In Re Wachovia S’holders Litig., 2003 NCBC 10
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STATE OF NORTH CAROLINA
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IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION |
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FORSYTH COUNTY |
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In Re Wachovia Shareholders Litigation 01 CVS 4486 [Consolidated with 01 CVS 4810; 01 CVS 4748; 01 CVS 4868; 01 CVS 5163; 01 CVS 6893;
01 CVS 10641; 01 CVS 10075] |
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COUNTY OF GUILFORD |
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HARBOR FINANCE PARTNERS, derivatively on behalf of
Wachovia Corporation, Plaintiff, v. JAMES S. BALLOUN, PETER C. BROWNING, W. HAYNE HIPP, LLOYD U. NOLAND, III, DONA
DAVIS YOUNG, LESLIE M. BAKER, JR., THOMAS K. HEARN, JR., ELIZABETH VALK LONG, MORRIS W. OFFIT, JOHN C.
WHITAKER, JR., F. DUANE ACKERMAN, JOHN T. CASTEEN, III, GEORGE W. HENDERSON, III,
ROBERT A. INGRAM, GEORGE R. LEWIS and FIRST UNION
CORPORATION, Defendants,
and WACHOVIA CORPORATION, Nominal
Defendant. |
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01 CVS 8036 |
ORDER AND OPINION
{1} These two
related cases, a class action (In Re Wachovia Shareholders Litigation)
and a derivative suit (Harbor Finance Partners, derivatively on behalf of
Wachovia Corporation v. James S. Balloun et al.), arise out of litigation
commenced when First Union Corporation (“First Union”) and Wachovia Corporation
(“Wachovia”) announced a proposed merger. The consolidated class action cases
have been dismissed on a Consent Motion To Dismiss All Consolidated Actions As
Moot. The shareholder plaintiffs in that action have filed a Motion For An
Order Granting Their Application For Counsel Fees and Expenses.
{2} Defendants
have moved to dismiss the Harbor Finance action for failure to comply with
N.C.G.S. § 55-7-42. Counsel for Harbor
Finance requested that the case not be dismissed without giving them the
opportunity to apply for attorney fees and expenses. With the Court’s
permission, they filed a fee petition after the hearing on Wachovia’s motion to
dismiss.
{3} The pending
motions, together with the motion for attorney fees in the In Re Quintiles
Transnational Shareholder Litigation decided today, raise fundamental
questions of corporate governance and require the Court to consider how best to
balance the conflicting needs to protect shareholder interests and maintain
rational transaction costs in mergers and acquisition litigation. The Court concludes that the fairest, most
efficient and economical procedure is close judicial management of the class
action process coupled with a recognition that attorney fees may be paid in
connection with those cases. However,
the Court recognizes that there is legitimate contention that its decision to
award attorney fees where there is no common fund may represent a departure
from existing common law rules.
Accordingly, the Court urges the North Carolina Supreme Court to grant
discretionary review to determine the important questions of law presented by
these motions if presented with a petition.
The Court also believes that its determination of the standard for
determination of attorney fees is a subject ripe for review by the appellate
courts. The two determinations are
interdependent to the extent that the criteria for awarding attorney fees
impacts the transaction costs the trial court considers in determining the best
method of protecting shareholder rights in merger and acquisition cases. The
Court dismisses the Harbor Finance case both for failure to comply with the
statutory procedure and for failure to prosecute what are now moot claims. This
Court declines to award any attorney fees or expenses to counsel for Harbor
Finance in the derivative action for the separate reasons set forth below.
Wilson & Iseman, L.L.P., by G. Gray Wilson (Co-Lead Counsel) and Linda L. Helms; Abbey Gardy, LLP, by Arthur N. Abbey, Stephen T. Rodd (Co-Lead Counsel) and Stephanie D. Amin; McDaniel, Anderson & Stephenson, LLP by L. Bruce McDaniel; Cauley Geller Bowman & Coates, LLP, by Howard K. Coates, Jr. and Jonathan M. Stein; Schriffrin & Barroway, LLP by Marc A. Topaz and Gregory Castaldo; Chitwood & Harley by Martin D. Chitwood, Jeffrey H. Kronis and M. Krissi Temple; Kantrowitz, Goldhamer & Graifman, P.C.; Malcolm & Schroeder, L.L.P. by John G. Malcolm and Robert F. Schroeder; Finkelstein, Thompson & Loughran by Burton Finkelstein and Jessica F. Whitehurst; The Finnell Firm by Robert Finnell; Clark, Bloss & McIver, P.L.L.C., by John F. Bloss; Kirby McInerney & Squire, L.L.P., by Ira M. Press; Bernstein, Liebhard & Lifshitz, LLP: for Wachovia shareholder plaintiffs.
