf of Odyssey Re but the derivative claims have been withdrawn.
Now before the court is defendants' motion to strike the complaint pursuant to Practice Book § 10-39(a) on the ground that plaintiff's complaint fails to state any claim upon which relief can be granted in that it lacks specific factual allegations of unfairness in either substance or process or of violations of the fiduciary duties alleged to have been breached; in that the tender offer included safeguards for minority shareholders like plaintiff which negate any claim of structural coercion; in that every omission alleged by plaintiff was either not omitted in the first place, or so trivial or immaterial that it was not required to be disclosed as a matter of law; and in that because plaintiff fails to state any claims as to alleged breaches by the individual defendants, plaintiff also fails to state a claim against the corporate defendants for aiding and abetting such breaches.
Practice Book § 10-39(a) provides that, "Whenever any party wishes to contest (1) the legal sufficiency of the allegations of any complaint, counterclaim, or cross claim, or of any one or more counts thereof, . . . that party may do so by filing a motion to strike the contested pleading or part thereof."
The parties maintain, and court agrees, that this case is governed by the substantive law of Delaware, where Odyssey Re is incorporated. The law of the state of incorporation normally determines issues relating to the internal affairs of a corporation because application of that body of law achieves the need for certainty and predictability of result while generally protecting the justified expectations of parties with interests in the corporation. Nattel, LLC v. SAC Capital Advisors, LLC et al., 370 Fed.Appx. 132, 2006 WL 957432 (2nd Cir. 2006) (Under Connecticut choice-of law rules, and "internal affairs doctrine," law of the Bahamas, as the country where the corporation was incorporated, governed minority shareholder's lawsuit); Restatement (Second) of Conflict of Laws §§ 304, 306; Lowinger v. Communications Corp., Docket No. X06CV99-0153534S, Superior Court, 2000 WL 73581 at*1, 26 Conn. L. Rptr. 311 (Conn.Super.Ct.) (Recognizing that the "internal affairs doctrine" governs disputes arising out of "relationships between and among a corporation's directors, officers and shareholders"). The corollary to this rule is that ". . . in a choice of law situation, the forum state will apply its own procedure." Paine Webber Jackson Curtis, Inc. v. Winters, 22 Conn.App. 640, 650 (1990), citing Gibson v. Fullin, 172 Conn. 407, 411 (1977).
Standard of Decision
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC. v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "The role of the trial court [is] to examine the [complaint], construed in favor of the plaintiffs, to determine whether the [pleading party] has stated a legally sufficient cause of action." (Internal quotation marks omitted.) Dodd v. Middlesex Mutual Assurance Co., 242 Conn. 375, 378, 698 A.2d 859 (1997). "For the purpose of ruling upon a motion to strike, the facts alleged in a complaint, though not the legal conclusions it may contain, are deemed to be admitted." (Internal quotation marks omitted.) Murillo v. Seymour Ambulance Assn., Inc., 264 Conn. 474, 476, 823 A.2d 1202 (2003). "The court must assume the truth of both the specific factual allegations and any facts fairly provable thereunder. In doing so [the court must] . . . read the allegations broadly, rather than narrowly." (Internal quotation marks omitted.) Broadnax v. New Haven, 270 Conn. 133, 173, 851 A.2d 1113 (2004). Under Connecticut practice ". . . conclusory statements unsubstantiated by supportive facts" are insufficient to survive a motion to strike. Bennett v. Connecticut Hospice, Inc., 56 Conn.App. 134, 136-37 (1999), cert. denied, 252 Conn. 938 (2000).
"It is well established that a motion to strike must be considered within the confines of the pleadings and not external documents . . . We are limited . . . to a consideration of the facts alleged in the complaint. A `speaking' motion to strike (one imparting facts outside the pleadings) will not be granted." (Internal quotation marks omitted.) Zirinsky v. Zirinsky, 87 Conn.App. 257, 268 n. 9, cert. denied, 273 Conn. 916 (2005); see also Rowe v. Godou, 209 Conn. 273, 278 (1988). Despite that latter rule, the moving parties, the defendants, have submitted with their memorandum of law an affidavit of counsel, Atty. Thomas Goldberg, which has attached to it a copy certified to be true and correct of Odyssey Re Holdings Corp.'s Solicitation/Recommendation Statement on Schedule 14D-9 ("Recommendation Statement") filed with the Securities and Exchange Commission (SEC) on September 30, 2009 together with copies of certain exhibits to the Recommendation Statement, and other documents relating to this transaction, consisting of approximately 155 pages in all, including:
A letter of September 30, 2009 from defendants Kenney and Bernard to Odyssey Re shareholders. (Ex. (A)(1)(I));
Agreement and Plan of Merger By and Among Fairfax Financial Holdings, Ltd., Fairfax Investments USA Corp., and Odyssey Re Holdings, Corp., dated as of September 18, 2009. (Ex. (d)(1));
Stockholder Support Agreement dated as of September 18, 2009 among Fairfax Financial Holdings, Ltd. And Marshfield Associates, Inc. (Ex. (d)(2));
Excerpts from Odyssey Re Holding Corp's Proxy Statement dated March 16, 2009. (Ex. (e)(1));
Odyssey Re Holding Corp's Tender Offer Statement on Schedule To (Amendment No. 6) field with the SEC on October 22, 2009;
Odyssey Re Holding Corp's Current Report on Form 8-K filed with the SEC on October 30, 2009; and
Amendment No 1 to Odyssey Re Holding Corp's Solicitation/Recommendation Statement on Schedule 14D-9 filed with the SEC on October 9, 2009 along with Exhibit (a)(5)(A) thereto being the complaint filed in this action on October 8, 2009.
