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UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA
MATTHEW LUSK and ST. CLAIR EMPLOYEES RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiffs, v. BAHRAM AKRADI, GILES H. BATEMAN, JACK W. EUGSTER, GUY C. JACKSON, JOHN K. LLOYD, MARTHA A. MORFITT, JOHN B. RICHARDS, and JOSEPH S. VASSALLUZZO, Defendants.
Case No. 0:15-cv-01911-JRT-BRT
LEAD PLAINTIFFS’ OMNIBUS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTIONS FOR JUDGMENT ON THE PLEADINGS
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TABLE OF CONTENTS Page I.
INTRODUCTION ........................................................................................... 1
II.
STATEMENT OF FACTS .............................................................................. 4 A.
Background of LTM and its valuable real estate assets ........................ 4
B.
Akradi takes control of the sales process to usurp LTM’s real estate value for himself ......................................................................... 5
C.
Akradi negotiates self-interested deal terms and tilts the sales process in favor of his preferred bidder ................................................ 7
D.
The Board abdicates the process to Akradi and fails to protect LTM’s public shareholders from Akradi’s directly conflicting interests .................................................................................................. 8
E.
The Board truncates the bidding process despite evidence that the confidentiality of the purportedly blind bidding packages was compromised and locks up the deal in favor of the Buyout Group ..................................................................................................... 9
F.
The Board consciously turns its back to LTM’s real estate value and approves an undervalued sale of the Company ............................ 10
G.
Defendants extract improper personal benefits from the Buyout at the expense of LTM’s public shareholders ..................................... 11
H.
Defendants make misleading partial disclosures regarding the sales process and fail to fully inform LTM’s public shareholders regarding facts that would have revealed Defendants’ breaches of fiduciary duty .............................................. 12
III.
STANDARD OF REVIEW ........................................................................... 12
IV.
ARGUMENT ................................................................................................. 13 A.
Plaintiffs plead non-exculpated claims against Akradi and the Board Defendants ................................................................................ 13 1.
Defendants’ duties under Minnesota law.................................. 14
2.
Akradi acted disloyally and in bad faith by usurping LTM’s real estate value from the Company’s public shareholders .............................................................................. 17
3.
The Board Defendants acted disloyally and in bad faith by abdicating the sales process to Akradi and turning their backs on the known value of LTM’s real estate ............... 21 i
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B.
V.
4.
The Board Defendants knowingly violated Section 302A.673 by failing to promptly form a special committee to consider the multiple definitive acquisition proposals that they received ...................................................... 27
5.
This Court has already rejected Defendants’ argument that fiduciary duty claims are subject to heightened pleading standards ..................................................................... 29
Defendants’ breaches of fiduciary duty cannot be ratified under Minnesota law or Delaware law .......................................................... 31 1.
There is no statutory ratification for breaches of fiduciary duty............................................................................................ 31
2.
This Court should reject Defendants’ request to import Delaware’s common-law shareholder ratification doctrine...................................................................................... 34
3.
Even if Delaware’s common-law shareholder ratification doctrine applied, Defendants cannot not carry their burden to show that the LTM shareholder vote was fully informed .................................................................................... 35
CONCLUSION.............................................................................................. 41
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TABLE OF AUTHORITIES Page CASES Anderson v. First Nat’l. Bank of Pine City, 228 N.W. 257 (Minn. 1975) .........................................................................35, 36 Ashley Cty. v. Pfizer, Inc., 552 F.3d 659 (8th Cir. 2009) ........................................................................13, 34 Augustine v. Arizant Inc., 751 N.W.2d 95 (Minn. 2008) ............................................................................. 14 Bartholomew v. Avalon Capital Grp., Inc., No. CIV. 09-1279, 2010 WL 3033727 (D. Minn. July 27, 2010) ...................... 15 Berreman v. W. Publ’g. Co., 615 N.W.2d 362 (Minn. Ct. App. 2000)............................................................. 17 Bond Opportunity Fund v. Unilab Corp., No. 99 CIV. 11074 (JSM), 2003 WL 21058251 (S.D.N.Y. May 9, 2003) .............................................................................................................36, 37 Broin v. Nat’l Computer Sys., Inc. No. C9-91-235, 1991 WL 204460 (Minn. Ct. App. Oct. 15, 1991) .......30, 32, 33 Brown v. Brewer, No. CV06-3731-GHK SHX, 2010 WL 2472182 (C.D. Cal. June 17, 2010) ......................................................................................................passim Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (Del. 1995) ................................................................................. 26 Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) .......................................................................34, 35, 41 Diedrick v. Helm, 14 N.W.2d 913 (Minn. 1944) ............................................................................. 15 F.D.I.C. v. Milbauer, 119 F. Supp. 3d 939 (D. Minn. 2015) ................................................................. 17
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Flake v. Hoskins, 55 F. Supp. 2d 1196 (D. Kan. 1999) ................................................................... 16 Gottlieb v. Willis, No. 12-CV-2637, 2012 WL 5439274 (D. Minn. Nov. 7, 2012) ......................... 38 Harbor Fin. Partners v. Huizenga, 751 A.2d 879 (Del. Ch. 1999) ............................................................................ 35 Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342 (D. Nev. 1997) ...................................................................... 16 Holdahl v. Bioergonomics, Inc., No. 27-CV-10-24236 (Minn. Dist. Ct. Feb. 8, 2012) ......................................... 32 In re Ebix, Inc. Stockholder Litig., C.A. No. 8526-VCN, 2014 WL 3696655 (Del. Ch. July 24, 2014) ................... 37 In re Novell, Inc. S’holder Litig., No. CIV.A. 6032-VCN, 2013 WL 322560 (Del. Ch. Jan. 3, 2013) ................... 18 In re Om Grp., Inc. Stockholders Litig., No. CV 11216-VCS, 2016 WL 5929951 (Del. Ch. Oct. 12, 2016) ................... 41 In re RFC & ResCap Liquidating Tr. Litig., No. 13-CV-3451-(SRN/JJK/HB), 2015 WL 8082540 (D. Minn. Dec. 7, 2015) .................................................................................................12, 13 In re Textainer P’ship Sec. Litig., No. C-05-0969, 2005 WL 3801596 (N.D. Cal. Dec. 12, 2005) ......................... 37 In re Toys “R” Us, Inc., S’holder Litig., 877 A.2d 975 (Del. Ch. 2005) ............................................................................ 25 In re Volcano Corp. Stockholder Litig., 143 A.3d 727 (Del. Ch. 2016) ............................................................................ 35 Int’l Broadcasting Corp. v. Turner, 734 F. Supp. 383 (D. Minn. 1990) ...................................................................... 37 ii
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Larkin v. Shah, No. CV 10918-VCS, 2016 WL 4485447 (Del. Ch. Aug. 25, 2016) .................. 39 Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) ................................................................................... 16 Mahoney & Emerson v. Private Bank of Minn., No. A08-1571, 2009 WL 1852789 (Minn. Ct. App. June 30, 2009) ................. 15 Marino v. Patriot Rail Co., No. CV 11605-VCL, 2016 WL 885576 (Del. Ch. Feb. 29, 2016) ...............33, 34 Markewich ex rel. Medtronic, Inc. v. Collins, 622 F. Supp. 2d 802 (D. Minn. 2009) ................................................................. 14 McMullin v. Beran, 765 A.2d 910 (Del. 2000) ................................................................................... 18 Noble Sys. Corp. v. Alorica Cent., LLC, 543 F.3d 978 (8th Cir. 2008) ................................................................................ 6 Perl v. St. Paul Fire & Marine Ins. Co., 345 N.W.2d 209 (Minn. 1984) .....................................................................29, 30 Rejsa v. Beeman, No. C7-97-182, 1997 WL 526320 (Minn. Ct. App. Aug. 26, 1997) .................. 29 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1986) .................................................................................... 16 Rupp v. Thompson, No. C5-03-347, 2003 WL 24176126 (Minn. Dist. Ct. Oct. 30, 2003) ................................................................................................................... 17 Rupp v. Thompson, No. C5-03-347, 2005 WL 2757129 (Minn. Dist. Ct. Jan. 12, 2005) ...........15, 16 Sifferle v. Micom Corp., 384 N.W. 503 (Minn. Ct. App. 1986) ...........................................................29, 30 iii
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Tuttle v. Lorillard Tobacco Co., 118 F. Supp. 2d 954 (D. Minn. 2000) ................................................................. 29 Wayne Cty. Emps.’ Ret. Sys. v. Corti, C.A. No. 3534-CC, 2009 WL 2219260 (Del. Ch. July 24, 2009) ...................... 26 West-Anderson v. Mo. Gaming Co., 557 F. App’x 620 (8th Cir. 2014) ....................................................................... 13 Westgor v. Grimm, 318 N.W.2d 56 (Minn. 1982) ............................................................................. 30 Yary v. Voigt, No. CIV. 11-694 JNE/FLN, 2011 WL 6781003 (D. Minn. Dec. 27, 2011) ................................................................................................................... 30 Zinn v. VLI Corp., 681 A.2d 1050 (Del. 1996) ................................................................................. 38 STATUTES, RULES AND REGULATIONS Minneapolis Statutes §302A.011 ........................................................................................................... 14 §302A.251 ...............................................................................................14, 17, 32 §302A.255 ...............................................................................................31, 32, 33 §302A.601 ........................................................................................................... 32 §302A.673 .........................................................................................14, 17, 27, 28
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Lead Plaintiffs Matthew Lusk and St. Clair Employees Retirement System (“Plaintiffs”) respectfully submit the following Omnibus Memorandum of Law in Opposition to the Motions for Judgment on the Pleadings filed by Defendant Bahram Akradi (“Akradi”), Dkt. No. 163 (“Akradi Br.”), and the Board Defendants,1 Dkt. No. 168 (“Board Br.”) (collectively, the “Motions”): I.