Donaldson & Black, P.A. by Arthur J. Donaldson and John T. O’Neal; The Brualdi Law Firm by Richard B. Brualdi and Kevin O’Brien: for Plaintiff Harbor Finance Partners.
Robinson, Bradshaw & Hinson, P.A. by Robert W. Fuller and Katherine G. Maynard; Deputy General Counsel Francis Charles Clark: for Defendant First Union Corporation, n/k/a Wachovia Corporation.
Bell, Davis & Pitt, P.A. by William K. Davis; Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P. by James T. Williams, Jr.: for
Defendants Wachovia Corporation, Leslie M. Baker, Jr., James S. Balloun, Peter
C. Browning, W. Hayne Hipp, Lloyd U. Noland, Dona Davis Young, Thomas K. Hearn,
Jr., Elizabeth Valk Long, John C. Whitaker, Jr., F. Duane Ackerman, John T.
Casteen III, George W. Henderson, III, Robert A. Ingram and George R. Lewis.
Kilpatrick Stockton, L.L.P. by J. Robert Elster and Richard S. Gottlieb for Defendant Morris W. Offit.
I.
{4} These
motions raise the question of how the North Carolina courts will control the
agency costs, including litigation expenses, associated with the merger or sale
of the modern American corporation which has a large and dispersed shareholder
base. The control of those agency costs has been the focus of much study by
corporate law scholars for many years, most recently in a comprehensive work
paper prepared by Robert B. Thompson and Randall S. Thomas for the Columbia
Center for Law and Economics.[1] They postulate the question this way:
The key policy question is how to properly balance the
positive management agency cost reducing effects of shareholder litigation
against the often-maligned litigation agency costs. Some tradeoffs between the
two are inevitable, but where the proper balance should be struck is important
if litigation is to be a significant force in bringing about good corporate
governance.[2]
{5} These cases
present a unique opportunity for our courts to address that balance. They arise
at a time when the importance of sound corporate governance to the health of
our capital markets is a matter of national concern.[3] The juxtaposition of the class action, the
derivative action and a suit by a competing bidder in the setting of one merger
transaction, combined with the attorney fees sought by counsel for both class
and derivative plaintiffs, sharply focuses the Court’s attention on the
competing interests and costs. Nowhere is the cost balancing more difficult
than in a merger transaction challenged by a third party bidder for the company
to be acquired. In those situations, as here, the third party bidder (here,
SunTrust) usually mans the laboring oar in the litigation. In those cases, as here, the goal is not to
create a common fund or pool for recovery but to obtain the best offer in an
open market for shareholders who are not coerced to sell. While no fund is
created, maximization of shareholder value is the goal. The typical case, as
here, involves a challenge to deal protection devices that the plaintiffs,
including the third party bidder, claim prevent a fair vote on the merger
proposal or unfairly restrict competitive bidding. The deal protection devices
become more important in a “merger of equals” because the premium to be paid
for the acquired company is low. Such deals can frequently attract third-party
bidders. They also attract shareholder litigation. Where a subsequent bidder prevails, it is often difficult, if not
impossible, to determine how much of the increased offering price was
attributable to the litigation as opposed to increased value generated by the
market. [4]
{6} If we start
from the premise that shareholders have three basic rights—to vote, sell and
sue for breach of fiduciary duty [5]—
the right to sue becomes more important if the shareholders’ abilities to vote
or sell are at risk. Accordingly, the court should be careful in adopting rules
or procedures that unduly restrict the tools available to shareholders to
protect their fundamental rights to sell and vote their shares. Deal protection
devices inherently involve one of those rights. Concomitantly, the trial courts must control the litigation costs
associated with providing that protection and assure that the interests of the
lawyers and their clients (shareholders) are properly aligned.
{7} These
issues fit within the following factual and procedural context.
{8} On April 15, 2001, First Union and
Wachovia announced their planned merger.
Almost immediately, plaintiffs' counsel began filing lawsuits, starting
with the Bennett and Leser suits on May 1.