Defendants ask the court to consider the foregoing documents in evaluating the sufficiency of plaintiff's complaint pursuant to the claimed practice under analogous federal law that permits a court deciding a challenge to the adequacy of merger/tender offer disclosures to consider documents referred to in the complaint or integral to the plaintiff's claim whether or not copies thereof are attached or designated as exhibits to the complaint. Defendants cite Cortec Industries, Inc. v. Sum Holdings, LP, 949 F.2d 42, 47 (2d Cir. 1991) (holding that "when a plaintiff chooses not to attach to a complaint or incorporate by reference a prospectus upon which it solely relies and which is integral to the complaint" then "the defendant may produce the prospectus when attacking the complaint for its failure to state a claim, because plaintiff should not so easily be allowed to escape the consequences of its own failure") and Sira v. Morton, 380 F.3d 57, 67 (2d Cir. 2004) (finding that documents explicitly referred to and relied upon in the complaint are deemed "incorporated by reference" and thus may be considered on a motion to dismiss under Fed.R.Civ.P. 12(b)(6). Claiming a similarity between Conn. Practice Book § 10-39(a) (quoted, supra, at fn.3) and FedR.Civ.P. 12(b)(6) (" . . . a party may assert the following defenses by motion: . . . (6) failure to state a claim upon which relief can be granted") the defendants ask the court to adopt the federal procedure cited above, and consider their affidavit of counsel and all its attachments in support of their motion to strike so that plaintiff may not misquote or mischaracterize or omit key provisions of a document that are integral to the complaint even though the allegations may be simply and blatantly unsupported or even contradicted by the very document being referred to. The court declines to adopt that principle. This motion is governed by the Connecticut Practice Book and the procedural law of Connecticut, not by the Federal Rules of Civil Procedure, or the interpretation thereof by the federal courts. In deciding Cortec Industries, supra, the Second Circuit relied in part on the provision of Rule 12(d) which stated that when a motion is made under Rule 12(b)(6) and "matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of under Rule 56," giving all parties a reasonable opportunity to present pertinent material under that Rule. Cortec Industries, Inc. v. Sum Holdings, LP, 949 F.2d 42, 47 (2d Cir. 1991). There is no similar provision in the Connecticut Practice Book. This court's adoption of that procedure would be in effect an unwarranted rewriting of the Practice Book and a departure from the established rule of Zirinsky v. Zirinsky and Rowe v. Godou, supra.
With reference to the Supreme Court's opinion in Larobina v. McDonald, 274 Conn. 394 (2005), permitting under certain circumstances a challenge to the legal sufficiency of a complaint to be made by motion for summary judgment, the court at oral argument of this motion offered the parties the opportunity to stipulate that this motion to strike would be decided as a motion for summary judgment supported by defendant's Goldberg affidavit, with the court to decide whether or not to permit repleading if the motion were to be granted. The plaintiff would not so stipulate, claiming that it would require an opportunity to conduct discovery before opposing any motion for summary judgment. (Tr. 8/11/10, 70-72.) The plaintiff did stipulate, however, at oral argument that "We are not suggesting that the court should look at anything that was disclosed in public filings for purposes of the veracity, the truthfulness, or the accuracy of it. We are simply suggesting that the court may look at it to see if it was disclosed." (Tr. 53, 72-73.) That offer had earlier been alluded to in plaintiff's memorandum of law in opposition to this motion at p 4, fn.4 where it cited the decision of the Delaware Supreme Court in In re Santa Fe Pacific Corp. Shareholder Litigation, 669 A.2d 59, 69-70 where the court, noting that Delaware's Rule 12(b)(6) on motions to dismiss is worded identically to the federal rule, approved the holding of federal cases such as Cortec Industries, supra, allowing the court to review documents outside the pleadings under the circumstances mentioned in Cortec Industries ". . . not to prove the truth of their contents but only to determine what the documents stated." Id. at 70.
The court will therefore consider the defendant's Goldberg affidavit and the publicly-filed documents attached thereto, not for the truth or veracity of their content, but for the limited purpose of determining the fact of whether or not a particular disclosure was made, and the exact wording of that disclosure. This will not be done because Connecticut law generally permits such use of documents outside the pleadings in deciding a motion to strike, but because the plaintiff in this case has stipulated to that limited use of the documents. Under this arrangement, then, the court will not address or consider the defendant's argument that a certain provision of the Sales Agreement known as the non-waivable "majority of the minority" tender condition is one of the indicia of fairness of a tender offer by a controlling shareholder, since that clause of the Sales Agreement is not alleged in the complaint, and consulting the Recommendation Statement to verify the validity of a defensive contention by construction of such a provision would fall outside the parties' stipulation.
