Opinion
601895/2008.
Decided October 31, 2008.
SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, Four Times Square, New York, NY, By: Douglas M. Kraus, Esq., Elizabeth A. Hellman, Esq., SHEARMAN STERLING, LLP, New York, NY, By: Richard Schwed, Esq., Andrew Agor, Esq., Attorneys for Plaintiffs, Attorneys for Defendants Taro and the Outside Directors.
WEIL, GOTSHAL MANGES, New York, NY, By: Ashish D. Ghandi, Esq., Attorneys for the Levitt/Moros Defendants.
Defendants, Taro Pharmaceutical Industries ("Taro"), and Gad Keren, Micha Friedman, Heather Douglas, Eric Johnston, Myron Strober, Haim Fainaro and Ben Zion Hod (collectively, the "Outside Directors") bring this motion, by order to show cause, seeking a stay in all proceedings until the Israeli Supreme Court renders a decision in a prior, related action, the outcome of which, Taro and the Outside Directors contend, will control the outcome of this action; and seeking to extend their time to answer or move against the Complaint to 30 days after the Israeli Supreme Court renders its decision (Motion Sequence No. 001).
The other Defendants, Taro Development Corporation ("TDC"), and Barrie Levitt, Tal Levitt, Jacob Levitt, and Daniel Moros (collectively, with TDC, the "Levitt/Moros Defendants") bring Motion Sequence No. 002, also by order to show cause, seeking the same relief as Motion Sequence No. 001.
Although Defendants ask, in the first instance, for a stay of all proceedings, and in the second instance, for an extension of time to answer or otherwise respond to the Complaint, it is clear that if I grant the stay, the time to respond will be extended, and if I grant the extension, all proceedings will effectively be stayed. I will therefore analyze these motions only in terms of the request for a stay. Furthermore, both Motion Sequence No. 001 and No. 002 are consolidated for disposition in accordance with the following memorandum and order.
Counsel to Taro and the Outside Directors effectively conceded this point at oral argument, stating:
We characterize our motion as a motion for a stay and an extension of time. We would be perfectly happy with an extension of time. What we want to avoid is the burden and expense which is falling on Taro's ordinary innocent shareholders here that would be involved in making motions. So whether you characterize it as a stay or an extension or stay and extension it doesn't really matter, so long as we don't have to move until we know whether there are going to be claims against our class and we are going forward or not.
(Hr'g Tr. 15-16, October 3, 2008.)
Briefly, the events giving rise to this action are as follows. In early 2007, Taro, an Israeli pharmaceutical corporation sought an infusion of capital from an outside investor. Plaintiff, Sun Pharmaceutical Industries Ltd. ("Sun"), an Indian corporation, proposed a takeover at the price of $7.75 per share, which was approved by Taro's board of directors. Sun then purchased $41 million worth of Taro's ordinary shares and exercised a warrant to purchase $18 million worth of additional shares. Taro has two classes of shares, Ordinary shares and Founders' shares. One-third of the corporation's total voting rights are allocated to the Founders' shares. ( See Compl. ¶ 8.)
Complaint and Jury Trial Demand, June 25, 2008. A copy of the Complaint is annexed to the Affirmation of Douglas M. Kraus in Support of Motion to Stay all Proceedings and for an Extension of Time to Respond to the Complaint at Ex. A.
Sun and Taro entered into a series of agreements to effectuate Sun's takeover of Taro, only three of which are relevant to this motion. First, pursuant to a merger agreement (the "Merger Agreement"), plaintiff corporation, Aditya Acquisition Company, would merge with and into Taro, and the resulting company would then become a subsidiary of plaintiff corporation, Alkaloida Chemical Company Exclusive Group Ltd. ("Alkaloida"), which, itself, is a subsidiary of Sun. A second agreement, the "TDC Merger Agreement," provided that TDC would merge into and become a subsidiary of Sun, and Sun would thereby acquire the Taro Founders' shares held by TDC, as well as the voting rights and equity in Taro's US subsidiary ("Taro USA") held by TDC. ( See Compl. ¶¶ 9, 51-53.)
Sun and Taro also entered into an option agreement (the "Option Agreement"), whereby, if the Merger Agreement were not consummated, Sun would be given the option to acquire all Ordinary shares owned by Barrie Levitt, Daniel Moros and Tal Levitt, and all of the Founders' shares held by Barrie Levitt and Daniel Moros and their families, as well as the option to acquire defendant TDC. Under the Option Agreement, Barrie Levitt, Jacob Levitt, Tal Levitt, Daniel Moros and certain entities under their control (collectively, the "Optionors"), would be required to sell their controlling shares for $7.75 apiece, and Sun would then be obligated to make a tender offer to acquire the rest of the outstanding shares from minority shareholders for the same price. ( See id. ¶¶ 9, 55-56.)