Five more suits followed, each featuring allegations substantially
identical to those in the first two:
Plaintiff Plaintiff's
Counsel Date
Filed
Bennett Law Firm of
Harvey Greenfield May 1,
2001
01
CVS 4486 Wilson
& Iseman
Kantrowitz,
Goldhamer & Graifman
Leser Clark, Bloss
& McIver May
1, 2001
01
CVS 5163 Kirby,
McInerney & Squire
Heaney McDaniel,
Anderson & Stephenson May 14,
2001
01
CVS 4748 Schriffrin
& Barroway
Wachsman Brown & Assoc. May 17,
2001
01
CVS 4810 Bernstein,
Liebhard & Lifshitz
Drucker Ferguson,
Stein, Wallas, Adkins, May
29, 2001
01
CVS 10641 Gresham & Sumpter
Morris
& Morris
Rosenburg McDaniel, Anderson
& Stephenson June 1, 2001
01
CVS 4868 Cauley,
Geller, Bowman & Coates
Hrobar Abbey Gardy June
6, 2001
01
CVS 0006893 Chitwood &
Harley
McDaniel,
Anderson & Stephenson
Seven separate complaints (the “Shareholder Suits”)were filed by 17 different law firms for eight named plaintiffs; twelve firms, representing seven of the named plaintiffs, joined in the fee petition at issue here.
{9} On July 6,
2001, this Court entered an order consolidating the above individual actions
into one action, In re Wachovia Shareholder Litigation, 01 CVS 4486.
{10}
First Union filed suit
against SunTrust in Mecklenburg County Superior Court on May 22, 2001 (01 CVS
10075). The action was filed shortly
after Wachovia’s board started its meeting to consider SunTrust’s proposal to
merge with Wachovia. The next morning,
First Union filed an amended complaint, and Wachovia joined the action as a
co-plaintiff. Less than an hour later,
SunTrust sued both Wachovia and First Union in the Superior Court of Fulton
County, Georgia. SunTrust immediately
moved to consolidate its Georgia action with a previously filed shareholder
suit in Georgia and asked for a hearing in Georgia (01 CV 38062). Anticipating a classic "forum
fight," on May 24, 2001, First Union and Wachovia obtained a temporary
restraining order (“TRO”) prohibiting SunTrust from moving forward with its
second-filed action in Georgia.
SunTrust subsequently removed the Mecklenburg County action to the
United States District Court.
{11}
Judge Lacy Thornburg
granted First Union and Wachovia’s emergency motion to remand on May 30; the
Superior Court set a hearing on the motion for preliminary injunction for June
1, 2001. At this point, SunTrust
conceded in the forum fight and agreed during the night of May 31/June 1 to
have this Court hear the First Union/Wachovia/SunTrust case (hereinafter the
"SunTrust Case"). A few
shareholder suits filed in Georgia were voluntarily dismissed by the
plaintiffs. None of the counsel seeking
fees here had a role in the forum dispute.
{12}
On June 14, 2001, Harbor
Finance[6]
joined the fray by filing a derivative action pursuant to North Carolina Gen.
Stat. § 55-7-40 et seq. The
Harbor Finance action (01 CVS 8036) was assigned to the Business Court on July
9, 2001. For efficiency’s sake, the
Court ordered Harbor Finance’s attorney to cooperate with SunTrust and the
Shareholder plaintiffs in conducting discovery.
{13}
After a conference with
counsel, this Court set a schedule for the SunTrust Case. The Shareholder Suits and Harbor Finance
essentially “tagged along” as a consolidated action. The Court appointed Wilson & Iseman and Abbey Gardy as
co-lead counsel for the Shareholder Suits and ordered that a consolidated
amended complaint be filed by these counsel.
Counsel filed the consolidated amended complaint on July 5, 2001 two
business days before the conclusion of all discovery.
{14}
During June and the
first three weeks of July, the SunTrust Case proceeded at an extremely
expedited pace on the following schedule:
(a)
On June 18, this Court
heard the motions to dismiss SunTrust’s counterclaims filed by Wachovia and
First Union and ordered that the Main Case proceed (other than dismissing a
Georgia antitrust claim). Wachovia and First
Union filed 43 pages of briefs supporting these motions. SunTrust filed 26 pages of briefs opposing
the motions. Counsel in the Shareholder
Suits filed nothing, not yet having filed their consolidated amended complaint.