A similar procedure was followed in Chalverus v. Bershad, Superior Court, Docket No. CV09-4044848, Judicial District of Hartford at Hartford (August 6, 2010, Aurigemma, J.) [ 50 Conn. L. Rptr. 413], where the court granted a motion to strike the complaint in a case similar to this. In Chalverus the court based its decision on the plaintiff having a right to be paid the value of his shares based on an appraisal under Conn. Gen. Stat. § 33-386, which the court found to be plaintiff's exclusive remedy. Nothing had been pleaded in the complaint about the statutory appraisal remedy which is available to a dissenting shareholder only where provided "by a resolution of the board of directors." For purposes of the motion to strike the court accepted the stipulation of the parties that the statutory appraisal remedy was available to the plaintiff's pursuant to a provision in the Merger Agreement.
Discussion
A. Allegations of the Complaint: The Tender Offer/Merger Transaction
The complaint alleges that: Odyssey Re was formed by Fairfax primarily through the combination of businesses acquired by Fairfax in 1996 and 1999, and that in June 2001 Odyssey Re completed its initial public offering of common stock at $18 per share (of which a substantial portion of the proceeds went to Fairfax), and that prior to and at all times after that initial public offering Fairfax maintained majority ownership of Odyssey Re (¶ 30); that prior to the tender offer acquisition, the vote of the holders of a majority of the shares present in person or represented by proxy at Odyssey Re's annual shareholder meetings elects the company's directors (¶ 31); that prior to the tender offer acquisition Fairfax held approximately 72.6% of the outstanding shares of Odyssey Re common stock (¶ 31); that Fairfax has used its control of Odyssey Re to dominate the outcome of any shareholder vote of Odyssey Re, including the election of directors to its board (¶ 31); that Fairfax has used its control of Odyssey Re to stack the company's board with officers and directors of the Fairfax Group to the extent that a majority of the company's board are also directors and/or officers of Fairfax (¶ 31); that defendants Dowd, Griffiths, Martin Sweitzer and Horn serve as directors of Odyssey Re while simultaneously serving as directors and/or officers of Fairfax and/or its subsidiaries (¶ 31); that defendant Barnard, president, CEO and a director of Odyssey Re also serves as president of a Fairfax subsidiary, ORH Holdings, Inc. and Donald L. Smith, Senior V.P., General Counsel, and Corporate Secretary of Odyssey Re, serves as a member of the board of directors of ORH Holdings, Inc., and as V.P. and Assistant Secretary of Fairfax Holdings, Inc. (¶ 31). If is further alleged in the complaint that: despite the "Great Recession" Odyssey Re reported specified improved financial results for the second quarter of 2009 as compared with the results reported for the second quarter of 2008, in the categories of net income available to common shareholders, operating income after tax, shareholders' equity (15.7% increase); book value per common share (18.5% increase); and total invested assets and cash (2.5% increase) (¶ 32); that, recognizing Odyssey Re's positive performance and potential for growth and wanting to take advantage of the market downturn to acquire the same, at the August 21, 2009 meeting of the company's Board of Directors, defendant Watsa, the Chairman and CEO of Fairfax and Chairman of the Board of Directors of Odyssey Re, formally advised the Board of Directors of Odyssey Re that Fairfax was contemplating pursuing a transaction pursuant to which Fairfax would acquire all the shares of Odyssey Re common stock that Fairfax did not currently own (¶ 33) and that, at that same meeting the Odyssey Re Board appointed a special committee comprised of directors defendants Kenney, (as chairman) Bennett, and Solomon, and empowered it to review, evaluate and negotiate the terms of any potential transaction (¶ 34), but the resolutions establishing the special committee did not authorize the committee to seek a sale of the entire company because Fairfax had conveyed that it had no intention of selling the shares of common stock that it owned (¶ 35). Paragraph 35 also alleges that the special committee retained the law firm Simpson Thatcher Bartlett as its legal advisor and the firm of Sandler O'Neil as its financial advisor after consulting with Donald Smith who serves as general counsel and senior officer of Odyssey Re and holds a position as a director and officer of various Fairfax subsidiaries. The compensation of the members of the special committee is alleged to have been $75,000 for defendants Bennett and Solomon and $90,000 for defendant Kenney for services rendered during the "less than one-month period" that a Sale Agreement was negotiated (¶ 34). Thereafter, the complaint further alleges, on September 2, 2009, defendant Watsa informed the special committee that Fairfax was considering a proposal to acquire the outstanding shares of Odyssey Re not already owned by Fairfax at a price of $58 per share, and that two days later, on September 4, Mr. Watsa informed Mr. Kenney of his proposal to increase the offer price to $60 per share after representatives of Fairfax had spoken regarding the proposal with Marshfield Associates, Inc. which managed and controlled the largest block of shares held by Odyssey Re's unaffiliated shareholders, and that the $60 per share offer was publicly announced on September 4, 2009. (¶ 36.) It is alleged that Fairfax also indicated that it had advised Odyssey Re that its sole interest was in acquiring the shares of Odyssey Re common stock that it did not already own and that it had no interest in a disposition of its controlling interest in Odyssey Re, and that on or about September 16, 2009 the special committee made a counterproposal of $66 per share. (¶ 37.) Paragraphs 38 and 39 allege a Sale Agreement reached between Fairfax and Odyssey Re whereby Fairfax would commence a tender offer to acquire all the outstanding shares of Odyssey Re common stock not owned by Fairfax for $65 in cash per share, representing total cash consideration approximately $1.0 billion, and that, following that tender offer, Fairfax would consummate a second-step merger pursuant to which non-tendering holders of Odyssey Re common stock would be entitled to receive the price per share paid by Fairfax in the tender offer, and Odyssey Re would then become an indirect subsidiary of Fairfax. Finally, it is alleged in ¶ 40 that the tender offer was commenced on or about September 23, 2009 and was scheduled to terminate on October 21, 2009 unless extended, and in ¶ 41 that on September 30, 2009 the individual defendants caused Odyssey Re to file with the SEC a Recommendation Statement stating that the individual defendants recommended that the company's shareholders tender their shares pursuant to the tender offer. There is nothing alleged in the complaint as to the processes used or the determinations made by the Special Committee in negotiating the tender offer price with Fairfax.
