Crandon Capital Partners v. Shelk

• Decision Date: 16 November 2005
• Docket Number: A123576.,0011-11695.,A123575 (Control).,0011-11691.
• Citation: 202 Or. App. 537,123 P.3d 385
• Parties: CRANDON CAPITAL PARTNERS, derivatively on behalf of Willamette Industries, a nominal defendant, Appellant, v. Stuart J. SHELK, Jr.; Paul N. McCracken; Michael G. Thorne; Gerard K. Drummond; Kenneth W. Hergenhan; Robert M. Smelick; Benjamin R. Whiteley; Winslow H. Buxton; G. Joseph Prendergast; William Swindells; and Duane C. McDougall, Defendants, and Willamette Industries, Inc., Respondent. Rae Ann Brown, derivatively on behalf of Willamette Industries, a nominal defendant, Appellant, v. Willamette Industries, Inc., Respondent, and William Swindells; Duane C. McDougall; Gerard K. Drummond; Paul N. McCracken; Stuart J. Shelk, Jr.; Michael G. Thorne; Kenneth W. Hergenhan; Robert M. Smelick; Benjamin R. Whiteley; Winslow H. Buxton; and G. Joseph Prendergast, Defendants.
• Court: Oregon Supreme Court

123 P.3d 385

202 Or. App. 537

CRANDON CAPITAL PARTNERS, derivatively on behalf of Willamette Industries, a nominal defendant, Appellant, v. Stuart J. SHELK, Jr.; Paul N. McCracken; Michael G. Thorne; Gerard K. Drummond; Kenneth W. Hergenhan; Robert M. Smelick; Benjamin R. Whiteley; Winslow H. Buxton; G. Joseph Prendergast; William Swindells; and Duane C. McDougall, Defendants, and Willamette Industries, Inc., Respondent.

Rae Ann Brown, derivatively on behalf of Willamette Industries, a nominal defendant, Appellant, v. Willamette Industries, Inc., Respondent, and William Swindells; Duane C. McDougall; Gerard K. Drummond; Paul N. McCracken; Stuart J. Shelk, Jr.; Michael G. Thorne; Kenneth W. Hergenhan; Robert M. Smelick; Benjamin R. Whiteley; Winslow H. Buxton; and G. Joseph Prendergast, Defendants.

0011-11691.

0011-11695.

A123575 (Control).

A123576.

Court of Appeals of Oregon.

Argued and Submitted July 8, 2005.

Decided November 16, 2005.

Michael J. Barry, Wilmington, and A. Rick Atwood, Jr., San Diego, CA, argued the cause for appellants. On the opening brief were Gary M. Berne and Stoll Stoll Berne Lokting & Shlachter P.C., and Justine Fischer and Law Offices of Justine Fischer, and Edwin A. Harnden and Barran Liebman LLP, Portland. With them on the reply brief was Scott A. Shorr, Portland.

John F. Neupert, Portland, argued the cause for respondent. With him on the briefs were Bruce L. Campbell and Miller Nash LLP.

Before HASELTON, Presiding Judge, and ARMSTRONG and ROSENBLUM, Judges.

HASELTON, P.J.

Plaintiffs appeal the trial court's judgment denying attorney fees in this corporate derivative suit. Defendant¹ raises several cross-assignments of error, arguing, in part, that, because the merits of the underlying dispute had become moot before the trial court addressed plaintiffs' asserted entitlement to fees, the trial court lacked jurisdiction to enter any judgment other than a judgment of dismissal. We agree with defendant. See Kay v. David Douglas Sch. Dist. No. 40, 303 Or. 574, 738 P.2d 1389 (1987), cert. den., 484 U.S. 1032, 108 S.Ct. 740, 98 L.Ed.2d 775 (1988). Accordingly, we vacate the trial court's judgment and remand with instructions to dismiss the case as moot.

The facts that are material to our analysis and disposition are undisputed. This litigation arose from the proposed, and eventually completed, acquisition of Willamette Industries, Inc. (Willamette) by Weyerhaeuser Co. (Weyerhaeuser). Plaintiffs, Crandon Capital Partners (Crandon) and Rae Ann Brown (Brown), owned shares of Willamette.

In November 2000, Weyerhaeuser offered to purchase all of Willamette's outstanding shares for $48 per share. That $48 offer was greater than the value of the stock at that time. Willamette rejected Weyerhaeuser's offer outright. On November 14, 2000, several days after Willamette's rejection, plaintiffs Crandon and Brown simultaneously filed derivative lawsuits on behalf of Willamette against the corporation and its directors. Those two suits, which were filed in Multnomah County Circuit Court, were consolidated on December 20, 2000.

In their first consolidated complaint, plaintiffs alleged claims for breach of fiduciary duty, abuse of control, and waste, all arising from Willamette's rejection of Weyerhaeuser's offer. Plaintiffs alleged that Willamette's directors refused to consider Weyerhaeuser's offer in good faith and that the directors used unlawful entrenchment measures (a series of "golden parachutes"² and "poison pills"³) to deter Weyerhaeuser's potential acquisition. Plaintiffs' prayer for relief sought an injunction eliminating the alleged entrenchment measures, attorney fees, and damages.