The terms of the Merger Agreement required a shareholder vote to approve the merger. This vote never occurred, and on May 28, 2008, Taro's board of directors voted to terminate the Merger Agreement. The same day, Taro and the Outside Directors filed a lawsuit in the Tel Aviv District Court, in Israel, alleging that Sun could not exercise its options under the Option Agreement until it made a "special tender offer" in accordance with Israeli law, and seeking an injunction barring Sun from proceeding with the acquisition. ( See Compl. ¶¶ 77-79; Kraus Affirm. ¶ 25.)
Affirmation of Douglas M. Kraus in Support of Motion to Stay All Proceedings and for an Extension of Time to Respond to the Complaint.
On June 25, 2008, Sun exercised its options anyway, commenced a tender offer to acquire the remaining shares, and brought the action in this court, alleging, inter alia, that Defendants fraudulently induced them to make the initial investment, that Defendants breached the Merger Agreement and the TDC Merger Agreement, and that the Optionors breached the Option Agreement by failing to deliver their shares. Plaintiffs also seek declaratory judgments that would prohibit the Defendants from taking any actions that are inconsistent with their obligations under the Merger, TDC Merger, and Option Agreements.
The Complaint in this action was served June 27, 2008, and Defendants' time to answer or move against the Complaint was extended, upon ex parte application, by Order of the Hon. Alice Schlesinger, until August 17. (Order, July 28, 2008, a copy of which is annexed to the Schwed Affirm. at Ex. B.) On August 8, the parties entered into a stipulation extending Taro's and the Outside Directors' time to answer or move until September 15, 2008, but also requiring the Optionors to answer Counts VI and VII of the Complaint no later than August 25, 2008. ( See Kraus Affirm. Ex. C.) Count VI seeks a declaratory judgment on the Option Agreement, and Count VII asserts a claim for anticipatory breach of the Operating Agreement.
Affirmation of Richard F. Schwed in Support of Plaintiffs' Memorandum in Opposition to Defendants' Motion to Stay.
On August 26, the Tel Aviv District Court denied Defendants' application for injunctive relief and ruled that Sun was not required to conduct a special tender offer in these circumstances. Defendants immediately appealed this decision to the Israeli Supreme Court and sought a stay pending the appeal. The Israeli Supreme Court enjoined Sun from completing the tender offer or otherwise acquiring Taro until it issues a decision. The appeal will be heard December 8. (Kraus Affirm. ¶ 25.)
Defendants now seek to stay all proceedings in this action until after the appeal is decided. They argue that the Israeli decision will "dispose of or limit issues which are involved in the [present] action." (Def. Supp. Mem. 4, quoting Belopolsky v. Renew Data Corp. , 41 AD3d 322 , 323 [1st Dep't 1969].) According to Defendants, a decision by the Israeli Court that the tender offer is valid will result in an effort by Sun to enforce the Option Agreement and consummate the acquisition, and such action would render the fraudulent inducement and breach of Merger Agreement claims "academic and unnecessary." (Def. Supp. Mem. 4, quoting RAD Ventures Corp. v. Gotthilf , 6 AD3d 415 , 416 [2d Dep't 2004].) Defendants have indicated that they intend to move to dismiss at least some of the claims asserted in the Complaint, and they contend that requiring them to do so now, before the decision of the Israeli Supreme Court is issued, would be a waste, not only of judicial resources, but also of funds that would otherwise be in the hands of the shareholders. ( See Hr'g Tr. 9-10, October 3, 2008.)
Memorandum of Law in Support of Motion of Taro Pharmaceutical Industries Ltd. and its Outside Directors to Stay Proceedings and for an Extension of Time to Respond to the Complaint. The Levitt/Moros Defendants have adopted all arguments set forth in the memorandum of Taro and the Outside Directors, and they did not submit a separate memorandum of law. ( See Affirmation of Ashish D. Ghandi in Support of Certain Defendants' Application for a Stay of All Proceedings and for an Extension of Time to Respond to the Complaint ¶ 4.)