Further allegations of the complaint will be referenced in the following discussion of the substantive counts.
B. First Count Alleging Breach of Fiduciary Duties.
Plaintiff alleges that the individual defendants all have, as directors of Odyssey Re, a publicly-held corporation, fiduciary duties of care, loyalty, disclosure, good faith, and fair dealing and are liable for breaches thereof. The allegations of the complaint (other than disclosure-related) are:
Since inadequate disclosure and material omissions from disclosure have been substantively alleged as a separate count which will be discussed infra, the court will not address or discuss those claims under this breach of fiduciary duty count.
Where it appears that a director has obtained any personal profit from dealing with the corporation, and the transaction is drawn into question as between him and the stockholders of the corporation, the burden is upon the director or officer to show that the transaction has been fair, open and in the utmost good faith. (¶ 19.) As alleged in detail below, defendants have breached, and/or aided other defendants' breaches of, their fiduciary duties to Odyssey Re's public shareholders by acting to cause or facilitate the Sale Agreement, because it is not in the best interests of those shareholders, but is in the best interests of the individual defendants. (¶ 20.)
Because defendants have knowingly or recklessly breached their fiduciary duties in connection with the Sale Agreement, and/or are personally profiting from the same, the burden of proving the inherent or entire fairness of the Sale Agreement, including all aspects of its negotiation, structure, and terms, is borne by Defendants as a matter of law. (¶ 21.)
These allegations are ample in conclusory statements and claims of law (which, under our motion to strike practice, are not assumed to be true or construed most favorably to the plaintiff) and sparse of specific allegations of facts constituting the self interest or personal profit which would show unfairness or trigger the director's claimed obligation to show fairness.
Practice Book § 10-20 requires that a complaint "shall contain a concise statement of the facts constituting the cause of action . . ."
Although the plaintiff argues in its brief the unfairness of the tender offer price, and defendants have responded thereto in terms of the relationship between the tender offer price and historic market price, the only relevant facts pleaded are the initial public offering price of $18 per share in 2001, the history of the negotiations leading to the $65 per share offer price, the relative financial performance of Odyssey Re in the second quarter of 2009 as compared to the second quarter of 2008, the fact that Fairfax desired to take advantage of a "market downturn" in August 2009 when it determined to make its tender offer, the bare fact that the Special Committee's financial expert Sandler O'Neil Partners L.P. had rendered an opinion that the price to be paid pursuant to the tender offer was fair (¶ 22), and the fact that the Recommendation Statement recommended acceptance of the $65 per share tender offer. There is nothing alleged as to the market value at any time of Odyssey Re common stock (which is traded on the New York Stock Exchange). There is nothing alleged as to the processes used or determinations made by the Special Committee in negotiating the offer price with Fairfax. Plaintiff cites the case of In Re Emerging Communications Inc. Shareholders Litigation, 2004 Del.Ch. LEXIS 70 (May 3, 2004). In that case the Chancery Court was deciding two consolidated actions: a statutory appraisal proceeding and a class action asserting that the privatization process was not entirely fair to minority shareholders. In the appraisal proceeding the court found that the "fair value" of the stock was $38 per share rather than the negotiated $10 per share tender offer price. In reaching that conclusion the court delved into the relationship of the offer price to market value, the effectiveness of the market in which the stock was traded, the lack of any public announcement of the company's latest financial projections, cost of debt, cost of equity, corporate opportunities, and the assumptions and components of a discounted cash flow analysis of the company's value. This is not an appraisal case, and none of the factors used by the vice chancellor to determine fair value have been pleaded by the plaintiff in the complaint, with the exception of the publication of financial data where para. 32 alleges that improved financial data of Odyssey Re from 2008 to 2009 was reported in publicly filed documents. Plaintiff also cites In Re Emerging Communications for the proposition that, under Delaware law, in a privatization transaction such as this where the majority shareholder stands on both sides, the burden of proving entire fairness — both of the price and the process or dealings between the parties. That is the correct general rule in Delaware cases at the trial of the cases, such as the trial in In Re Emerging Communications. Id. at 111. Aside from the fact that the burden of proof would presumably be governed here by Connecticut law, plaintiff has not established the applicability of that Delaware doctrine at this motion to strike stage of this case. For, in order to effect that burden shifting, a plaintiff must allege more than just the fact that the transaction is between the controlling shareholder and the corporation it controls:
See Access International Advisors Limited v. Argent Management Co., LLC, Docket No. FSTCV09-5012939S, Superior Court, Judicial District of Stamford/Norwalk at Stamford (June 1, 2010, Tierney, J.), 2010 Ct.Sup. 11791 (Connecticut burden of proof law applies to prejudgment remedy hearing on contract dispute governed by New York law).
Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved — such that entire fairness review is in play — plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. Simply put, a plaintiff who fails to do this has not stated a claim. Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. Such transactions are perfectly acceptable if they are entirely fair and so plaintiff must allege facts that demonstrate a lack of fairness. Monroe County Employees' Retirement System v. Carlson, 2010 WL 2376890, at *2 (Del.Ch., June 7, 2010).
Assuming all the allegations of the complaint are true, and construing those allegations most favorably to the plaintiff, the court finds no pleaded factual basis supporting plaintiff's claim of unfair price, and an inadequate pleaded factual basis to invoke the Delaware doctrine of an entire fairness review with the burden on the majority shareholder.
The other aspect of unfairness argued with respect to the First Count is the claim of lack of fair process. The factual allegations are that the individual defendants, directors of Odyssey Re who approved the tender offer and facilitated the approval of the Sales Agreement knowingly or recklessly breached their fiduciary duties in connection with the Sale Agreement and/or are personally profiting from the same. (Complaint ¶ 21.) The only specific factual allegations which might support this conclusory claim are that all the directors are elected by Fairfax and a majority of the directors (but not including the three members of the Special Committee) were also officers and/or directors of Fairfax (or a Fairfax subsidiary). This alone is inadequate, without a further allegation of particularized facts manifesting a direction of corporate conduct in such a way as to comport with the wishes of the corporation or persons doing the controlling. See Aronson v. Lewis, 473 A.2d 805, (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.Supr., 2000). There is no allegation of any compensation or other monetary benefit to the directors other than the compensation paid to the three members of the Special Committee for serving on the committee. That alone, without some allegation of the fees being contingent on approval of the transaction or an expectation of continuing fees in the surviving entity, would not be a disabling interest. In Re Emerging Communications, supra at *126. Plaintiff has argued that the defendants failed to disclose the number and value of restricted shares of Odyssey Re stock held by each of them, that would become free of restriction under the terms of the Sales Agreement, thereby conferring a benefit on the directors not common to all shareholders. The specific allegation is that:
"The Recommendation Statement Discloses that, as of September 23, 2009, the directors and executive officers of the Company held 465,079 shares of restricted Common Stock subject to restrictions on transferability." (The Restricted Stock.) The Recommendation Statement is deficient because it fails to disclose the number and value of Restricted Stock held by each of the Company's Directors. (Complaint, ¶ 42(I).)
This allegation is made in the portion of the First Count clearly designated as "D The Materially Misleading And/Or Incomplete Recommendation Statement," to be discussed below. It is not made in connection with the allegations supporting the affirmative claim of Breach of Fiduciary Duty. In fact the key allegation that the restrictions on transferability were being lifted under the Sales Agreement does not appear at all in the complaint. That fact was advanced only in argument. (It could be confirmed by checking the copy of the Sales Agreement attached to the Goldberg Affidavit, but that usage of the affidavit would exceed the limited use stipulation. The issue here on the violation of fiduciary duties claim is not whether or not the easing of restrictions appears in the agreement or disclosures, but whether or not it actually does lift those restrictions and thereby confer a benefit.)
The allegations of personal profit from the tender offer are obviously inadequate on their own to support any claim of breach of fiduciary duty. The mere ownership by the directors of Odyssey Re shares, restricted or unrestricted, even construed most favorably to the plaintiff, is not indicative of a conflict of interest. If anything, it would show an alignment of the directors' positions with those of all other shareholders including the plaintiffs. Apparently recognizing that deficiency the plaintiff places primary reliance on the Delaware entire fairness doctrine, and urges the court not to strike this part of the complaint because the burden to prove entire fairness should be on the defendant. Once again, however, the pleading inadequacy comes into play because, as previously discussed, a plaintiff cannot invoke the benefit of the entire fairness doctrine unless it has pleaded an adequate factual basis of the unfairness claimed. Monroe County Employees' supra. The plaintiff here has not done so.
The claim in the First Count of breach of fiduciary duties of the individual defendants by putting out an allegedly materially misleading and/or incomplete Recommendation Statement is identical to the claim of the Second Count against the individual defendants for failure to disclose. In fact, the Second Count incorporates all 45 paragraphs of the first count, and adds not a single additional factual allegation. The wrong alleged in the second Count is strictly "[a]s alleged in detail, above . . ." (¶ 46.) The claims of misleading or incomplete disclosure will therefore be conflated under the discussion of the Second Count, below.
C. Second Count: Claim for Failure to Disclose
By incorporating Part D. of the First Count (para. 42 of the complaint) plaintiff alleges that the individual defendants on or about September 30, 2009 filed a Recommendation Statement with the SEC in connection with recommending that shareholders tender their shares pursuant to the Fairfax tender offer. Plaintiff alleges that the Recommendation Statement violates the defendants' fiduciary duty of full disclosure in that it is deficient because it misrepresents and/or omits nine pieces of information which will be considered individually after a review of the general principles of law applicable to representations made to a shareholder in this situation.