During the pendency of the litigation, Weyerhaeuser continued in its attempt to purchase Willamette. However, on December 10, 2001, Willamette announced that it was beginning its own negotiations with Georgia Pacific Corp. (GP) to purchase GP's building products division. Weyerhaeuser made it clear that the proposed deal with GP would render Willamette undesirable and that, if the transaction were completed, Weyerhaeuser would discontinue its efforts to acquire Willamette.

Crandon and Brown regarded the potential GP transaction as a further entrenchment measure (a "suicide pill") designed to thwart Weyerhaeuser's advances. Consequently, on December 18, 2001, plaintiffs filed a second amended complaint, which styled the proposed GP transaction as an unlawful entrenchment measure; plaintiffs again sought an injunction, attorney fees, and damages.

On January 4, 2002, Willamette stockholder Wyser-Pratt Management Co. (Wyser-Pratt) filed a derivative complaint in Multnomah County Circuit Court.⁴ Like plaintiffs' second amended complaint, the Wyser-Pratt complaint was filed in response to the proposed GP transaction and also sought injunctive relief precluding such a transaction.

Willamette moved to consolidate the Wyser-Pratt action with the previously filed Crandon and Brown actions. Wyser-Pratt moved for expedited discovery and a preliminary injunction to stop the GP acquisition. On January 16, 2002, the trial court heard arguments on both Willamette's motion to consolidate and Wyser-Pratt's motion for expedited discovery. Although attorneys for Crandon and Brown were present at the hearing, only attorneys for Wyser-Pratt presented argument. After ruling that the three actions would be consolidated, the court commented:

"[I]t seems to me, from the plaintiffs' allegations, [that the GP acquisition is] something that would in fact — affirmative steps, maybe not completed yet, but affirmative steps that would prevent the takeover and entrench the board."

After the court made those comments, but before the court rendered any ruling, Willamette's attorneys stipulated that Willamette would allow at least 48 hours between the time it announced an agreement with GP and the time it finalized that transaction. The 48-hour waiting period would allow plaintiffs and the court to review the final terms of any acquisition agreement.

On January 21, 2002, Willamette accepted Weyerhaeuser's offer and agreed to sell at a price of $55.50. Thereafter, the tender price was paid out to the shareholders. Plaintiffs never sought to restrict or enjoin the distribution of any part of those funds as a possible source of the payment of attorney fees.

On March 21, 2002, two months after Willamette accepted Weyerhaeuser's offer, plaintiffs filed a motion for an award of attorney fees. The gravamen of that motion was that plaintiffs were entitled to attorney fees because plaintiffs' efforts had "force[d] defendants to comply with their fiduciary obligations to the Company and its shareholders and respond to Weyerhaeuser's offers in good faith." Plaintiffs contended further:

"Now, after 15 months of litigation, defendants have finally caved in, removed their improper defensive measures, agreed to a merger between Willamette and Weyerhaeuser, and abandoned a proposed acquisition by Willamette of the liability-ridden building products division of [GP]. By acquiescing to demands made by plaintiffs, defendants have conceded to plaintiffs' primary claims. Continued litigation of plaintiffs' claims is not necessary as plaintiffs have obtained the substantive relief they sought."

The court denied that motion based on defendants' assertion that plaintiffs' second amended complaint did not comply with ORCP 68. However, the court, over defendants' objections, allowed plaintiffs to file a third amended complaint solely to seek fees.

On December 5, 2003, after a series of motions and hearings related to plaintiffs' third amended complaint, the trial court held a hearing addressing issues of fee entitlement. Ultimately, after reviewing voluminous submissions on fee entitlement in corporate derivative suits, with particular emphasis on Delaware case law addressing arguably analogous circumstances, the court determined that plaintiffs were not entitled to recover fees. That ruling rested on two principal premises: First, the primary benefit that plaintiffs had sought was enhancement of the price of Willamette shares, including through Willamette's acceptance of Weyerhaeuser's tender offer. Second, in derivative cases involving claims for attorney fees based on securing such a common pecuniary benefit, a plaintiff is required to enjoin the distribution of at least a portion of the tender price so as to segregate and maintain a fund from which fees can be paid by those who benefitted from the attorneys' efforts. That is, as an equitable matter, the benefitted shareholders of the acquired company — and not the shareholders of the acquiring company — should bear the cost of efforts that increased the buyout price. Because that prerequisite was not met here — the tender price had been fully disbursed — plaintiffs could not recover fees. The trial court explained:

"[W]hat I see in all of these [Delaware] cases is that the * * * common fund or corporate benefit exception is a[n] exception to the American rule for attorneys fees, and it is based on the notion that it would be more equitable to require those who are benefitted to pay the attorneys fees and that it enhances certain public policies in terms of encouraging enforcement of shareholders' rights to do that. But the first and foremost underlying premise is those who benefitted should pay, whether it's common fund or corporate benefit.

"The gravamen of the benefit in this case, even though it would be extremely difficult [to measure] is, in fact, in the increased dollar value received by the shareholders as a result of Willamette's board finally agreeing to the tender offer and, frankly, driving up Weyerhaeuser's bid. And it's for that reason that this method of having funds segregated for the tender offer for the payment of fees and expenses has been developed, because that's the benefit * * * even if you characterize it as a dismantling of these barriers and elimination of this...