INTRODUCTION This direct shareholder class action alleges state law breach of fiduciary duty
and disclosure claims against Akradi and the Board Defendants arising from their unfair and self-interested sale of Life Time Fitness, Inc. (“LTM” or the “Company”) to a consortium of private investors that included Leonard Green & Partners, Inc. (“LGP”), TPG Capital, L.P., and LNK Partners (“LNK”) (collectively, the “Buyout Group”), which closed on June 10, 2015 (the “Buyout”). LTM operates a chain of fitness centers. The Company owned the real estate underlying 70% of it locations, which had a value of over $2.3 billion, but which was in fact worth significantly more. In 2014, LTM’s largest outside shareholder, Marcato Capital Management (“Marcato”), began pushing for LTM to spin off its valuable real estate assets into a Real Estate Investment Trust in order to unlock additional shareholder value (the “REIT Conversion”). The financial advisors to LTM’s Board of
1
The Board Defendants are Giles H. Bateman, Jack W. Eugster, Guy C. Jackson, John K. Lloyd, Martha A. Morfitt, John B. Richards, and Joseph S. Vassalluzzo. The Board Defendants, together with Akradi, are collectively referred to as “Defendants.” 1
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Directors (the “Board”) opined that a REIT Conversion could send the Company’s stock price over $80 per share. Instead of unlocking this hidden real estate value for the benefit of LTM’s public shareholders, as his fiduciary duties demanded, Akradi hijacked LTM and usurped the Company’s real estate value for himself by engineering a sale of the Company to a group of cherry-picked private equity buyers that allowed Akradi to make a $150 million equity rollover investment in the surviving company – which increased Akradi’s ownership stake in LTM. All told, Akradi stood to receive between 45% and 65% more value than LTM’s public shareholders who were stripped of their long-term equity investments for the inadequate consideration of $72.10 per share. The Board Defendants who approved the Buyout consciously disregarded their fiduciary duties to protect LTM’s public shareholders from Akradi’s directly conflicting interests. The Board Defendants breached their fiduciary duties by abdicating the sales process to Akradi and turning their backs on the known value of LTM’s real estate. Specifically, the Board Defendants:
Allowed Akradi to personally select bidders with whom he had a pre-existing relationship;
Allowed Akradi to privately negotiate self-interested deal terms with bidders;
Refused to promptly form a special committee to run the sales process, as required by Minnesota law; 2
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Allowed Akradi to continue private negotiations with bidders even after a pro forma Special Committee was formed;
Allowed the Special Committee’s financial advisors to advise both the special committee and Akradi;
Turned their backs on LTM’s higher real estate value in order to approve the lower $72.10 per share merger consideration;
Truncated the bidding process despite evidence that the confidentiality of the purportedly blind bids had been compromised; and
Locked up the deal in favor of the Buyout Group with preclusive deal protection devices designed to preclude topping bidders.
For their part in approving the unfair deal, the Board Defendants each received cash payments of over $300,000 from the accelerated vesting of performance-based restricted stock. These are payments that they would not have received had they done what was best for LTM’s shareholders and pursued a REIT Conversion. In order to obtain shareholder approval of the unfair and self-interested Buyout, Defendants filed with the Securities and Exchange Commission on April 30, 2015 a materially false and misleading proxy statement on Schedule 14A (the “Proxy”). The Proxy failed to fully inform LTM’s former shareholders of material facts that would have revealed Defendants’ breaches of fiduciary duty.
3
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In light of the foregoing, Plaintiffs allege that Akradi and the Board Defendants acted disloyally, in bad faith, and in breach of their fiduciary duties to LTM’s former public shareholders. Defendants’ Motions ask the Court to accept their version of the facts and to decide highly factual issues on the pleadings. Defendants have not offered any persuasive reason to warrant the relief they seek. As detailed herein, Plaintiffs pleaded non-exculpated claims of disloyalty, bad faith, and knowing violations of law. Moreover, Minnesota courts have not adopted Delaware’s common-law shareholder ratification doctrine that Defendants rely on, and the Court should reject Defendants’ request to import Delaware law. But even under Delaware’s ratification doctrine, Defendants would be unable to carry their burden to show that the LTM shareholder vote on the Buyout was fully informed, which precludes application of the ratification doctrine. For these reasons, detailed below, Plaintiffs respectfully request that the Court deny Defendants’ Motions in full. II.
STATEMENT OF FACTS A.
Background of LTM and its valuable real estate assets
LTM is a Minnesota corporation that operates a chain of fitness centers. ¶¶2, 12.2 Akradi founded LTM in 1992. Once LTM went public, Akradi became the 2
Citations to “¶_” refer to paragraphs in the Amended Class Action Complaint, Dkt. No. 87 (the “AC”). 4
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Company’s largest shareholder, with a 6.25% stake, and acted as President, CEO, and Chairman of the Board. ¶¶13, 28. LTM accrued substantial real estate holdings in major metropolitan areas. Each new 100,000-square-foot, amenity-rich fitness center required an investment of $30 to $50 million. ¶¶30-31. At the time that the Buyout was announced, LTM owned 70% of its 114 locations, most of which had no mortgage attached. ¶¶2, 31. As of May 2014, LTM booked its real estate holdings at $2.3 billion, but the actual, undisclosed fair market value was significantly higher. Id. Marcato recognized that LTM was undervalued and began pushing Akradi and the Board to spin off the Company’s real estate assets into a REIT Conversion to unlock additional value for the Company’s shareholders. ¶¶3, 32. In May 2014, Marcato increased its position in LTM to 7.2%, suggesting a potential hostile takeover attempt. Then on July 30, 2014, the Board received an unsolicited acquisition proposal from Party A to purchase LTM for $60 per share. ¶¶4, 35. Shortly thereafter, Party A submitted a second proposal, increasing its bid to $70 per share. ¶40. B.
Akradi takes control of the sales process to usurp LTM’s real estate value for himself
In response to Marcato’s and Party A’s efforts, Akradi and the Board adopted a poison pill, which warded off unwelcome takeover attempts and ensured that Akradi and the Board retained control over the terms of any sale of the Company. ¶¶6, 36, 39. The Board also retained Wells Fargo Securities, LLC on July 21, 2014 and 5
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Guggenheim Securities, LLC on August 21, 2014 to assist in evaluating potential strategic alternatives and purportedly also a REIT conversion. ¶¶4, 35. Akradi then began contacting cherry-picked buyers with whom he had a “pre-existing relationship,” including Party A and LGP. ¶40; Proxy at 37.3 On December 19, 2014, the Board requested each interested bidder to submit detailed acquisition proposals for the “first-round” of the bidding process. Proxy at 38. Each bidder was requested to include detailed “information as to each bidder’s proposed purchase price, financing, required approvals, closing conditions, required due diligence and other material information.” Id. “On January 16, 2015, Party A submitted an indication of interest in response to the first-round process letter reaffirming its proposal of $70.00 per share, and [LGP] proposed a purchase price of $65.00 to $69.00 per share. Party B . . . proposed a range of purchase prices and on January 20, 2015 confirmed in writing a proposed purchase price of $60.00 per share.” ¶41; Proxy at 38.