(b)
After expedited document
production from Friday, June 29, through Monday, July 9, counsel in the
SunTrust Case took 16 depositions.
SunTrust, Wachovia, and First Union decided who would be deposed. Counsel in the Shareholder Suits attended 15
of these depositions. Except for the
deposition of Eric Heaton in New York, where Shareholders’ counsel asked
questions for approximately one hour, the questions of Shareholders’ counsel
appear on only 23 transcript pages, in total, for all 15 depositions they
attended.[7] The derivative plaintiff, Harbor Finance,
attended three depositions. It offered
the following information regarding its participation: “Due to timing limits on the depositions
imposed by the Court, Harbor’s participation in depositions generally consisted
of attending depositions and suggesting questions to counsel for SunTrust,
which that counsel almost always asked.”
(c)
On Friday, July 13, and
Monday, July 16, counsel for SunTrust, Wachovia, and First Union filed
extensive briefs (totaling 233 pages) in support of and opposing motions for
preliminary injunction and summary judgment.
Counsel for the Shareholders filed a single four-page brief that joined
in the initial SunTrust brief.
{15}
SunTrust did not appeal
this Court’s order, and counsel for the Shareholders did not pursue an appeal
independently. At the time it
considered SunTrust’s motion for preliminary injunction (and the tagalong
motions of Harbor Finance and the Shareholder Plaintiffs), the Court reserved
the issue of whether Harbor Finance could properly maintain a derivative action
on behalf of Wachovia. See
Plaintiff’s Preliminary Injunction Br. at note 3. In October 2001 defendants answered the Amended Complaint and
moved to dismiss plaintiff’s claims on multiple grounds.
{16}
On July 20, this Court
issued its opinion, holding that the challenged cross-options were valid but
determining that the termination provisions of the merger agreement tied the
hands of Wachovia’s board in an impermissible manner. The Court denied all of SunTrust’s motions (and the tagalong
motions of the Shareholders’ counsel), holding that, with the opinion in hand,
Wachovia shareholders could vote on the merger in an informed manner, thus
obviating any need for affirmative relief.
Wachovia and First Union promptly and voluntarily amended the
termination provisions in the merger agreement in a manner that conformed to
the Court’s opinion. First Union’s
shareholders approved the merger on July 31, and Wachovia’s shareholders
approved the merger on August 3. The
merger was consummated on September 1.
{17}
Except for the voluntary
dismissal of the SunTrust Case, there was no litigation activity at all for
over a year after the Court issued its opinion. On September 13, 2002, the Court signed a Consent Order tendered
by the parties dismissing all the Shareholders’ cases with prejudice and
granting the Shareholders’ counsel 30 days after entry thereof in which to file
a fee petition (with Wachovia reserving its rights, in full, to argue that no
fees should be awarded).
{18}
During the April 9, 2003
oral arguments on the Shareholder Plaintiffs’ motion for fees and costs and the
motion to dismiss Harbor Finance’s derivative claims, this Court requested that
Harbor Finance submit a detailed affidavit regarding its costs and fees. The Court also asked the Shareholder
Plaintiffs to submit more detailed time records in support of their motion for
fees and costs. In the interests of
efficiency and in order to present a fuller record for appellate review, the
Court is entering one order that will contrast the class action and derivative
action and the costs and fees associated with those actions.
II.
{19}
The Court turns first to
the questions raised in the derivative action.
{20}
The North Carolina
statutory procedure is set forth in section 55-7-42 of the North Carolina
General Statutes as follows:
No shareholder may commence a derivative proceeding
until:
1)
A written demand has
been made upon the corporation to take suitable action; and
2)
90 days have expired
from the date the demand was made unless, prior to the expiration of the 90
days, the shareholder was notified that the corporation rejected the demand, or
unless irreparable injury to the corporation would result by waiting for the
expiration of the 90-day period.
N.C.G.S. § 55-7-42 (1995).
A.
{21}
This case and other
cases challenging deal protection devices demonstrate the difficulties of the
derivative action as a means to protect shareholder rights in the fast- paced
deal environment under North Carolina law. [8]
Companies desiring to consummate a merger will generally move as swiftly as
possible to complete the transaction. There are sound business reasons for the
rapidity with which companies act. The financial markets, commercial markets
and employees all look for certainty. Once a deal is announced, many things can
intervene between announcement and closing which could derail the transaction.
