City Trading Fund v. Nye

• Decision Date: 08 February 2018
• Docket Number: 2014,651668
• Citation: 72 N.Y.S.3d 371,59 Misc.3d 477
• Parties: CITY TRADING FUND, Lawrence Bass and Andres Carullo as all of the Partners of City Trading Fund, a general partnership, suing on behalf of themselves and all others similarly situated, Plaintiffs, v. C. Howard NYE, Stephen P. Zelnak, Jr., Sue W. Cole, David G. Maffucci, William E. McDonald, Frank H. Menaker, Jr., Laree E. Perez, Michael J. Quillen, Dennis L. Rediker, Richard A. Vinroot, Martin Marietta Materials, Inc., and Texas Industries, Inc., Defendants.
• Court: New York Supreme Court

59 Misc.3d 477
72 N.Y.S.3d 371

CITY TRADING FUND, Lawrence Bass and Andres Carullo as all of the Partners of City Trading Fund, a general partnership, suing on behalf of themselves and all others similarly situated, Plaintiffs,
v.
C. Howard NYE, Stephen P. Zelnak, Jr., Sue W. Cole, David G. Maffucci, William E. McDonald, Frank H. Menaker, Jr., Laree E. Perez, Michael J. Quillen, Dennis L. Rediker, Richard A. Vinroot, Martin Marietta Materials, Inc., and Texas Industries, Inc., Defendants.

651668
2014

Supreme Court, New York County, New York.

Decided on February 8, 2018

Mintz & Gold LLP and The Brualdi Firm, P.C., for plaintiffs.

Cravath, Swaine & Moore LLP, for defendant Martin Marietta Materials, Inc. and the individuals defendants.

Wachtell, Lipton, Rosen & Katz, for defendant Texas Industries, Inc.

Shirley Werner Kornreich, J.

59 Misc.3d 481

I. Introduction

This case concerns the acquisition of Texas Industries, Inc. (TXI) by Martin Marietta Materials, Inc. (the Company), a North Carolina Corporation. The plaintiffs, stockholders of the Company,¹ filed this action on May 30, 2014, alleging that the Company breached its fiduciary duties to its shareholders by making material misstatements and omissions in the definitive proxy, which was provided to the shareholders for the purpose of evaluating and voting on the proposed merger. Plaintiffs' operative pleading is their amended complaint that was filed on June 19, 2014.

Simply put, this is a case where a stockholder sought to enjoin a merger on the ground of inadequate disclosures. The stockholder moved for a preliminary injunction, and on the eve of the hearing, the parties settled for a "peppercorn and a fee."² In other words, they entered into a "disclosure-only" settlement that provides no monetary relief to the stockholders, but which calls for a significant payment of attorneys' fees to plaintiffs' counsel (here, $500,000). The "supplemental disclosures" are the gravamen of the settlement. They purportedly remedy the alleged deficiencies in the proxy. These new disclosures are

59 Misc.3d 482

supposed to help the shareholders make a more informed decision on the merger by providing them with additional useful information about the deal. They do not. Until recently, most courts would routinely approve such settlements. As discussed herein, that is no longer the case.

By order dated January 7, 2015, this court denied plaintiffs' motion for preliminary approval of the parties' settlement. See Dkt. 108 ( City Trading Fund v. Nye , 46 Misc.3d 1206(A), 2015 WL 93894 (Sup. Ct., N.Y. County 2015) (the 2015 Decision ) ).³ The 2015 Decision sets forth the procedural history of this action, the allegations in plaintiffs' amended complaint, the terms of the parties' settlement agreement, and the reasons why the court believed the immateriality of such terms warranted its refusal to approve the settlement. The court also addressed the public policy concerns that arise from worthless disclosure-only settlements of strike suits that seek to enjoin mergers of publicly traded corporations. Since the 2015 Decision was issued, the Delaware courts also have addressed worthless disclosure-only settlements, most notably in In re Trulia, Inc. Stockholder Lit. , 129 A.3d 884 (Del. Ch. 2016) (Bouchard, C.). In Gordon v. Verizon Commc'ns, Inc. , 148 A.D.3d 146, 46 N.Y.S.3d 557 (1st Dept. 2017), however, the First Department adopted a more lenient settlement approval standard utilizing the classic factors set forth in In re Colt Indus. S'holder Lit. , 155 A.D.2d 154, 553 N.Y.S.2d 138 (1st Dept. 1990), aff'd as mod. 77 N.Y.2d 185, 565 N.Y.S.2d 755, 566 N.E.2d 1160 (1991), plus two additional factors.⁴