3
The Proxy does not clearly specify whether LGP was one of the parties with whom Akradi had a pre-existing relationship. This ambiguity may have been deliberate and intended to hide the existence of a pre-existing relationship. This Court may consider the Proxy in its review of Defendants’ Motions because Defendants rely on it and it is a public record that is “necessarily embraced by the pleadings.” See Noble Sys. Corp. v. Alorica Cent., LLC, 543 F.3d 978, 982 (8th Cir. 2008) (holding that the trial court did not err in considering a publicly filed financing statement that was not expressly mentioned in the pleadings). 6
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C.
Akradi negotiates self-interested deal terms and tilts the sales process in favor of his preferred bidder
Throughout the bidding process, Akradi freely negotiated the terms of his future employment and equity rollover investment with his cherry-picked bidders. ¶43. According to the Proxy:
“[R]epresentatives of Life Time” (most likely Akradi) met privately with Party A on September 30, 2014;
Akradi met with LGP on October 6, 2014; and
Akradi met with LNK on December 15 and 16, 2014.
[Proxy at 37]. The Proxy does not disclose the substance of the discussions between Akradi and potential buyers. On March 8, 2015, Party A balked at Akradi’s proposed terms and, due to “open issues” regarding those terms, decided to table any discussions concerning postclosing employment and a potential equity investment from Akradi until after a merger agreement was signed. ¶¶44-45. Five days later, on March 13, 2015, Akradi fully committed to the Buyout Group and executed an agreement under which he would rollover $100 million of his LTM equity into the surviving company. ¶48. Akradi continued to privately negotiate self-interested terms with the Buyout Group, and on March 15, 2015, increased his planned equity rollover investment to $150 million. ¶¶40, 43, 50.
7
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D.
The Board abdicates the process to Akradi and fails to protect LTM’s public shareholders from Akradi’s directly conflicting interests
The Board Defendants recognized Akradi’s conflict, so on February 9, 2015, they adopted a supervisory “framework” for Akradi to have “initial discussions with Party A and [LGP]” with “one senior representative of the Board’s financial advisors attend[ing] each such discussion and defined the scope of Mr. Akradi’s discussions with potential bidders.” Proxy at 39. By the time that the Board adopted the supervisory framework, Akradi had already met privately with Party A, LGP, and LNK. And the Board allowed Akradi to continue meeting privately with LGP to negotiate the terms of his equity rollover investment with LGP, without respecting the requirements of the supervisory framework. ¶¶39-40, 43-44, 50 46-48. The Board Defendants also refused to promptly form a special committee of independent directors to consider the definitive acquisition proposals it received from Party A on July 30, 2014 and September 3, 2014, or even the definitive acquisition proposals that they received – at the Board’s request – in the first-round of the bidding process on January 16, 2015. The Board Defendants purportedly “considered establishing a special committee but [inexplicably] determined that such a committee was not necessary at such time.” Proxy at 38.
8
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It was not until March 3, 2015 – 7 months after Party A’s initial proposal and just 12 days before the Board Defendants met to approve the Buyout – that a pro forma Special Committee was formed to rubberstamp the deal. ¶43; Proxy at 40. But the Special Committee still allowed Akradi to privately negotiate the terms of his rollover investment and his continued employment with the surviving company. Id. “The Special Committee also determined that the financial advisors and legal counsel to Life Time were independent of management and could also serve as advisors to both the Board and the Special Committee[,]” i.e. both the Special Committee and Akradi (the only Board member who was not part of the Special Committee). Proxy at 40. E.
The Board truncates the bidding process despite evidence that the confidentiality of the purportedly blind bidding packages was compromised and locks up the deal in favor of the Buyout Group
By March 11, 2015, members of the Buyout Group had submitted a $70.50 per share bid, including a rollover investment by Akradi, while Party A had submitted a bid of $70 per share. ¶¶45-46. On March 15, 2015, Party A submitted its revised proposal, which included a topping bid of $72.00. ¶49. Akradi immediately went back to the Buyout Group to prod their proposal incrementally higher and offered to roll in millions more of his equity. ¶50. The Buyout Group approved, and on the evening of March 15, 2015,
9
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raised their bid by a whole $1.10 to top Party A’s purportedly confidential bid by just ten cents. ¶50. Despite this evidence that the confidentiality of the purportedly blind bidding packages may have been compromised, the Board truncated the bidding process and never went back to Party A to foster a bidding war to maximize the value for LTM’s former shareholders. ¶51. No justification was ever provided as to why bidding process had to end on March 15, 2015. The Board Defendants then approved the Buyout and adopted additional defensive mechanisms to work in conjunction with the Company’s previously adopted poison pill to deter any topping bids that would defeat Akradi’s efforts to usurp LTM’s real estate value for himself. Those devices included: (i) a no-solicitation provision; (ii) a matching rights provision; (iii) an information rights provision that required LTM to share highly sensitive information about competing proposals with the Buyout Group; and (iv) a termination fee of $97 million, as well as an expense reimbursement provision of $7 million. ¶53. F.
The Board consciously turns its back to LTM’s real estate value and approves an undervalued sale of the Company
In approving the Buyout Group’s inadequate $72.10 per share bid, the Board Defendants consciously disregarded LTM’s real estate value. ¶¶7, 9, 39, 62. Wells Fargo and Guggenheim each conducted an “Illustrative Analysis” of a possible REIT Conversion showing that LTM could be worth as much as $84.50 and 10
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$92.23 per share, respectively. Id. Guggenheim and Wells Fargo – whose fees were, in large part, contingent upon a successful deal – then expressly disregarded their Illustrative Analyses, and each issued a fairness opinion that the $72.10 per share merger consideration was fair to LTM’s shareholders. ¶52. The Board Defendants then inexplicitly disregarded the higher value resulting from Guggenheim’s and Wells Fargo’s Illustrative Analyses, accepted the fairness opinions, and approved the merger agreement. ¶¶52, 64. G.
Defendants extract improper personal benefits from the Buyout at the expense of LTM’s public shareholders
The terms of the merger agreement provided Akradi with an equity rollover (the terms of which were withheld from shareholders), continuing employment with an annual base salary of $1 million (and guaranteed annual bonus of $1 million), lucrative stock options, and golden parachute compensation, amounting to a windfall of $255 to $290 million. ¶¶7, 57-58. All told, Akradi stood to receive between 45% and 65% more value for his equity holdings in the Company than LTM’s public shareholders. ¶¶7, 59-60. Other executive officers and directors of the Company collected immediate profits from the Buyout through accelerated vesting of their stock options, placing their interests in direct conflict with the interests of the Company’s shareholders as well. ¶61. The Board Defendants who approved the Buyout each received over $300,000 in cash from the accelerated vesting of performance-based restricted stock. Id. Akradi 11
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and the Buyout Group began harvesting the proceeds of their scheme on the same day that the Buyout closed. ¶¶54-55. Within ten days, they had already sold 29 of LTM’s 114 fitness centers for $900 million. Id. H.
Defendants make misleading partial disclosures regarding the sales process and fail to fully inform LTM’s public shareholders regarding facts that would have revealed Defendants’ breaches of fiduciary duty
To secure shareholder approval of the Buyout, Defendants filed a materially misleading Proxy that recommended shareholders vote in favor of the Buyout. ¶¶8, 63. The Proxy failed to fully disclose material information regarding Defendants’ disloyal, bad faith, and unlawful conduct, which would have revealed their breaches of fiduciary duties to LTM’s former public shareholders who were, therefore, not fully informed. ¶¶50, 64-78, 118. The Proxy also did not disclose the fact that Defendants never obtained an appraisal of LTM’s real estate value until after the Proxy was filed. See Tr. Hr’g on Defs.’ Mots. to Dismiss at 8:24-9:1 (“[T]here were appraisals obtained in connection with the buying group doing sale and leaseback transactions, but those were obtained after the proxy was issued. The proxy was issued in April.”), attached as Exhibit A to the Declaration of Garrett D. Blanchfield Jr. (“Blanchfield Decl.”) filed herewith; see also ¶112. III.