Sun argues that the standard for issuance of a stay is not whether some of the issues in a case may be disposed by another action pending, but rather, whether all of the questions and issues in the case will be determined by the other action. ( See Plf. Opp. Mem. 8, citing Somoza v. Pechnik , 3 AD3d 394 [1st Dep't 2004].) Sun contends that the standard to be applied is the "render academic" standard, which requires a conclusion that the determination of the related action would "render academic" the issues presented in this action. ( Id., quoting Global Reinsurance Corp.-U.S. Branch v. Equitas Ltd., 20 Misc 2d 1115 (A), 2008 WL 2676805 [Sup. Ct. NY County 2008].) Because the only claims that will be affected by the Israeli decision are those relating to the Option Agreement, which the Optionors have already answered, Sun argues that the remaining claims will not be rendered academic by the Israeli decision, and Defendants' motion for a stay must therefore be denied. Furthermore, Sun argues that if Defendants are permitted a further extension of time to respond to the Complaint, it will be early 2009 before the commencement of what Defendants have conceded will be complex motion practice, and Plaintiffs' ability to obtain relief on claims brought in June of 2008 will be delayed even further. ( See Hr'g Tr. 25-29, October 3, 2008.)
Memorandum in Opposition to Defendants' Motion to Stay.
Looking first to the question of the appropriate standard to be applied to a request for a stay, Defendants are correct that in Belopolsky the First Department concluded that it was not improper to stay an action pending resolution of a previously commenced, related action, even in the absence of complete identity of the parties, where "there were overlapping issues and common questions of law and fact, and the prior action may dispose of or limit issues which are involved in the subsequent action." 141 AD3d at 322-323 (citations omitted). Nonetheless, I do not read Belopolsky to render the "render academic" standard, well, academic. Rather, the "render academic" standard, set forth in Corbetta Construction Co. v. George F. Driscoll Co., 17 AD2d 176, 179 (1st Dep't 1962), has not, after decades of application to cases in the First Department, been overruled. Nor, as I noted in Global Reinsurance, is Belopolsky's standard necessarily inconsistent with the render academic rule, as Belopolsky still requires limiting or disposing of issues; an issue may be limited by being rendered academic, although it is not necessarily disposed of by the other proceeding. See Global Reinsurance, 20 Misc 3d 1115 (A), 2008 WL 2676805 at *4. It is therefore appropriate for me to ascertain whether the determination of the Israeli Supreme Court will render academic the issues raised in the action here.
If the Israeli Supreme Court concludes that the tender offer is valid, Sun will move for summary judgment on its claims relating to the Option Agreement. Defendants argue that such a motion would require a concession that the Option Agreement is valid and enforceable according to its terms, which would preclude them from arguing that it is invalid because they were fraudulently induced into entering it. (Def. Reply Mem. 2, citing Spataro v. Concept Two Accessories, No. 0603906/2006, 2007 WL 3325466 at *10 [Sup. Ct. NY County Oct. 23, 2007]). Similarly, Defendants argue that the claims asserting breach and fraudulent inducement of the Merger Agreement (Counts III and I, respectively) will fail, because the Option Agreement, by its terms, can only be enforced upon termination of the Merger Agreement. Defendants assert that if Sun wishes to enforce the Option Agreement, it cannot then also argue that the Merger Agreement was induced by fraud, nor that the Merger Agreement was improperly terminated and remains in effect. Likewise, the claims relating to the TDC Merger Agreement (Counts IV and V) would be mooted because the TDC merger was to go forward only upon completion of the Merger Agreement, whereas enforcement of the Option Agreement requires termination of the TDC Merger Agreement.
Reply Memorandum of Taro Pharmaceutical Industries Ltd. and its Outside Directors in Support of Motion to Stay Proceedings and for an Extension of Time to Respond to the Complaint. The Levitt/Moros Defendants have, again, adopted all arguments set forth in the memorandum of Taro and the Outside Directors and have not submitted a separate reply memorandum. ( See Reply Affirmation of Ashish D. Ghandi in Support of Certain Defendants' Application for a Stay of All Proceedings and for an Extension of Time to Respond to the Complaint ¶ 4.)
Furthermore, Defendants argue, since enforcement of the Option Agreement would require the Levitt/Moros Defendants to turn over their shares, such enforcement would effectively give Sun control of Taro, which would moot the claims seeking to block the sale of a Taro Irish subsidiary (Counts II — V), and if Sun takes over Taro, its claims alleging breach of the duty of good faith and fair dealing and unjust enrichment (Counts VIII and IX, respectively) would be precluded or mooted because the takeover is precisely what Sun bargained for. ( See Def. Reply Mem. 2-3.)