Under Delaware law directors must fully and fairly disclose all material information in the Recommendation Statement they circulate to shareholders and, if they do not, plaintiff has an actionable claim. See In Re Siliconix Shareholder Litigation, 2001 Del.Ch LEXIS 83, *36 (Del.Ch. June 19, 2001) ("A majority stockholder . . . Who makes a tender to acquire the stock of the minority shareholders owes the minority shareholders a fiduciary duty to disclose accurately all material facts surrounding the tender"). See also, McMullin v. Beran, 765 A.2d 910, 917 (Del. 2000) ("[Directors are] also obliged to disclose with entire candor all material facts concerning the merger, so that the minority shareholders would be able to make an informed decision whether to accept the tender offer price or to seek judicial remedies such as appraisal or an injunction"). The definition of what is "material" information under Delaware law has been stated:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote . . . It does not require proof of a substantial likelihood that a disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available. Zirn v. VLI Corp., 621 A.2d 773, 778-79 (Del. 1993), quoting TSC Indus. v. Northway, 426 U.S. 438, 449 (1976); Gantler v. Stevens, 965 A.2d 695, 710 (Del. 2009).
In this regard,
The objective materiality standard applied by Delaware courts is derived from that articulated by the United States Supreme Court in TSC Indus. v. Northway. As such Delaware law mirrors federal law on materiality. Abrons v. Maree, 911 A. 2d. 805, 812-13 (Del.Ch. 2006).
But it is firmly established under federal law under TSC Indus. that:
The issue of materiality may be characterized as a mixed question of law and fact, involving as it does the application of a legal standard to a particular set of facts. In considering whether summary judgment on the issue is appropriate, we must bear in mind that the underlying objective facts, which will often be free from dispute, are merely the starting point for the ultimate determination of materiality. The determination requires delicate assessments of the inferences a `reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. Only if the established omissions are `so obviously important to an investor, that reasonable minds cannot differ on the question of materiality' is the ultimate issue of materiality appropriately resolved `as a matter of law' by summary judgment. (Citations omitted.) TSC Indus. v. Northway, supra 426 U.S. at 450.
See, also, O'Malley v. Boris, 742 A.2d. 845, 850 (Del. 1999) ("The determination of materiality is a mixed question of law and fact that generally cannot be resolved on the pleadings").
But, just as there are requirements of pleading specific facts to invoke the doctrine of entire fairness, so also must a plaintiff meet a factual pleading requirement to invoke a claim of material misrepresentation or omission:
Although materiality determinations are necessarily fact intensive and do not generally lend themselves to dismissal on the pleadings, some statements or omissions may be immaterial as a matter of law. To survive a motion to dismiss the plaintiffs `must allege that facts are missing from the statement, identify those facts, state why they meet the materiality standard and how the omission caused injury.' Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001).
The plaintiffs included the first sentence of this quotation in their memorandum of law, at page 10, but omitted the part after the comma, and substituted ellipses for the initial word "Although."
Defendants cite other cases where Delaware courts have dismissed disclosure claims on challenges to the sufficiency of the complaint. See, e.g. In re JCC Holding Co. S'Holders Litig., 843 A.2d 713, 720 (Del.Ch. 2003) (dismissing disclosure claims on the pleadings); Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170 (Del. 2001) (affirming dismissal of disclosure claims on a Rule 12(b)(6) motion); and Sanders v. Devine, 1997 Del.Ch. LEXIS 131 at *25 (Sept. 24, 1997) (dismissing disclosure claims at the pleading stage because "the alleged omissions . . . are immaterial as a matter of law"). Defendants ask the court to strike all the allegations of this Second Count on the grounds that alleged omissions were not in fact omitted in the first place and that alleged misrepresentations or omissions are immaterial as a matter of law.
The court finds with respect to the allegation of ¶ 42(i) of the complaint that the number of shares and value of restricted stock held by each director is not omitted from the disclosures. By stipulation the court has reviewed the Recommendation Statement where the allegedly omitted information is in fact disclosed in Item 3 (Goldberg Affidavit p. A-5) and Exhibit (e)(1) (Goldberg Affidavit pp. 117-19). Likewise, the allegations of ¶¶ 42(v) through (ix) of omissions concerning the financial advisor Sandler O'Neil's cash flow analysis of the value of Odyssey Re stock are inaccurate. The "criteria used to select the companies for the Reinsurance Composite Group" (¶¶ 42(v), (vi)) is disclosed at page 25 of the Recommendation Statement (Goldberg Affidavit, pp. A26-27). The "criteria used to select transactions reviewed for this analysis [Sandler O'Neil's Comparable Transaction Analysis]" (¶ 42(vii)) are disclosed at page 27 of the Recommendation Statement (twenty-three designated property and casualty insurance and reinsurance transactions since 2004 that Sandler O'Neil, based on its experience, deemed comparable to this transaction after an analysis from information in SNL Financial, A.M.Best, Highline Data, Company Filings of equity value, enterprise value, price to last twelve months' net operating income, price to estimated consensus earnings per share, and book value per share for each transaction) (Goldberg Affidavit, p. A28). The "criteria used to select the selected property and casualty insurance and reinsurance transactions and selected financial services transactions reviewed" [for Sandler O'Neil's Premiums Paid Analysis]" (¶ 42(viii)) is also fairly disclosed. Since the same twenty-three transactions as were used for the Comparable Transactions Analysis are also used for the Premiums Paid Analysis, the disclosure for the former (summarized above) serves as part of the disclosure for the latter. Additional criteria are listed at page 28 of the Recommendation Statement "using publicly available information [from SNL Financial, A.M.Best, Highline Data, Company Filings]; Sandler O'Neil also reviewed, analyzed, and compared the premiums paid over trading prices one day and thirty days, one day prior to the announcement date of certain selected property and casualty insurance and reinsurance transactions since 2004") (Goldberg Affidavit, p. A-29). Paragraph 42(ix) alleges the omission of "the basis for the assumption of a 2.5% per year growth rate beginning in 2010 and the methodology used to select the multiples ranging from 1.0x to 1.1x used for this analysis [the Sandler O'Neil Discounted Cash Flow Analysis]." As explained in the Recommendation Statement at page 32 these are Sandler O'Neil estimates based in part on "projections prepared by and reviewed with senior management of the Company" (which are themselves disclosed in the Recommendation Statement at p. 19, Goldberg Affidavit, p. A-20) and "GAAP common shareholders' equity multiples ranging from 1.0x to 1.1x" (Goldberg Affidavit p. A-33). These are adequate disclosures when considered with the further disclosure that:
In connection with its analyses, Sandler O'Neil considered and discussed with the Special Committee how the present value analyses would be affected by changes in the underlying assumptions, including variations with respect to net income, terminal value, and selected discount rate. Sandler O'Neil noted that the discounted cash flow and terminal value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent on the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results. Id.