STANDARD OF REVIEW “A motion for judgment on the pleadings will be granted only where the
moving party has clearly established that no material issue of fact remains and the 12
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moving party is entitled to judgment as a matter of law.” In re RFC & ResCap Liquidating Tr. Litig., No. 13-CV-3451-(SRN/JJK/HB), 2015 WL 8082540, at *2 (D. Minn. Dec. 7, 2015).4 In evaluating a motion for judgment on the pleadings, the Court is required to “accept as true all factual allegations set out in the complaint and to construe the complaint in the light most favorable to the plaintiffs, drawing all inferences in their favor.” Ashley Cty. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009). “Judgment on the pleadings is appropriate only when there is no dispute as to any material facts and the moving party is entitled to judgment as a matter of law[.]” Id. Thus, a plaintiff’s allegations need only “raise a reasonable expectation that discovery will reveal evidence” of the claims’ elements, “even if it strikes a savvy judge that proof of those facts is improbable.” West-Anderson v. Mo. Gaming Co., 557 F. App’x 620, 623 (8th Cir. 2014) (Twombly and Iqbal “did not abrogate notice pleading standard of [Rule] 8(a)(2)”). IV.
ARGUMENT A.
Plaintiffs plead non-exculpated claims against Akradi and the Board Defendants
Defendants’ reliance on the exculpatory provision in LTM’s articles of incorporation is misplaced.5 The AC sufficiently pleads that buy allowing Akradi to usurp LTM’s real estate value for himself, Defendants acted disloyally and in bad 4
Internal citations and quotations omitted and emphasis added unless otherwise noted.
5
See Board Br. at 7-8. 13
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faith and knowingly violated Minn. Stat. §302A.673 by failing to promptly form a special committee. Under Minnesota law, Defendants cannot limit their liability for these claims. 1.
Defendants’ duties under Minnesota law
Minnesota law requires corporate directors to discharge their duties “in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Minn. Stat. Ann. §302A.251, subd. 1. These duties are referred to as the duties of good faith, loyalty, and care. Directors of Minnesota corporations cannot limit their liability for breaches of the duties of loyalty and good faith. Id. at subd. 4. Under Minnesota law, “good faith” means “honesty in fact in the conduct of the act or transaction concerned.” Minn. Stat. §302A.011, subd. 13; Augustine v. Arizant Inc., 751 N.W.2d 95, 100 (Minn. 2008). There are few Minnesota cases analyzing this good faith standard, so the Court should look to Delaware law for guidance. See Markewich ex rel. Medtronic, Inc. v. Collins, 622 F. Supp. 2d 802, 808 (D. Minn. 2009) (looking to Delaware law for guidance on complex issue of corporate law because such cases “are uncommon in Minnesota”). Delaware courts recognize that bad faith can be shown “where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious
14
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disregard for his duties.” Brown v. Brewer, No. CV06-3731-GHK SHX, 2010 WL 2472182, at *7 (C.D. Cal. June 17, 2010) (observing that under Delaware law, “intentional dereliction of duty or a conscious disregard for one’s responsibilities . . . is properly treated as a non-exculpable, non-indemnifiable violation of the fiduciary duty to act in good faith”). Intentional dereliction of duty goes beyond gross negligence and crosses the line into bad faith. Id. at *14. Whether an act was undertaken in good faith is ultimately a question of fact not appropriate for resolution on the pleadings. See Mahoney & Emerson v. Private Bank of Minn., No. A08-1571, 2009 WL 1852789, at *10 (Minn. Ct. App. June 30, 2009) (“Determination of what constitutes good faith necessarily involves factual findings. It is for the trier of fact to evaluate the credibility of a claim of ‘honesty in fact’ and, in doing so, to take account of the reasonableness or unreasonableness of the claim.”). The duty of loyalty requires corporate fiduciaries to “exercise their powers as directors solely for the benefit of the corporation and its stockholders.” Diedrick v. Helm, 14 N.W.2d 913, 919 (Minn. 1944). “Implicit in such duty is that of not exercising their powers as directors to serve their own personal interests at the expense of the corporation and its stockholders.” See also Bartholomew v. Avalon Capital Grp., Inc., No. CIV. 09-1279, 2010 WL 3033727, at *3 (D. Minn. July 27, 2010); see also Rupp v. Thompson, No. C5-03-347, 2005 WL 2757129, at *11 (Minn.
15
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Dist. Ct. Jan. 12, 2005) (“The duty demands of an officer or director the most scrupulous observance of his duty[.]”). In the context of a potential sale of a corporation that will result in a change of control and forever strip shareholders of their equity stake in the company, the duty of loyalty requires a corporate fiduciary to obtain the highest value reasonably available for the company’s shareholders. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 176 (Del.1986).6 Ultimately, “[w]hether Defendants’ conduct violated their duty of loyalty is a question of fact that is not appropriately 6
The Board Defendant’s suggestions that Minnesota does not recognize a corporate fiduciary’s duty to maximize shareholder value, see Board Br. at 25 n.11, has been expressly rejected by courts in jurisdictions with “other constituency” statutes similar to Minnesota’s. See, e.g., Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342, 1351 (D. Nev. 1997) (“ITT also claims that it has properly considered other constituencies in responding to Hilton’s offer, as it is expressly allowed to do under N.R.S. § 78.138. ITT is correct. Other constituencies may be considered under that provision, but nothing in that statute suggests that the interests of third parties are as important as the right of shareholder franchise. While the two interests are not exclusive, neither are they equal.”); Flake v. Hoskins, 55 F. Supp. 2d 1196, 1213–14 (D. Kan. 1999) (explaining that “other constituency” statutes are insignificant “because in all business actions, a corporate board of directors owes a fiduciary duty to shareholders and must generally operate for their benefit. Any consideration of other constituencies must therefore have at least a reasonable relationship to the general interests of shareholders.”). To be sure, the Delaware Supreme Court has clarified that “Revlon did not create any new fiduciary duties[,]” but rather “[i]t simply held that in the context of a change in control transaction, the board must perform its fiduciary duties in the service of a specific objective: maximizing the sale price of the enterprise.” Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239 (Del. 2009). Moreover, Revlon also permits fiduciaries to consider “various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.” Revlon, 506 A.2d at 182. The Board Defendants do not articulate a single “other constituency” that was actually benefited by the Buyout (other than Akradi and themselves), but the Proxy makes six references to Defendants’ purported efforts to maximize shareholder value through a REIT conversion or a sale of the Company. See Proxy at 35-36, 38-39. They clearly understood their duty to maximize shareholder value. 16
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resolved [on the pleadings].” F.D.I.C. v. Milbauer, 119 F. Supp. 3d 939, 942 (D. Minn. 2015); see also Berreman v. W. Publ’g. Co., 615 N.W.2d 362, 367 (Minn. Ct. App. 2000) (“Whether a fiduciary duty has been breached generally is a question of fact.”). Directors of Minnesota corporations also cannot limit their liability where they receive an improper benefit from a transaction. See Minn. Stat. §302A.251, subd. 4(d). It is a question of fact as to whether a fiduciary received an improper benefit. See Rupp v. Thompson, No. C5-03-347, 2003 WL 24176126, at *9 (Minn. Dist. Ct. Oct. 30, 2003) (Defendants’ argument that benefits were not unusual “raises a fact issue not appropriate for resolution at this stage.”). Finally, when a corporate acquisition is proposed, Minnesota law requires the target company’s board of directors to “promptly form a committee composed solely of one or more disinterested directors . . . [to] take action on the proposal[.]” Minn. Stat. §302A.673. Directors of Minnesota corporations cannot limit their liability for a knowing violation of this statute or any other law. See Minn. Stat. Ann. §302A.251, subd. 4. 2.
