Henkel v. Aschinger

• Decision Date: 11 January 2012
• Docket Number: 234,11CVH-11-14,414,256
• Parties: ROBERT HENKEL, Individually, and on behalf of others similarly situated, and Derivatively on behalf of Pinnacle Data Systems, Inc. Plaintiffs, v. CARL J. ASCHINGER, et al., Defendants. RUSSELL SPRUILL, et al. Individually and on behalf of others similarly situated, and Derivatively on behalf of Pinnacle Data Systems, Inc. Plaintiffs, v. CARL J. ASCHINGER, et al., Defendants. WEISER REV TRUST, Individually and on behalf of others similarly situated, and Derivatively on behalf of Pinnacle Data Systems, Inc., Plaintiffs, v. JOHN D. BAIR, et al., Defendants.
• Court: Ohio Court of Common Pleas

ROBERT HENKEL, Individually, and on behalf of others similarly situated, and Derivatively on behalf of Pinnacle Data Systems, Inc. Plaintiffs, v. CARL J. ASCHINGER, et al., Defendants.

RUSSELL SPRUILL, et al. Individually and on behalf of others similarly situated, and Derivatively on behalf of Pinnacle Data Systems, Inc. Plaintiffs, v. CARL J. ASCHINGER, et al., Defendants.

WEISER REV TRUST, Individually and on behalf of others similarly situated, and Derivatively on behalf of Pinnacle Data Systems, Inc., Plaintiffs, v. JOHN D. BAIR, et al., Defendants.

Nos. 11CVH-11-14, 234, 11CVH-11-14, 256, 11CVH-11-14, 414

Court of Common Pleas of Ohio, Franklin County

January 11, 2012

Law Offices of John C. Camillus LLC and John C. Camillus; Brodsy & Smith LLC, Evan J. Smith and Marc L. Ackerman; The Briscoe Law Firm PLLC and Willie Briscoe; and Levi & Korinsky LLP, and Donald J. Enright; for plaintiffs.

Ice Miller LLP, John C. McDonald and Matthew L. Fornshell, for Individual Defendants, and Nominal Defendant Pinnacle Data Systems, Inc.

Squire, Sanders, & Dempsey LLP, David W. Alexander and Joseph P. Rodgers; for defendants Avent, Inc. and Air Acquisition Corp.

OPINION

RICHARD A. FRYE, JUDGE

1. Introduction

{¶1} Prompted by the announcement of a proposed corporate merger, three cases (now consolidated) were filed by four shareholders of Pinnacle Data Systems, Inc. ("PDSi"). Under a proposal unanimously endorsed by PDSi's board of directors, holders of PDSi common shares would receive $2.40 per share in an all cash merger with a newly created subsidiary of Avnet, Inc., a Fortune 500 company. The proposed transaction has been valued at roughly $22 million.

{¶2} Plaintiffs challenge the merger as derivative plaintiffs under Civ. R. 23.1. They also assert direct claims on behalf of themselves and a putative Civ. R. 23 class of shareholders. Primarily they seek injunctive relief to stop the proposed acquisition, and beyond that hope to "obtain a [new] transaction that is in the best interests of Pinnacle's shareholders." (Consolidated complaint, at ¶71 (D)) The focus of the cases is the adequacy of the proposed $2.40 per share price offered by Avnet.

{¶3} No shareholder vote approving or rejecting the merger has occurred, but a special meeting of PDSi shareholders has been noticed for later this month. Because PDSi is publicly traded, shareholder votes are being solicited using a proxy statement filed (initially as a nearly complete draft and since in final form) with the Securities and Exchange Commission ("SEC".) The proxy includes a complete copy of a fairness opinion completed for PDSi's Board by outside valuation consultant GBQ Consulting, LLC ("GBQ".)

{¶4} Claiming material omissions and misstatements exist in the proxy statement and that the Board's reliance upon GBQ's fairness opinion demands scrutiny, plaintiffs sued all six members of PDSi's board. Five are not employees, but the sixth board member is PDSi's president, chief executive officer and a potential recipient of benefits under a so-called "golden parachute" severance agreement. (Prel. Proxy at pp. 38-39.) In addition plaintiffs sued Avnet and its merger subsidiary. Plaintiffs claim Avnet knowingly aided and abetted breaches of fiduciary duty by PDSi's board and took affirmative steps in the acquisition contract to improperly discourage other potential bidders.

{¶5} In seeking dismissal, defendants argue that no individual cause of action is presented because plaintiffs assert only a common injury - that the price offered by Avnet is too low - with the result that the only legal remedies potentially available are through a derivative action indirectly benefitting all PDSi shareholders, or under Ohio's "dissenting shareholder" rights statute for anyone voting against the merger. R.C. 1701.85. Absent standing to sue for some individual-focused claim specifically impacting one or more individual plaintiffs, of course, a Rule 23 class action cannot be certified. Defendants next argue that a derivative claim has not been properly brought in compliance with Civ. R. 23.1. Everyone acknowledges that no demand was made on PDSi's board to address the problems about which plaintiffs sued. According to defendants, plaintiffs' allegation of the futility of such a demand is inadequate, and beyond that none of the plaintiffs properly verified their claims. Avnet independently seeks dismissal and primarily argues that it simply owed no legal duty to PDSi shareholders to pay them a higher share price, or to proceed on business terms less favorable to itself.