Sun, on the other hand, asserts that the only claims that will be impacted by the decision of the Israeli Supreme Court are those relating to the Option Agreement, and those claims have already been answered by the Optionors. The Israeli decision will have no bearing on Sun's other claims, as Sun can seek enforcement of the Option Agreement while simultaneously asserting its claims that it was fraudulently induced into entering the Merger Agreement, and that Defendants breached and improperly terminated the Merger and TDC Merger Agreements. Although Sun concedes that it cannot seek specific performance of both the Merger Agreement and the Option Agreement, it contends that the rest of its claims, and any motions that Defendants may wish to make in response, would be unaffected by the decision of the Israeli Supreme Court. ( See Hr'g Tr. 23, October 3, 2008; see also Plf. Opp. Mem. 9-10.)
I am not unsympathetic to Defendants' contention that the Israeli Supreme Court's decision may change the landscape of this litigation, but neither am I convinced that it will render academic all, or even the majority of Sun's claims. Without delving into the merits of the individual claims, it is evident that if the Israeli Supreme Court affirms the lower court's decision and permits the tender offer to go forward, a summary judgment motion by Sun on its Option Agreement claims will not necessarily moot or otherwise render academic Sun's causes of action pertaining to the other agreements. I make no finding as to the legal sufficiency of any of these claims, as challenges to same are best addressed in Defendants' motions to dismiss, which I have been assured will be forthcoming. ( See Hr'g Tr. 9, 17, October 3, 2008.)
It is true that the Merger Agreement must have been terminated in order for the Option Agreement to be enforceable, but it is not clear that Sun may not seek to enforce the Option Agreement and, at the same time, argue that the Defendants breached, or fraudulently induced, the Merger and TDC Merger Agreements, and that such breach or fraud resulted in damage to Sun. In other words, by arguing that the Option Agreement was put into place to protect Sun in the event that the Merger Agreement was never consummated, and that such bargained-for protection cannot deprive Sun of the right to also pursue legal action to make itself whole, and that the Option Agreement contains no such limitation.
As regarding the unjust enrichment and good faith and fair dealing claims, Defendants argue that if the Option Agreement is enforced, then Sun will have received the benefit of its bargain and would thus be precluded from pursuing these claims. At argument, Sun contended that enforcement of the Option Agreement alone will not result in its obtaining complete control over Taro, and it thus will not have received the benefit of its bargain. ( See id. at 19-20.) However, Sun made this assertion for the first time at oral argument, and I therefore disregard it. Nonetheless, even if, as Defendants contend, enforcement of the Option Agreement would result in Sun taking complete control over Taro, the Option Agreement would not be enforced immediately upon the issuance of the Israeli Supreme Court's decision. If that decision is in Sun's favor, then Sun's tender offer will go forward, and it will still have to seek summary judgment on its claims relating to the Option Agreement. Defendants assert that such a summary judgment motion "would, if successful, give Sun complete control of Taro," thereby mooting several of Sun's claims. (Def. Reply Mem. 2-3, emphasis added.) Thus, if so, these claims would be rendered academic not by the decision of the Israeli Supreme Court, but rather, by the summary judgment decision.
Moreover, as with the fraud and breach claims, the enforcement of the Option Agreement may not necessarily preclude the other relief sought by Sun. If Defendants believe that Sun's claims are insufficiently pled, are duplicative, or fail for want of personal jurisdiction or any other reason, then I assume that they will set out such arguments in their motions to dismiss.
While it is conceivable that Sun may choose not to pursue certain of its claims if the Israeli Supreme Court permits the tender offer to go forward ( see Hr'g Tr. 32-33, October 3, 2008, where counsel to Taro and the Outside Directors has stated that, even if the claims could survive, "it still doesn't make sense to require an answer because they may not elect to pursue it if they are allowed to pursue their option claims") (emphasis added), nonetheless, Sun has represented that it intends to pursue all claims asserted in its Complaint, and no authority has been cited that would support granting a stay merely because the plaintiff may ultimately elect not to pursue some of its claims once the other action has been decided.
Accordingly, it is
ORDERED that the Motion by Taro and the Outside Directors for a Stay of Proceedings and for an Extension of Time to Respond to the Complaint (Motion Sequence No. 001) is denied; and it is further
ORDERED that the Motion by the Levitt/Moros Defendants for the same relief (Motion Sequence No. 002) is denied; and it is further
ORDERED that the Defendants shall answer or otherwise respond to the Complaint within thirty (30) days of service of this Order with notice of entry.