Akradi acted disloyally and in bad faith by usurping LTM’s real estate value from the Company’s public shareholders
In May 2014, Marcato, LTM’s largest outside shareholder, began pushing Defendants to spin off LTM’s real estate assets through a REIT Conversion to unlock
17
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additional shareholder value. Wells Fargo and Guggenheim estimated that a REIT Conversion would send the Company’s stock price over $80 per share. Instead of pursuing a REIT Conversion in good faith, Akradi hijacked LTM and usurped the Company’s real estate value for himself. To be sure, Akradi and the Buyout Group began selling off LTM’s real estate assets on the same day the Buyout closed. Corporate fiduciaries have a duty to maximize shareholder value when a change-in-control merger is proposed, even if that means not selling the company. See, e.g., McMullin v. Beran, 765 A.2d 910, 919 (Del. 2000) (observing that “directors are obliged to make an informed and deliberate judgment, in good faith, about whether the sale to a third party that is being proposed by the majority shareholder will result in a maximization of value for the minority shareholders”); In re Novell, Inc. S'holder Litig., No. CIV.A. 6032-VCN, 2013 WL 322560, at *7 (Del. Ch. Jan. 3, 2013) (“Once a board has decided to [pursue] a sales process it is required to seek the highest value reasonably available for the shareholders regardless of where that value comes from.”). Due to his personal continuing interest in the surviving Company, Akradi’s interests were in direct conflict with the interests of LTM’s public shareholders who were stripped of their long-term equity investment in LTM for inadequate consideration. By hijacking the Company and forcing an undervalued sale, Akradi increased his own ownership stake in the surviving company and ultimately secured
18
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for himself 45% to 65% more value than LTM’s public shareholders. By securing these personal benefits at the expense of LTM’s public shareholders, Akradi acted disloyally, in bad faith, and in breach of his fiduciary duties. Once Akradi committed to a self-interested sale of LTM, he exacerbated his breaches of fiduciary duty by tilting the playing field in favor of a preferred bidder who would agree to Akradi’s self-interested deal terms. Akradi began by adopting a poison pill to ward off takeover attempts from buyers who could potentially reject Akradi’s terms. Akradi then personally contacted potential bidders with whom he had a pre-existing relationship, including Party A and LGP. Akradi met privately with his preferred bidders, including with Party A on September 30, 2014, LGP on October 6, 2014, and LNK on December 15 and 16, 2014. Akradi continued to meet privately with bidders even after the Board adopted a framework that required an independent director or financial advisor to supervise Akradi’s future meetings with bidders. The discussions during these private meetings were not disclosed. But at some point, Akradi began negotiating the terms of his continued personal employment and personal equity rollover investment in the surviving company. Perhaps concerned about liability for aiding and abetting a breach of fiduciary duty, Party A balked at Akradi’s efforts to negotiate self-interested terms before a merger agreement was signed. The Buyout Group, however, was not so reluctant, so
19
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five days later, Akradi fully committed to the Buyout Group and executed an agreement to rollover $100 million of his equity into the surviving company. Akradi then continued to privately negotiate self-interested deal terms with the Buyout Group, eventually raising his equity rollover investment to $150 million. Party A then increased its bid to $72.00 per share. After holding undisclosed private conversations with Akradi, the Buyout Group submitted a topping bid that suspiciously beat Party A’s bid by just 10 cents. By favoring the Buyout Group in order to ensure his continuing interest in the surviving company, Akradi hindered the maximization of shareholder value and acted disloyally, in bad faith, and in breach of his fiduciary duties. See Brown, 2010 WL 2472182, at *5. (“[F]avoritism for a white knight to the total exclusion of a hostile bidder was impermissible if divorced from the objective of shareholder value maximization.”). No officer in Akradi’s position could have been influenced by an honest desire to serve the interests of the Company and its shareholders. The ultimate question of whether Akradi’s self-interested actions constituted a breach of his fiduciary duties is a question of fact that should be resolved by a jury. Therefore, Akradi’s Motion should be denied.
20
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3.
The Board Defendants acted disloyally and in bad faith by abdicating the sales process to Akradi and turning their backs on the known value of LTM’s real estate
Akradi could not have usurped LTM’s real estate value without the help of the Board Defendants, who consciously disregarded their fiduciary duties to protect LTM’s public shareholder from Akradi’s directly conflicting interests by abdicating the sales process to Akradi and turning their backs to the Company’s known real estate value. The Board Defendants recognized Akradi’s conflict, so to create the appearance of a fair process, they adopted a supervisory framework that required an independent director or financial advisor to be present during Akradi’s discussions with bidders. But by the time the Board adopted that framework, Akradi had already met privately with Party A, LGP, and LNK. The Board then inexplicably allowed Akradi to continue private negotiations with bidders without respecting the supervisory framework. The Board Defendants also refused to promptly form a special committee to lead the sales process, as required by Minnesota law. The Board Defendants eventually formed a pro forma Special Committee to rubberstamp the deal 12 days before Defendants announced the Buyout. But even after the belated formation of the Special Committee, the Board Defendants still allowed Akradi to privately negotiate self-interested deal terms with bidders. To make matters worse, the Board Defendants 21
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allowed Wells Fargo and Guggenheim to advise both the Special Committee and Akradi. The Board Defendants then consciously turned their backs on LTM’s known value hidden in the Company’s real estate assets, which the Illustrative Analyses suggested could send the Company’s stock price over $80 per share. They then approved an undervalued sale of LTM that stripped the Company’s former public shareholders of their long-term equity investments in LTM for just $72.10 per share. Despite the apparent breach in confidentiality of the purportedly blind bid packages suggested by the Buyout Group’s ten-cent topping bid, the Board Defendants inexplicably truncated the bidding process and locked up the deal in favor of the Buyout Group with preclusive deal protection devices that inhibited the maximization of shareholder value. At the February 17, 2016 hearing on Defendants’ motions to dismiss the AC, counsel for the Board Defendants conceded that they never conducted an appraisal of LTM’s real estate assets until after the Proxy was filed and, thus, had no idea of the true market value of LTM’s real estate. These facts suggest a conscious disregard by the Board Defendants of their fiduciary duties of loyalty and good faith. The Central District of California’s decision in Brown, is analogous. There, the CEO of Intermix (former parent of Myspace) was motivated to pursue a sale of the company to a buyer that offered him continued
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employment in the surviving company. 2010 WL 2472182, at *11. Like here, the Intermix board of directors argued that they took all necessary steps to fulfill their fiduciary duties in connection with a sale of the company. Those steps included: Meeting repeatedly throughout the sales process, authorizing ongoing discussions with competing bidders, and consulting legal and financial advisers; Successfully negotiating an increase in the merger consideration offered by the CEO’s preferred bidder; Rejecting requests for exclusivity and for a variety of deal protection provisions as “too strong a deterrent to other potential bidders”; Reaching out to a competing bidder to inquire whether it planned submitted an offer; Relying on financial advisor’s fairness opinion regarding the fairness of the merger consideration; and
Voting to approve the proposed merger.