In dealing with similar claims of omissions regarding valuation of a company by the financial advisor to the company in a merger transaction, the Chancery Court of Delaware in Globis Partners, L.P. v. Plumtree Software, Inc., 2007 Del.Ch. LEXIS 169 in granting defendants' motion to dismiss in all respects, held at *11 that ". . . this kind of quibble with the substance of a banker's opinion does not constitute a disclosure claim . . . Plumtree's board's duty was simply to make fair disclosure of the material facts in its possession bearing on the fairness of the merger it was putting before the stockholders. By setting forth a fair summary of the valuation work [the valuation advisor] in fact performed, the board met its obligation under our law." And, the Plumtree court continued, "Omitted facts are not material simply because they might be helpful. A disclosure that does not include all financial data needed to make an independent determination of fair value is not per se misleading or omitting a material fact" (*12); and "[a] reasonable line has to be drawn or else disclosures in proxy solicitations will become so detailed and voluminous that they will no longer serve their purpose" (*12). (Internal quotation marks omitted from all Plumtree quotations). And in In Re Pure Resources, 808 A.2d 421, 459 (Del.Ch. 2002), the court said "A Pure minority stockholder engaging in the before-the-fact-decision whether to tender would find it material to know the basic valuation exercises that First Boston and Petrie Barknan [the financial advisors] undertook, the key assumptions that they used in performing them, and the range of values that were thereby generated." The court finds that all of these factors, and more, were disclosed in this case by Sandler O'Neil. Applying these principles, the court finds that the disclosures made regarding assumed rate of growth and multiples of earnings were adequate, and that omission of any further explanation of those assumptions as used in the Sandler O'Neil Cash Flow Analysis would be immaterial as a matter of law.
The remaining allegations of misrepresentation appear in the complaint, ¶¶ 42(ii), (iii) and (iv). Subparagraph (ii) challenges as inadequate the disclosure of the possible ownership of Fairfax or Odyssey Re stock by the financial advisor, Sandler O'Neil. The Recommendation Statement discloses:
In the ordinary course of its business as a broker-dealer, Sandler O'Neil may purchase securities from and sell securities to the Company and Fairfax and their respective affiliates. Sandler O'Neil may also actively trade the equity and/or debt securities of the Company and Fairfax and/or their respective affiliates for Sandler O'Neil's own account, and for the accounts of its customers, and, accordingly, may at any time hold a long or short position in such securities. (Recommendation Statement, p. 33, Goldberg Affidavit, p A34.)
Plaintiff alleges failure to quantify the Sandler O'Neil holdings of Odyssey Re or Fairfax equity and/or debt securities is a material omission because it goes to whether or not Sandler O'Neil would have a conflict of interest in rendering its fairness opinion on valuation. "For example, if Sandler O'Neil held millions in Fairfax's investments, its opinion would be less reliable" (Complaint, ¶ 42(ii)). Defendants respond that the disclosure as made is entirely standard in Recommendation Statements for transactions such as this where the financial advisor is an operating broker-dealer, and that plaintiff is venturing into the realm of hypothesis and speculation in alleging that such information may be material. The court finds that plaintiff has not met its pleading burden in alleging this to be a material omission. To survive a motion to dismiss the plaintiffs must allege that facts are missing from the statement, identify those facts, state why they meet the materiality standard and how the omission caused injury. Malpiede v. Townson, supra. The plaintiff here has met its burden as to the first two elements, but has failed with regard to the third and fourth. The allegation as to meeting the materiality standard is but a boiler plate statement of the law of conflict of interest, and the suggestion of a purely speculative and hypothetical scenario — totally devoid of facts — that would put Sandler O'Neil in a conflict of interest situation for owning millions of dollars of Fairfax stock. This is inadequate under the Delaware standard. In David P. Simonetti Rollover IRA v. Margolis, 2008 Del.Ch. LEXIS 78, 2008 WL 504 8692 (Del.Ch.), 33 Del.J.Corp. 882 (June 27, 2008, Noble, Vice Chancellor) the dissenting shareholder seeking a preliminary injunction was claiming material omissions in the Proxy Statement for failure to quantify certain facets of the interests in the transaction held by the company's financial advisor, UBS. The Proxy Statement disclosed that UBS held stock warrants and convertible notes of the company that would cash out if the merger closed. The court found these "peculiar benefits" to be significant: "It appears that its [UBS's] debt holdings will be cashed out, and the complex hedge/warrant arrangements will be unwound. Turning debt into cash, perhaps at something of a premium, confers a significant benefit, especially in the current economic environment." Id. At *8 (Westlaw). Before holding that further disclosures of UBS's holdings must be made before the merger could proceed, the court specifically found that the plaintiff had met its threshold burden which is almost identical to the Delaware pleading burden: "Of course, the extent of UBS's holdings will only prove to be material if they are of sufficient magnitude. The Court is satisfied that the Plaintiff has met its burden of demonstrating that there is a reasonable probability UBS's holdings will survive that threshold." Id. FN. 29. Here the Capgrowth plaintiff has made no such showing in the factual allegations of its complaint either of the probable magnitude of Sandler O'Neil's Fairfax or Odyssey Re holdings or of any special or unique benefit that Sandler O'Neil's holdings would confer if the tender offer is accepted. The allegations of failure to disclose a conflict of interest are therefore inadequate.