The clearest threat is the intervention of another bidder. However, there are
limitless other possibilities: natural disaster, financial market changes,
strikes and government intervention, just to name a few. Each side naturally
wants the transaction to move promptly to closing.
{22}
Our derivative statute
does not adequately or specifically address the time pressure created in the
merger of publicly traded companies. It is designed to substitute for
litigation by and on behalf of the corporation when management or directors are
conflicted or refuse to act in the best interest of the corporation. The
derivative claim belongs to the corporation, and any recovery belongs to the
corporation. The shareholders may not recover individually in a derivative
action.
{23}
The ninety-day waiting
period embodied in the statute does not provide a realistic time frame within
which to deal with challenges to proposed mergers. The speed with which
transactions are completed requires that the ninety-day period be shortened.
However, the mechanism for shortening the ninety-day waiting period is unclear.
It is the failure of Plaintiff Harbor Finance to take action to shorten that
response period which defendants rely upon for dismissal of this action.[9] The ninety-day waiting period is generally
designed to give the board of directors sufficient time to consider and act
upon any request for action. It is normally a rational period, since the board
must make some factual inquiry in connection with the action it is being asked
to take, and boards do not meet frequently.
The board may take corrective action on its own, thus avoiding the cost
of litigation. It may select a committee of independent directors to decide if
it is in the best interest of the corporation to pursue the action demanded, or
it may ask the court to appoint an advisory committee to act on behalf of
conflicted directors.[10] The purpose is twofold: first, to give the
corporation the option to pursue its own claims, and second, to hold down
litigation costs.
{24}
In the context of a
proposed merger containing deal protection devices, the derivative statute does
not work particularly well. In the first instance, the ninety-day waiting
period is too long. Allowing the board
a full ninety days to consider the demand in connection with a pending merger
is unrealistic and does not provide the certainty required in the acquisition
environment. On the other hand, simply waiving the ninety-day period without
providing an opportunity for the company to act defeats the purpose of the
statute. The demand requirement has benefits in the merger context.[11]
{25}
For those reasons, this
Court has interpreted the statute to require that an adequate demand be made
and that the plaintiff move to shorten the response time based upon a showing
of irreparable injury as required by the statute.[12]
{26}
In the acquisition
environment, the board, in all probability, has considered the deal protection
devices incorporated in the merger agreement at some length and, after
consultation with counsel and investment bankers, has determined that to
include those protections in the merger agreement would be in the best interest
of the corporation. It would not be logical to reassign that responsibility to
a court-appointed advisory committee.
Deal protection devices are carefully negotiated components of an
overall business agreement.[13] The advisory committee could not
unilaterally take action without renegotiating the deal. Deals would never get done.
{27}
While the derivative
claim technically fits in the merger situation, it misses the mark to a certain
extent by couching the claim as one that the corporation has against its
directors. Shareholder rights and interests are central considerations at stake
in this type of litigation. It is more
logical to litigate the claims in the context of shareholder rights than in the
context of a corporate claim for breach of fiduciary duty. In most cases, the
relief sought is injunctive relief designed to alter or eliminate a deal
protection device that allegedly unfairly impacts the shareholder voting
process.
{28}
The derivative action
also does not afford the trial court the degree of supervision it might
exercise in the class action setting. In the derivative action, the client may
have selected the lawyer and may even be a professional plaintiff with an
ongoing relationship with the law firm—factors more limiting than the options
the court may have in a class action with several potential class
representatives and counsel from which to choose. There is less flexibility in
a derivative action than in a class action, where the court can define the
class and the claims to be pursued.[14]
{29}
In most jurisdictions
complaints based upon breach of fiduciary duty in the acquisition context are
brought as class actions.[15]
The derivative action is generally reserved for conflict of interest claims in
the non-acquisition context. However,
some challenges to deal protection devices do arise in the derivative context.
{30}
Turning to the case at
hand, there are several factors that demonstrate the difficulties and
inefficiencies associated with the use of derivative actions in acquisition
situations. In this case, the derivative action was filed after the class
action litigation had begun and after the SunTrust/Wachovia litigation had
commenced. Plaintiff’s counsel wrote a demand letter and sent it via Federal
Express. Wachovia declined receipt of the FedEx package. Plaintiff’s counsel
subsequently sent the letter by first class mail addressed to the board of
directors. Plaintiff then commenced suit. At no time did plaintiff make an
attempt to shorten the time for response to the demand letter.