Id. at *12. The trial court in Brown denied the defendants’ summary judgment motion, holding that “[t]here is nothing in the case law to warrant granting judgment as a matter of law for Defendants, simply because they engaged in some bargaining.” Id. at *10. The court reasoned that, like here, there was evidence that “the board as a whole never conducted any independent analysis to determine what an appropriate price per share would be.” Id. at *14. The court ultimately held that there was a question of fact
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as to whether the board “placed the entire process in the hands of [the CEO] . . . thereby materially contribut[ing] to the allegedly unprincipled conduct of those upon whom it looked with a blind eye.” Id. at *13 The court reasoned that “a reasonable fact-finder could conclude that the other board members acted in bad faith by making decisions with knowledge that they lacked material information.” Id. at *14. Like in Brown, the pleadings in this case present a question of fact as to whether the Board Defendants consciously disregarded their fiduciary duties of loyalty and good faith by abdicating the process to Akradi, turning their backs on LTM’s real estate value, and approving a sale of LTM without having conducted an appraisal of the Company’s real estate assets or any independent evaluation of that value. Therefore, the Board Defendants’ Motion should be denied. The Board Defendants offer three arguments in their defense, none of which have merit. First, they argue that they had no incentive to disregard their fiduciary duties because their interests were aligned with the interests of LTM’s public shareholders. To support this argument, the Board Defendants cite cases for the proposition that accelerated vesting of stock options does not create a conflict of interest.7 Their reliance on those decisions is misplaced because the cash payments that the Board Defendants received included cash from the accelerated vesting of performance-based restricted stocks. 7
See Board Br. at 10-11. 24
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Unlike time-based stock options, which automatically vest on predetermined dates, performance-based restricted stock is contingent on the satisfaction of certain performance benchmarks. Absent the Buyout, there was no guarantee that the Board Defendants would receive the full value of their restricted stock. By approving the Buyout, rather than pursuing a REIT Conversion, the Board Defendants guaranteed themselves an immediate cash payment of over $300,000 each. Therefore, the shortterm interests of the Board Defendants in a sale of LTM directly conflicted with the long-term interests of LTM’s public shareholders. Second, the Board Defendants argue that the lockup provisions they granted to the Buyout Group have been upheld in other cases.8 But that does not mean that they are proper in this case where the Board Defendants used them to hinder the maximization of shareholder value. To be sure, in In re Toys “R” Us, Inc., S’holder Litig., the Delaware Chancery Court explained that a company’s board may offer deal protections to bidders only if the “decision to do so was reasonably directed to the objective of getting the highest price, and not by a selfish or idiosyncratic desire . . . to tilt the playing field towards a particular bidder for reasons unrelated to the stockholders’ ability to get top dollar.” 877 A.2d 975, 1000-01 (Del. Ch. 2005). Accepting Plaintiffs’ allegations as true, the Board Defendants’ decision to lock up the
8
See Board Br. at 15 n.6. 25
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deal in favor of the Buyout Group was “unrelated to the stockholders’ ability to get top dollar” and, therefore, improper. Third, and finally, Defendants argue that there was nothing improper about Akradi leading a sales process.9 While it may be true that “in certain circumstances it is appropriate for a board to enlist the efforts of management in negotiating a sale of control[,]” Wayne Cty. Emps.’ Ret. Sys. v. Corti, C.A. No. 3534-CC, 2009 WL 2219260, at *13 (Del. Ch. July 24, 2009), that is obviously not the case where, as here, the member of management has a conflict of interest and is motivated to work for his own self-interest. See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1173 (Del. 1995) (“The independence of the bargaining parties is a well-recognized touchstone of fair dealing.”). Moreover, the fact that the Board Defendants adopted a supervisory framework for Akradi’s negotiations belies their assertion that it was somehow appropriate for him to lead the sales process. At bottom, the allegations against the Board Defendants sufficiently state claims for disloyalty and bad faith. No director in their position could have been influenced by an honest desire to serve the interests of the Company and its shareholders. The ultimate question of whether the Board Defendants consciously disregarded their fiduciary duties is a question of fact that should be resolved by a jury. Therefore, the Board Defendants’ Motion should be denied. 9
See Akradi Br. at 12 n.9; Board Br. at 13. 26
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4.
The Board Defendants knowingly violated Section 302A.673 by failing to promptly form a special committee to consider the multiple definitive acquisition proposals that they received
Section 302A.673, subd. 1(d)(1) provides that “[w]hen a business combination or acquisition of shares is proposed pursuant to this subdivision, the board shall promptly form a committee composed solely of one or more disinterested directors.” The Board received an unsolicited acquisition proposals from Party A on July 30, 2014 and September 5, 2014. Then, at the Board’s request, Party A, Party B, and LGP each submitted a definitive acquisition proposal for the “first-round” of the process on January 16, 2015. The Board discussed forming a Special Committee at this point, but inexplicably waited for almost two months until March 3, 2015 to do so, during which time Akradi continued to control the sales process. The Board Defendants’ delay was far from “prompt,” and their deliberate refusal to form a special committee until 12 days before they rubberstamped the merger agreement constitutes a knowing violation of Section 302A.673. The Board Defendants unpersuasively attempt to defend their knowing violation of Section 302A.673 by characterizing Party A’s first two proposals as “unsolicited” and the three definitive proposals submitted in the first round of the process (in response to Defendants’ request) as “indications of interest.” Board Br. at 16. The Board Defendants’ self-serving characterizations cannot win on the pleadings. First, Section 302A.673, by its plain language, does not exclude “unsolicited” 27
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proposals. Therefore, the Board should have promptly formed a special committee after it received Party A’s first proposal on July 30, 2014. Second, the three acquisition proposals submitted on January 16, 2015 were definitive proposals, regardless of what Defendants choose to call them. They included “each bidder’s proposed purchase price, financing, required approvals, closing conditions, required due diligence and other material information.” Proxy at 38. Moreover, the bid that Party A submitted was its third acquisition proposal. Third, Section 302A.673 requires the formation of a special committee “to take action on the proposal.” The three definitive proposals submitted in January were specifically requested by the Board as part of the first-round process. By that time, the Board had adopted a poison pill, retained two financial advisers, and entered into confidentiality agreements with certain bidders. In short, the Board was already taking action on the definitive proposals. The only thing that it failed to do was form a special committee. While the Board consciously disregarded its duty under the statute, the highly conflicted Akradi controlled the sales process behind the scenes. That is precisely what the statute was intended to avoid when it required the prompt formation of a special committee upon receipt of a definitive proposal; not after the first round of bidding between cherry-picked buyers that have pre-existing relationships with a target company’s CEO.
28
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At best, the Board Defendants have created a factual dispute that should be decided by a jury. Therefore, their Motion should be denied. 5.
This Court has already rejected Defendants’ argument that fiduciary duty claims are subject to heightened pleading standards
This Court has already rejected Defendants’ argument that the Sifferle decision10 requires breach of fiduciary duty claims to be pled with particularity. See Dkt. No. 145 at 24 (the “Order”) (rejecting “[t]he Life Time Defendants[’] argu[ment] that the breach of fiduciary duty must be pled with particularity and rise to the level of fraud”). Undeterred, Defendants now attempt a second bite at the apple and advance the same exact argument. As detailed throughout this memorandum, Plaintiffs’ allegations set forth the “who, what, when, where, and how” of Defendants’ disloyalty and bad faith. Tuttle v. Lorillard Tobacco Co., 118 F. Supp. 2d 954, 963 (D. Minn. 2000). Therefore, Plaintiffs’ allegations would easily satisfy Rule 9(b) – if it applied. As this Court held, however, the term fraud, as used in Sifferle, does not mean common-law fraud. Order at 24. “[A] sufficiently pleaded breach of fiduciary duty claim would fall within the fraudulent exception[.]” Id. This Court’s holding is consistent with Minnesota law, which “treats the breach of a fiduciary duty as a constructive fraud, regardless of the actor’s intent or motive.” Rejsa v. Beeman, No. C7-97-182, 1997 WL 526320, at *4 (Minn. Ct. App. Aug. 26, 1997); Perl v. St. Paul 10
Sifferle v. Micom Corp., 384 N.W. 503 (Minn. Ct. App. 1986). 29
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Fire & Marine Ins. Co., 345 N.W.2d 209, 213 (Minn. 1984) (“Constructive fraud is, by definition, not actual fraud but conduct that the law treats as fraud, irrespective of the actor’s intent or motive. Constructive fraud reposes exclusively in the context of fiduciary obligations and is simply a characterization of a breach of such a duty.”); Yary v. Voigt, No. CIV. 11-694 JNE/FLN, 2011 WL 6781003, at *9 (D. Minn. Dec. 27, 2011) (same). No published Minnesota decision has applied a heightened pleading standard to fiduciary duty claims. That includes the Broin decision that the Board Defendant’s cite,11 which only repeated the “specificity” language from Sifferle. Further, in Westgor v. Grimm, the Minnesota Supreme Court dismissed a fraud claim because it was not stated with particularity, but the court allowed a related fiduciary duty claim – based on the same alleged conduct – to proceed. 318 N.W.2d 56 (Minn. 1982). Westgor clearly shows that fiduciary duty claims are not subject to heightened pleading standards in Minnesota. Defendants’ argument has no legal basis, is inconsistent with Minnesota Supreme Court precedent, and should be rejected for the second time.
11
See Board Br. at 23-24 (citing Broin v. Nat’l Computer Sys., Inc. No. C9-91-235, 1991 WL 204460, at *3 (Minn. Ct. App. Oct. 15, 1991)). 30
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B.
Defendants’ breaches of fiduciary duty cannot be ratified under Minnesota law or Delaware law
Defendants, relying on Delaware law, argue that the LTM shareholder vote on the Buyout ratified their breaches of loyalty and good faith in connection with the Buyout.12 This argument fails because Minnesota has not adopted Delaware’s developing common-law shareholder ratification doctrine, and the Court should reject Defendants’ request to import Delaware law. But even if Delaware law did apply, Defendants cannot carry their burden on this record to show that the LTM shareholder vote was fully informed. 1.