Prior to issuing Gordon , on November 29, 2016, the First Department reversed this court's denial of preliminary

59 Misc.3d 483

approval, remanded the case, and directed this court to hold a fairness hearing to determine whether final approval of the settlement should be granted. See City Trading Fund v. Nye , 144 A.D.3d 595, 43 N.Y.S.3d 21 (1st Dept. 2016) ( City Trading II ). City Trading II is a terse opinion in which the First Department held that this court's rulings were premature on a motion for preliminary approval. The First Department explained:

As a result of the proposed settlement, the shareholders obtained a number of additional disclosures reflected in the supplemental proxy statement, including disclosures of additional information regarding the investment banks' conflicts of interest and the projections upon which they relied in rendering their fairness opinions, that were arguably beneficial . The motion court's finding otherwise was, at the very least, premature , and should have awaited a fairness hearing during which opposition from shareholders could have been expressed .

The court reached its conclusion only in conjunction with its premature primary finding that the supplemental disclosures were so inadequate as to render the settlement not fair and adequate; on the record before us, the evidence of the tactics of the named plaintiffs and their counsel is not sufficient to warrant denial of preliminary class certification

59 Misc.3d 484

and preliminary approval of the settlement.

City Trading II , 144 A.D.3d at 595–96, 43 N.Y.S.3d 21 (emphasis added; internal citations omitted).⁵ Nothing in City Trading II purports to find fault with the substantive findings of this court. The First Department's only remark on the merits of the supplemental disclosures is that they are "arguably" beneficial. As discussed herein, that characterization falls below the standard subsequently set forth in Gordon (and, of course, is well below Trulia 's"plainly material" standard).

On September 12, 2017, plaintiffs filed the instant motion for final approval of their settlement agreement, which is set forth in a Memorandum of Understanding dated June 20, 2014. See Dkt. 148 (the MOU).⁶ Defendants do not oppose the motion (because they cannot without violating the MOU). However, as anticipated by the First Department, there are several objectors.

On September 18, 2017, Gardner Russo & Gardner LLC (GRG), which has been an institutional shareholder of the Company for over 20 years and owned shares in the Company valued between approximately $260,000 and $415,000 (i.e., far more than the value of CTF's ten shares), objected to the settlement because it "did not believe that the additional disclosures [CTF] demanded were necessary nor would they have been helpful to our shareholders." See Dkt. 171 at 2. GRG complained that "[i]t was unfair for such an exceedingly small shareholder as [CTF], with so little economic stake in the transaction, to have been able to delay [a merger] vote based on a

59 Misc.3d 485

request for insignificant incremental disclosures, when other, much larger shareholders such as [GRG]" did not want the vote delayed. See id. at 3. In other words, GRG felt that the disclosures in the preliminary and definitive proxies were sufficient to allow it to make an informed decision on the proposed merger. Another shareholder, Chapter IV LLC, by way of a June 27, 2017 letter from its CEO, expressed similar sentiments. See Dkt. 136 ("I strongly disagreed, and continue to disagree, with Plaintiff's disclosure claims against [the Company]. I found the additional disclosures to be completely unnecessary and not helpful to me as a shareholder .") (emphasis added). Then, on September 19, 2017, the North Carolina Chamber, a "nonprofit, nonpartisan business advocacy organization dedicated to improving the lives of all North Carolinians," filed an amicus brief in which it "urges" the court to reject the settlement. See Dkt. 164. Its brief largely addresses the same public policy concerns with disclosure-only settlements articulated in the 2015 Decision and in Trulia .

Plaintiffs filed a reply brief on October 10, 2017. Notably, they do not contend that any other shareholder supports the settlement, nor do they submit evidence that any other shareholder found the supplemental disclosures to have been helpful in deciding whether to vote for the merger. After a hearing on final approval was conducted on October 17, 2017, the court reserved on the motion. See Dkt. 187 (10/17/17 Tr.).

II. Governing Law

Since the Company is a North Carolina corporation, the internal affairs doctrine dictates that plaintiffs' claims for breach of fiduciary duty (i.e., their inadequate disclosure claims) are governed by North Carolina law. Hart v. Gen. Motors Corp. , 129 A.D.2d 179, 182, 517 N.Y.S.2d 490 (1st Dept. 1987) ; see Davis v. Scottish Re Group Ltd. , 30 N.Y.3d 247, 253, 66 N.Y.S.3d 447, 88 N.E.3d 892 (2017) ("the internal affairs doctrine, which provides that relationships between a company and its directors and shareholders are generally governed by the substantive law of the jurisdiction of incorporation."). This doctrine "is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the...