{31}
As a result of the late
filing of the derivative action and its assignment to the Business Court there
was no time to address the deficiencies of the derivative process. The Court permitted Harbor Finance to participate
in the SunTrust case and the shareholder suits with the clear understanding
that is was without prejudice to defendants’ right to raise any defenses to the
derivative action.
{32}
The decision to use the
derivative action as opposed to a class action could not have been an
inadvertent selection by this plaintiff. Harbor Finance clearly fits the
description of a “professional plaintiff.”
In their study of Delaware cases, Thompson and Thomas found two
partnerships at the top of the class action list of most frequent plaintiffs:
Harbor Finance and Crandon Capital.[16]
The study also showed:
The plaintiffs law firms that bring the largest number
of class actions, shown in Table 12, are much less frequently involved in
derivative suits. In the 83 lead derivative cases, the repeat law firms are
involved in only 27 (32%) as compare to 76% of all class actions. As for the
plaintiffs themselves, the only plaintiffs with more than two filings are two
partnerships that were at the top of the list in the class action area: Harbor
Finance with five suits and Crandon Capital with four. We note that the
derivative cases these entities filed were never the only suit filed and were
often associated with class actions or federal litigation against the same
company.[17] (Emphasis
added)
{33}
The Thompson study
speculates that there is a relationship between Crandon Capital Partners and
Harbor Finance.[18] This Court’s research indicates that Crandon
Capital Partners is the general partner of Harbor Finance Partners, Ltd.[19] The Court’s research further disclosed that
Harbor Finance has been involved in at least 35 suits based upon a claim of
breach of fiduciary duty, and the majority of those cases involved mergers or
acquisitions.[20] That number does not include three cases
brought under the name of Breakwater Partners since August of 2002, when Harbor
Finance changed its name.[21] One of those cases was filed in North
Carolina and is assigned to this Court.
See In re Quintiles Transnational Litigation.[22] In that litigation, counsel for Breakwater
Partners (The Brualdi Law Firm) was the first to file a class action suit
alleging breach of fiduciary duty in a tender offer situation. Other lawyers were designated lead counsel
in that litigation.
{34}
A review of the
pleadings and demand letter reveals that there were no claims asserted by
Harbor Finance not already at issue in the class action litigation and the
third-party litigation filed by SunTrust, a conclusion readily apparent to a
plaintiff with Harbor Finance’s experience in merger and acquisition
litigation.
{35}
Given the sophistication
of plaintiff and its counsel and the timing of their actions, as well as the
duplicative nature of the claims asserted, the Court is led to the disturbing
conclusion that the demand and subsequent derivative suit were filed solely to get
a piece of the litigation fee pie.
Counsel’s fee request, discussed in more detail below, supports that
conclusion. An efficient system should not reward or encourage that conduct.
{36}
The lack of clarity in
the statute with respect to how the time for board response gets shortened
highlights the court’s role in managing merger and acquisition litigation
efficiently. The court must have the
opportunity to review and rule on assertions of irreparable injury. In this instance, had a motion and supporting
papers been filed, the Court could have addressed two aspects of the
irreparable injury inquiry. First, the
Court would have been required to determine if the issues raised in the demand
were of a sufficiently urgent nature that they required determination before a
shareholder vote. In this case it was
clear that the deal protection devices being challenged had the potential to
impact the vote, and a preliminary injunction hearing was necessary to
determine their viability. If the
derivative action had not been an add-on to the preexisting litigation, the
Court might well have determined it necessary to shorten the response time or
eliminate it altogether. However, the
Court could also have considered the existence of the prior pending litigation
in which the shareholders’ interests were adequately represented. Accordingly, the Court might have determined
that there was no irreparable injury to the corporation and that the
corporation should not have to incur the additional costs and expenses of
dealing with separate claims in a derivative action that were identical to
claims already at issue. Each case will
be fact specific. In this instance the
Court never had the opportunity to make the necessary determinations because
the statutory procedure of waiting 90 days or having the period shortened was
not followed.
{37}
Failure to comply with
the demand requirements of N.C.G.S. § 55-7-42 constitutes an “insurmountable
bar” to recovery. Allen v. Ferrera,
141 N.C. App 284, 540 S.E.2d 761, 764 (2000); see also Winters v.
First Union Corp., 2001 NCBC 08 (No. 01 CVS 5362, Forsyth County Super. Ct.