There is no statutory ratification for breaches of fiduciary duty
Defendants rely on Minn. Stat. §302A.255 and argue that, under that statute, the Board’s approval of the merger agreement and the LTM shareholder vote on the Buyout ratified Defendants’ breaches of fiduciary duties.13 Defendants are wrong. Minn. Stat. §302A.255 provides that: A contract or other transaction between a corporation and one or more of its directors, or between a corporation and an organization in or of which one or more of its directors are directors, officers, or legal representatives or have a material financial interest, is not void or voidable because the director or directors or the other organizations are parties or because the director or directors are present at the meeting of the shareholders or the board or a committee at which the contract or transaction is authorized, approved, or ratified, if: 12
See Akradi Br. at 4-8; Board Br. at 16-22.
13
See Akradi Br. at 7-8; Board Br. at 17. 31
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(a) The contract or transaction was, and the person asserting the validity of the contract or transaction sustains the burden of establishing that the contract or transaction was, fair and reasonable as to the corporation at the time it was authorized, approved, or ratified; (b) The material facts as to the contract or transaction and as to the director's or directors' interest are fully disclosed or known to the holders of all outstanding shares, whether or not entitled to vote, and the contract or transaction is approved in good faith by (1) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested director or directors, or (2) the unanimous affirmative vote of the holders of all outstanding shares, whether or not entitled to vote; (c) The material facts as to the contract or transaction and as to the director's or directors' interest are fully disclosed or known to the board or a committee, and the board or committee authorizes, approves, or ratifies the contract or transaction in good faith by a majority of the directors or committee members currently holding office, but the interested director or directors shall not be counted in determining the presence of a quorum and shall not vote; or (d) The contract or transaction is a distribution described in section 302A.551, subdivision 1, or a merger or exchange described in section 302A.601, subdivision 1 or 2. By its plain terms, Section 302A.255 applies only to a “contract or other transaction between a corporation and one or more of its directors, or between a corporation and an organization in or of which one or more of its directors are directors, officers, or legal representatives or have a material financial interest[.]”
32
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Indeed, the Minnesota decisions applying Section 302A.255 that Defendants cite all involved an interested director transaction.14 Section 302A.255 does not ratify breaches of fiduciary duties in connection with a change-in-control transaction where directors are not contracting directly with the corporation, such as the Buyout. Indeed, the statute specifically references merger transactions where a director may be a counterparty, but not to make such transactions subject to ratification. See Broin, 1991 WL 204460, at *2 (citing Section 302A.255 for the proposition that “contracts between two corporations having common directors or officers are not void or voidable if approved by a majority of disinterested directors”). The statute only notes that such transactions are not void or voidable simply because they occur. The statute expressly does not adopt a ratification component for blessing such transactions. Id. Thus Defendants’ reliance on Section 302A.255 for a ratification defense lacks any support. Despite Defendants’ suggestion to the contrary, not even Delaware recognizes a statutory ratification defense that Minnesota could possibly be said to be parroting. Vice Chancellor Laster of Delaware’s Chancery Court has confirmed the Delaware Supreme Court’s holding that “[8 Del. Code §]144 only addressed the statutory validity of an interested transaction[.]” Marino v. Patriot Rail Co., No. CV 1160514
See Akradi Br. at 7-8; Board Br. at 17 (citing Holdahl v. Bioergonomics, Inc., No. 27CV-10-24236 (Minn. Dist. Ct. Feb. 8, 2012) (angel investors sued to directors who made a fraudulent conveyance to a related entity in which they held an interest); Broin, 1991 WL 204460 (merger between corporations with a common director). 33
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VCL, 2016 WL 885576, at *336 (Del. Ch. Feb. 29, 2016). Vice Chancellor Laster noted the Delaware Supreme Court’s conclusion that Section 144 “did not foreclose fiduciary review.” Id. Vice Chancellor Laster ended his analysis of Section 144 by recognizing “[r]ecent Delaware cases [that] have cited [the] axiom that corporate action is always ‘twice tested.’” Id. Thus Defendants’ purported statutory ratification defense fails on all fronts. 2.
This Court should reject Defendants’ request to import Delaware’s common-law shareholder ratification doctrine
Without a statutory basis for their ratification defense, Defendants are left arguing that this Court should somehow adopt whole cloth, and without any Minnesota precedent, Delaware’s common-law shareholder ratification doctrine as recently propounded by Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) and its progeny. But Corwin is not the law in Minnesota. If Corwin did apply in Minnesota, Defendants would have surely raised a ratification argument in the related state court action when they filed a supplemental brief to inform the court that LTM’s shareholders had approved the Buyout. See Life Time Defendants’ Supplemental Memorandum in Support of Motion to Dismiss, In re Life Time Fitness, Inc. S’holder Litig., No. 10-cv-15-358 (Minn. Dist. Ct. 1st Dist. July 6, 2015), attached as Exhibit B to the Blanchfield Decl. But Defendants only raised this argument after Corwin was decided.
34
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Because “[i]t is not the role of a federal court to expand state law in ways not foreshadowed by state precedent,” Ashley Cnty., 552 F.3d at 673, this Court should reject Defendants’ request to import Corwin. 3.
Even if Delaware’s common-law shareholder ratification doctrine applied, Defendants cannot carry their burden to show that the LTM shareholder vote was fully informed
Even if Minnesota courts did adopt Delaware’s Corwin doctrine, the doctrine would not ratify Defendants’ breaches of fiduciary duty here because the LTM shareholder vote on the Buyout was not fully informed. Indeed, Corwin “applies only to fully informed, uncoerced stockholder votes, and if troubling facts regarding director behavior were not disclosed that would have been material to a voting stockholder, then the business judgment rule is not invoked.” Corwin, 125 A.3d at 312. It is well settled that “[t]he burden to prove that the vote was fair, uncoerced, and fully informed falls squarely on the board.” Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 899 (Del. Ch. 1999) (“Delaware law does not make it easy for a board of directors to obtain ratification effect from a stockholder vote.”); see also In re Volcano Corp. Stockholder Litig., 143 A.3d 727, 748 (Del. Ch. 2016) (“[A] defendant bears the burden of demonstrating that the stockholders were fully informed when relying on stockholder approval to cleanse a challenged transaction.”). If Minnesota courts adopted Delaware’s Corwin doctrine, they would also place the burden on 35
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defendants to show that a shareholder vote was fully informed. See, e.g., Anderson v. First Nat’l. Bank of Pine City, 228 N.W. 257, 259 (Minn. 1975) (“As ratification was an affirmative defense, defendant had the burden of proving all material facts necessary to establish it.”). On this record, Defendants cannot carry their burden to show that the LTM shareholder vote was fully informed. Realizing their inability to meet their burden, Defendants incorrectly argue that Plaintiffs have not pled any state law disclosure claims by asserting that ¶¶109-112 do not plead disclosure claims under state law.15 Not true. The immediately preceding ¶108 that the Board Defendants deliberately omitted from their citation expressly incorporates all proceeding paragraphs of the AC. And, contrary to Defendants’ contention,16 this Court’s ruling that Plaintiffs’ federal securities claims did not satisfy the heightened pleading standards of Section 14(a) and the PSLRA did not extinguish Plaintiffs’ state law disclosure claims for a number of reasons. First, Plaintiffs allege state law disclosure violations that go beyond the two disclosure violations challenged under their Section 14(a) claims. Plaintiff’s state law disclosure claims are more expansive and address undisclosed facts related to Defendants’ breaches of fiduciary duties, which could not have been pled under
15
See Board Br. at 22 n.8.