Paragraph 42(iv) of the complaint alleges that failure to disclose the basis of the $66 per share counterproposal made to Fairfax by the Special Committee was a material omission. The defendant argues that this claim is trivial and redundant in light if the copious disclosures surrounding Sandler O'Neil's analysis including that the imputed range for Odyssey Re's stock was $54.45 to $68.65. (Recommendation Statement at 11, 14, 24-33; Goldberg Affidavit, pp. A-12, A-15, A-25-34.) The court, in accordance with the parties' stipulation has reviewed the disclosures as made and finds that they include not only the Sandler O'Neil fairness opinion but a comprehensive summary of the Sandler O'Neil valuation, and a history of the price negotiations, including a disclosure of the $66 per share counterproposal made by the Special Committee at a time when Fairfax had increased its initial offer of $58 per share to $60 per share. The disclosure then relates:
In the morning of September 16, 2009, after a telephonic meeting with the Special Committee's financial and legal advisors, Mr. Kenny, on behalf of the Special Committee, had reviewed the current Fairfax proposal and that the Special Committee had determined that the proposal was inadequate, did not reflect the inherent value of Odyssey Re and would not be supported by the Special Committee. Mr. Kenny further advised Mr. Watsa that the Special Committee would be willing to provide Mr. Watsa with a counterproposal that the Special Committee would be willing to support, assuming that Fairfax agreed to the other principal terms of a transaction, which Messrs. Kenny and Watsa did not discuss at that time. Mr. Kenny then advised Mr. Watsa that the Special Committee would agree to support a Potential Transaction at a price of $66 per share. Mr. Kenney also proposed that representatives of Sandler O'Neil meet with representatives of B of A Merrill Lynch [Fairfax's financial advisor] to discuss further the Special Committee's counterproposal in order to more fully inform Fairfax and its advisors of the bases for the Special Committee's counterproposal.
(Emphasis added.) (Recommendation Statement, p. 11; Goldberg Affidavit, p. A-12.)
It is clear from this chronology that the basis of the counterproposal was the inherent value of Odyssey Re as determined by Sandler O'Neil, whose reasoning was supported by an abundant summary. The test of materiality is not whether or not the omitted fact would have caused the reasonable investor to change his vote. The test is whether or not there is substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available. Zirn v. VLI, supra. And in a case such as this where there has been substantial disclosure of financial data and opinions, the test is further refined by putting the burden on the plaintiff to ". . . explain why receiving the information in addition to the basic financial data already disclosed will significantly alter the total mix of information available." Wayne County Emps. Ret. Sys. v. Corti, 954 A.2d 319, 330, n. 27 (Del.Ch. 2008). Given the financial disclosures that were made, the comprehensive summary of the Sandler O'Neil valuation, and the demonstrated linkage between the $66 per share counterproposal and the Sandler O'Neil valuation, the court concludes that the basis for the counterproposal was adequately disclosed in the total mix of disclosures and any further facts as to the basis for the counterproposal would be immaterial as a matter of law.
Finally, plaintiff alleges in the complaint ¶ 42(iii) that the failure to disclose the rationale for the selection of Patrick Kenney to be chairman of the Special Committee is a material omission. This claim was not briefed, and not mentioned at oral argument. It is therefore deemed to be abandoned. Connecticut Coalition Against Millstone et al. v. Connecticut Siting Council et al., 286 Conn. 57, 85-87 (2008); Lefebvra v. Zarka, 106 Conn.App. 30, 31, n. 5 (2008).
The allegations of the Second Count are therefore stricken.
D. Third Count: Aiding and Abetting Breaches of Fiduciary Duty
This count is directed at the Fairfax defendants and charges them with aiding and abetting the individual defendants in breaching their fiduciary duties as alleged in the First Count and the Second Count. This is a derivative claim, dependent on the validity of the claims of the first two counts. Since the court has found that the allegations of the First and Second Counts are inadequate and those counts must be stricken, the Third Count must necessarily also be stricken.
Order
For the foregoing reasons the defendant's Motion to Strike the Complaint is granted.