July 13, 2001) (Tennille, J.); Garlock v. Hilliard, 2001 NCBC 10 (No. 01 CVS 01018, Mecklenburg County Super. Ct.
November 14, 2001) (Tennille, J.); Greene
v. Shoemaker, 1998
NCBC 4 (No. 97 CVS
2118, Wilkes County Super. Ct. October 24, 1998) (Tennille, J.). The Harbor Finance case is subject to
dismissal for failure to comply with the statutory process.
{38}
Defendants have also
moved to dismiss under the statute for failure to make demand “with sufficient
clarity and particularity to permit the corporation . . . to assess its rights
and obligations and what action is in the best interest of the company.”
{39}
The Court first
addresses the method of conveying the demand. Simply put, it must be done in a
fashion that insures that the Company receives the demand so that it can act on
it. It must be addressed to a responsible
official, for example the corporate secretary or general counsel. It must be delivered in a manner that shows
that it has been received and when; personal delivery or certified mail are two
examples. Where the company is on
notice of the contents of the letter or of a forthcoming demand, it avoids
dealing with the issue at its peril. It may not simply refuse to accept what it
knows is a demand letter and then deny that it has rejected the demand.
{40}
This Court has held that
the statutory requirement of sufficient specificity must be met. See Garlock, 2001 NCBC 10 at 14-19; Greene 1998 NCBC at 15-25.
In this instance, the demand letter dated June 1, 2001
brought to the attention of the board of directors four aspects of the
transaction which Plaintiff Harbor Finance believed were potential violations
of fiduciary duty. First, plaintiff
asserted that the board was obligated to shop or auction the company. Second, plaintiff found objectionable the
provisions of the agreement that reserved nine board seats on the new board for
Wachovia directors and that insured that Leslie M. Baker, Jr. would be chairman
of the new board. Third, plaintiff objected to the including the termination
fee as a deal protection device.
Fourth, plaintiff objected to including the non-termination provision in
the merger agreement as a deal protection device. The first two claims were
never seriously pursued, with good reason.
{41}
The two deal protection
devices were the focus of the litigation. In the context of merger and
acquisition litigation, the letter was sufficient notice of the provisions of
the agreement which plaintiff claimed to be unreasonable. The Court notes that Wachovia’s investment
bankers had already informed the board that the termination fee was on the outer
edges of an acceptable range. In this
sophisticated world, all the parties understood the implications and importance
of the deal protection devices and the fact that they would be subject to
challenge. To impose any greater degree
of specificity than that contained in the demand letter would be unreasonable
in this context.
{42}
The actual action to be
taken by the corporation is unclear and again demonstrates the limitation of
the derivative action in this context.
It is difficult to impose upon a plaintiff the obligation to specify how
the merger should be renegotiated. It
is sufficient to point out the deal protection devices are alleged to be
coercive, preclusive or in violation of a fiduciary duty and to request that
something be done about them. In the unlikely event the board agrees, it should
have the flexibility to address the problem. In the shareholder focused class
action, the deal protection devices can be more directly addressed as
limitations on the right to vote or sell, and thus the relief requested can be
tailored to protect the shareholders’ rights and secure a market vote free of
coercion or preclusion.
{43}
In summary, the demand
letter was sufficiently specific with respect to the challenged deal protection
devices, and the plaintiff delivered it in an acceptable manner. The instant
case demonstrates the difficulty of using the derivative action in the context
of certain kinds of merger and acquisition litigation.
{44}
Finally, the Court notes
that the Harbor Finance claims are subject to dismissal as moot. After this Court’s decision on the
preliminary injunction motions was entered on July 20, 2001, no party appealed
that decision. Subsequently, the
shareholder vote proceeded as scheduled, and the shareholders of both Wachovia
and First Union approved the merger.
The merger is complete. All
Wachovia shares have been transferred. No claim for monetary damages has been
pursued. No discovery has taken place
and no motions have been filed. The
only requests for action this Court has received (other than to dismiss a
Georgia antitrust claim) are the current motion to dismiss by defendants and
the request for attorney fees by counsel for Harbor Finance. Plaintiff has not
moved to amend the complaint or take any further action. Plaintiff rode the
coattails of SunTrust and abandoned the case when those coattails were no
longer a means of transportation. The
Court never found Harbor Finance to be a suitable representative for the
corporation’s interest.