2. Procedural and Factual Background

A. The Consolidated Complaint and the Proxy Statements

{¶6} As originally filed, each case had its own individual complaint. The three complaints were all filed before PDSi's draft proxy statement (required by section 14(a) of the Securities Exchange Act of 1934) became available. It was publicly filed with the SEC on Friday November 25, 2011. The final proxy statement was filed at the SEC three weeks later supplying last minute details.

{¶7} Following consolidation of these cases and a conference with counsel, the court ordered that a single, consolidated complaint be filed covering all three cases. That occurred on December 9. Subsequently, complete copies of the preliminary and final versions of the proxy statement were filed as part of the record in these cases.

{¶8} Ordinarily, in ruling on a motion to dismiss a court may not consider matters outside the complaint. However, exceptions to this rule permit the court to consider PDSi's proxy statements. Plaintiffs' consolidated complaint specifically referenced the preliminary proxy statement. (e.g. ¶ 6). Defense counsel responded by referring to it repeatedly in their motions to dismiss. Both versions of the Proxy Statement are publicly filed at the SEC as well as at this court, and at oral argument both sides conceded to their authenticity. "[D]ocuments that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiffs complaint and are central to her claim.' Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993)." Nieman v. NLO, Inc., 108 F.3d 1546, 1555 (6^th Cir. 1997). Moreover, in deciding a Civ. R. 12(B)(6) motion, it has been recognized that " 'matters of public record [and] items appearing in the record of the case also may be taken into account'." Id. at 1554, quoting Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (2^d ed. 1990).

{¶9} Although Ohio remains a "notice pleading" jurisdiction, the Franklin County Court of Appeals has recognized that "unsupported conclusions in a complaint are not considered admitted and are not sufficient to withstand a motion to dismiss." Ferron v. Fifth Third Bank, 10^th Dist. No. 08AP-473, 2008-Ohio-6967, at ¶12. "Superficial, conclusory allegations included as an afterthought, or allegations that plainly are illogical or inconsistent with more detailed factual allegations in the complaint are insufficient to withstand a motion to dismiss. Silverman v. Roetzel & Andress, L.PA., 168 Ohio App.3d 715, 2006-Ohio-4785, 861 N.E.2d 834, at ¶ 6 (10^th Dist.)." Wagner-Smith Co. v. Ruscilli Constr. Co., 139 Ohio Misc.2d 101, 2006-Ohio-5463, 861 N.E.2d 612, at ¶23 (Franklin Co. C.P.). Thus, the allegations in the consolidated complaint are appropriately considered against the generally much more detailed statements about PDSi and the proposed merger set out in the proxy statements.

B. Pretrial Discovery

{¶10} Upon filing suit the plaintiffs demanded discovery. Following a conference with counsel, the court limited the scope of initial discovery somewhat until defendants' motions to dismiss could be briefed and argued. Nevertheless, it is important to recognize that in drafting their pleading, the plaintiffs had access to a significant amount of information about PDSi, the proposed merger and the process that lead PDSi's Board's to unanimously recommend it to shareholders at $2.40 per share.

{¶11} Plaintiffs are dealing with public companies on both sides of the proposed merger. Thus, their access to information was relatively broad through corporate press releases and the EDGAR® online system (which makes documents filed with the SEC readily available). Plaintiffs have had access to both the draft and final versions of the proxy statement which included GBQ's fairness opinion, though not its work papers. Beyond that, the court ordered that a substantial volume of readily available PDSi documents be provided during the time the motions to dismiss were being briefed. Within five weeks after the suits were first filed, therefore, PDSi produced an electronic library of material accumulated a few months earlier for Avnet's due diligence process. That collection, said to be 1.8 gigabytes in size, was estimated to comprise 80% or more of the documents that plaintiffs initially sought in discovery. As discussed hereinafter, despite the availability of such a large amount of potentially relevant material the consolidated complaint remains remarkably generic.

C. The Parties.

{¶12} PDSi is an Ohio corporation. Its shares are listed on the New York Stock Exchange Amex. They were traded on the last day prior to announcement of this proposed merger at $1.14 per share. Although PDSi's principal office is in Groveport, Ohio, it is a global provider of electronics repair and reverse logistics services, integrated computing services and embedded computing products and design services for computing, telecom, defense/aerospace, medical and other markets.

{¶13} Avnet, Inc. is a Fortune 500 company traded on the New York Stock Exchange. Avnet is said by plaintiffs to be one of the largest distributors of electronic components, computer products and embedded technology service in more than 70 countries worldwide. To accomplish the proposed merger, Avnet, Inc. created a...