16
See Akradi Br. at 6-7; Board Br. at 22 n.8. 36
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Section 14(a). See Bond Opportunity Fund v. Unilab Corp., No. 99 CIV. 11074 (JSM), 2003 WL 21058251, at *8 (S.D.N.Y. May 9, 2003) (“[C]laims of failure to disclose cannot support a cause of action pursuant to § 14(a) they are actually claims of breach of fiduciary duty.”). Second, the pleading standard on state law disclosure claims is minimal when compared to the onerous pleading standards of Section 14(a) and the PSLRA. A plaintiff alleging a Section 14(a) claim must plead their claim with particularity and show that alleged omissions of material information rendered other statements actually made in the proxy false or misleading. See Int’l Broadcasting Corp. v. Turner, 734 F. Supp. 383, 390 (D. Minn. 1990). By contrast, state law disclosures are reviewed under a basic materiality standard, which asks whether there “is a substantial likelihood that a reasonable shareholder would consider [the omitted information] important in deciding how to vote[.]” In re Ebix, Inc. Stockholder Litig., C.A. No. 8526-VCN, 2014 WL 3696655, at *23 (Del. Ch. July 24, 2014). Although the standard for materiality is similar under federal law, under state law, materiality is subject only to minimal Rule 8 scrutiny. See In re Textainer P’ship Sec. Litig., No. C-05-0969, 2005 WL 3801596, at *11 (N.D. Cal. Dec. 12, 2005) (“[T]he Court finds plaintiff’s complaint must satisfy only the minimal notice pleading requirements of Rule 8(a)(2); Rule 8(a)(2) requires only that the complaint
37
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include a short and plain statement of the claim showing that the pleader is entitled to relief.”). Third, under state law, a defendant can violate the duty of disclosure without
violating Section 14(a) by simply making misleading partial disclosures. See Zinn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996) (“Once defendants travel down the road of partial disclosure, they have an obligation to provide the stockholders with an accurate, full, and fair characterization of those historic events.”). Here this Court declined to consider Defendants’ arguments to dismiss Plaintiffs’ misleading partial disclosure claims, which are not actionable under the federal securities laws.17 The Board Defendants’ citation to Gottlieb v. Willis for the notion to the contrary should be rejected.18 In Gottlieb, on the question of whether the plaintiff showed a likelihood of success on the merits of a disclosure claim, Judge Schiltz speculated in dicta as to whether Minnesota courts would adopt Delaware’s expansive disclosure requirements and opined that it was doubtful. But the Court should not adopt that dicta here, where Defendants are expressly relying on Delaware’s common-law ratification doctrine in an effort to extinguish plaintiffs’ claims. Thus they should not be permitted to talk out
17
See Order at 21 n.7.
18
See Board Br. at 22 n.8 (quoting Gottlieb v. Willis, No. 12-CV-2637, 2012 WL 5439274, at *3 (D. Minn. Nov. 7, 2012)). 38
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of both sides of their mouth and ask the Court to pick and choose the elements of Delaware law that they like but disregard the ones they do not.19 This case is not like the Larkin v. Shah decision that Defendants cite.20 Unlike the plaintiffs in Larkin, Plaintiffs here have not withdrawn their state law disclosure claims. And this Court expressly declined to consider Defendants’ arguments to dismiss Plaintiffs’ state law disclosure claims, which Defendants raised for the first time in their reply brief.21 At bottom, on this record, Defendants cannot carry their burden to show that the LTM shareholders who approved the Buyout were fully informed about the following material facts:
That Defendants adopted LTM’s poison pill in order to ward off takeover attempts so that Akradi could work to usurp LTM’s real estate value for himself, ¶39;
Whether Akradi, indeed, had a pre-existing relationship with LGP and the nature of that relationship, ¶¶40, 50, 79;
19
See, e.g., the Board Defendants’ Motion to Dismiss the AC, Dkt. No. 117 at 26-32 (distinguishing Delaware law and taking the incorrect position that, under Minnesota law, Plaintiffs’ claims are derivative and appraisal is the exclusive remedy); Akradi’s Motion to Dismiss the AC, Dkt. No. 104 at 1 (joining the Board Defendants’ motion); the Board Defendants’ Reply Brief in support of their Motion to Dismiss the AC, Dkt. No. 130, at 8 (attempting to distinguish Delaware law). 20
See Akradi Br. at 6-7; Board Br. at 22 (citing Larkin v. Shah, No. CV 10918-VCS, 2016 WL 4485447, at *20 (Del. Ch. Aug. 25, 2016). 21
See Order at 21 n.7. 39
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The fact that Akradi continued to meet privately with bidders without respecting the supervisory framework that the Board adopted, ¶¶39-40, 43-44, 46-48;
The substance of the private discussions between Akradi and interested bidders, including whether Akradi subordinated the interests of LTM’s public shareholders to his own during those discussions, ¶¶44-45;
The “open issues” that Party A had with respect to Akradi’s proposed deal terms, ¶44;
The terms of Akradi’s Rollover agreement and the amount of value and equity that he received through the Buyout, ¶60;
The market value of LTM’s real estate assets, ¶¶75, 108;
The fact that Defendants did not pursue a REIT Conversion so that Akradi could usurp the value of LTM’s real estate for himself, ¶¶6, 39;
The nature of the discussions between Akradi and Marcato, ¶37;
The fact that the Board never conducted an appraisal of LTM’s real estate and, therefore, consciously sold LTM without having any knowledge of it true value, ¶75, Blanchfield Decl., Exhibit A at 8:24-9:1;
That the Board allowed Wells Fargo and Guggenheim to represent both the Special Committee and Akradi, ¶112;
That Minnesota law arguably required the Board to promptly form a Special Committee despite the Board’s conclusion on January 21, 2015 that a special committee was “not necessary,” ¶43;
Whether the confidentiality of the purportedly blind bidding packages was compromised in order to give the Buyout Group an unfair advantage, ¶51; and
40
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That the deal protection provisions granted to the Buyout Group were not designed to maximize shareholder value, ¶53.
The partial and misleading disclosures regarding these material facts made it so that the Company’s public shareholders could not fully “appreciate the factual bases of the gravamen of Plaintiffs’ breach of fiduciary duty claim[.]” In re Om Grp., Inc. Stockholders Litig., No. CV 11216-VCS, 2016 WL 5929951, at *11 n.58 (Del. Ch. Oct. 12, 2016). Full disclosure of these facts would change the total mix of information available to LTM’s former shareholders who would have considered this information important in deciding whether to approve the Buyout. Therefore, these facts are material, and the former LTM shareholders who approved the Buyout were not fully informed about Defendants’ disloyal, bad faith, and unlawful breaches of fiduciary duty. On this record, Defendants cannot meet their burden to show otherwise. Thus, even if Minnesota adopted Delaware’s Corwin doctrine, the doctrine would not ratify Defendants’ disloyal and bad faith breaches of fiduciary duties as alleged in the AC. Therefore, the Court should deny Defendants’ Motions. V.
CONCLUSION Plaintiffs respectfully request that Defendants’ Motions be denied in full.
November 21, 2016
Respectfully submitted, s/Garrett D. Blanchfield Jr. Garrett D. Blanchfield Jr. (#209855) Brant D. Penney (#316878) 41
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REINHARDT WENDORF & BLANCHFIELD E-1250 First National Bank Building 332 Minnesota Street St. Paul, MN 55101 Telephone: (651) 287-2100 Fax: (651) 287-2103
[email protected] [email protected] Kai Richter (#0296545) Carl Engstrom (#0396298) NICHOLS KASTER LLP 4600 IDS Center 80 South Eight Street Minneapolis, MN 55402 Telephone: (612) 256-3200 Fax: (612) 338-4878
[email protected] [email protected] Plaintiffs’ Co-Liaison Counsel Stuart A. Davidson (pro hac vice) Christopher Martins ROBBINS GELLER RUDMAN & DOWD LLP 120 East Palmetto Park Rd., Suite 500 Boca Raton, FL 33432 Telephone: (561) 750-3000 Fax: (561) 750-3364
[email protected] [email protected] David T. Wissbroecker (pro hac vice) ROBBINS GELLER RUDMAN & DOWD LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: (619) 231-1058 42
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Fax: (619) 231-7423
[email protected] Jason M. Leviton (pro hac vice) Jacob A. Walker (pro hac vice) BLOCK & LEVITON LLP 155 Federal Street, Suite 400 Boston, MA 02110 Telephone: (617) 398-5600 Fax: (617) 507-6020
[email protected] [email protected] Plaintiffs’ Co-Lead Counsel James M. Ficaro (pro hac vice) THE WEISER LAW FIRM, P.C. 22 Cassatt Avenue, First Floor Berwyn, PA 19312 Telephone: (610) 225-0206
[email protected] Additional Counsel for Plaintiffs
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