{45}
At the hearing on the
motions to dismiss the following exchange took place between the Court and Mr.
Brualdi:
The Court: I
think the obvious reason that they didn’t move to dismiss it gives them the
best argument that no attorneys’ fees ought to be paid.
Mr. Brualdi:
Well, that may well be the case, your honor.
In fact, I suspect that your honor is right
Your honor had asked why—where we thought the case would go from here, and I think that sort of explains why nothing has really happened for a year and that there are arguments that the case is moot under Delaware law. As your honor pointed out, there’s not much left that your honor can do.
Transcript of April 9, 2003 hearing, p. 34.
{46}
Plaintiff’s claims are
moot.
{47}
Accordingly, the claims
of Harbor Finance are dismissed.
B.
{48}
The Court next turns to
the fee request filed by plaintiff’s counsel. The North Carolina statute
governing derivative actions clearly provides that plaintiffs may be awarded
attorney fees in derivative actions where they perform some service of value to
the corporation or the shareholders. The award of such fees is in the
discretion of the Court.[23] In this instance, the Court finds that
neither Plaintiff Harbor Finance nor its counsel provided services of value to
the corporation. Piling on after
litigation is already in progress which adequately protects the interests of
shareholders should not be encouraged and does not promote the right balance
between the incentives and agency costs the courts must consider.
{49}
As the Court has
previously noted, at the time the derivative claim was made, SunTrust had
already challenged the deal protection devices in the litigation between it and
Wachovia. Numerous class actions had been filed challenging the same deal
protection devices, and the Court had already appointed capable and experienced
lead counsel in those consolidated cases.
The Court permitted Harbor Finance to file a short brief and appear at
oral argument in connection with the hearing on the motion for preliminary
injunction based solely on the late entry of Harbor Finance into the
litigation. Harbor Finance had not even
been determined to be a proper representative for the corporation.
{50}
Neither the brief nor
oral argument advanced any position different from or in addition to the
arguments made by SunTrust and lead counsel for the class action
plaintiffs. Nor does there appear from
the record to be any significant contribution of counsel during the discovery
process. The issues were hotly contested between SunTrust and Wachovia, and the
validity of the deal protection devices was squarely before the Court. If Harbor Finance had not filed its action,
the outcome of this case would have been exactly the same. There is an argument discussed below that
shareholders cannot always rely on a third party bidder to protect their
interests. In this instance, there was already a backup plaintiff, ably
represented in the litigation. The existence
of an additional shareholder representative in a different cloak added nothing
of value to the protection of the shareholders or the corporation. Plaintiff’s counsel brought no skills or
abilities to the litigation that were not already provided by experienced
counsel for SunTrust and the other shareholders. Harbor Finance’s suit did not create synergies or
efficiencies. Rather than providing
economies, the addition of the derivative action only increased the cost of the
litigation. No shareholder value was
created to justify the additional cost of the derivative action. Harbor Finance has not shown any tangible or
intangible benefit to the shareholders that would not have occurred but for the
actions of Harbor Finance or its counsel or as a direct benefit of the actions
of Harbor Finance. The fact that
counsel for Harbor Finance has taken no action to prosecute this case since
SunTrust withdrew is a fairly strong indication that the derivative action was
filed solely to ride the coattails of SunTrust’s counsel.
{51}
For the foregoing reasons,
the Court, in its discretion, denies counsel’s request for attorney fees in its
entirety.
C.
{52}
Were the Court called
upon to award attorney fees in its discretion, those fees would have been in
the amount of $25,000 to Brualdi and $5,000 to Donaldson and Black. Those fees would have been determined by the
same criteria discussed below. Harbor
Finance’s quantum meruit claim as the third representative of the shareholders
is extremely weak. The shareholders interests were already ably represented by
counsel for SunTrust and class counsel appointed by the court. The hourly rate
claimed by New York counsel is astonishingly out of line with market rates and
includes a risk premium far in excess of any this Court has seen approved. Given the insignificant contribution of
counsel upon their late arrival, the size of their fee request is a further
indication that New York counsel’s interest and those of the shareholders they
did not represent were not necessarily aligned.
III.
{53} The Court next turns to the fee issues in the class action litigation. In those cases, because the parties agreed to a consent dismissal of the cases as moot th