Henkel v. Aschinger

• Decision Date: 11 January 2012
• Docket Number: Nos. 11CVH–11–14,234,11CVH–11–14,414.,11CVH–11–14,256,s. 11CVH–11–14,234
• Citation: 962 N.E.2d 395,2012 -Ohio- 423,167 Ohio Misc.2d 4
• Parties: HENKEL, v. ASCHINGER et al.SPRUILL et al., v. ASCHINGER et al.WEISER REVOCABLE TRUST, v. BAIR et al.
• Court: Ohio Court of Common Pleas

167 Ohio Misc.2d 4

2012 -Ohio- 423

962 N.E.2d 395

HENKEL,

v.ASCHINGER et al.SPRUILL et al.,

v.ASCHINGER et al.WEISER REVOCABLE TRUST,

v.BAIR et al.

Nos. 11CVH–11–14,234

11CVH–11–14,256

11CVH–11–14,414.

Court of Common Pleas of Ohio, Franklin County.

Decided Jan. 11, 2012.

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

Ice Miller, L.L.P., John C. McDonald, and Matthew L. Fornshell, Columbus, for Individual defendants and nominal defendant Pinnacle Data Systems, Inc.

Squire, Sanders, & Dempsey, L.L.P., David W. Alexander, Columbus, and Joseph P. Rodgers, Cleveland, for defendants Avnet, Inc., and Air Acquisition Corp.FRYE, Judge.[Ohio Misc.2d 9] 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.” The focus of the cases is the adequacy of the proposed price of $2.40 per share 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 [Ohio Misc.2d 10] 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, L.L.C. (“GBQ”).

{¶ 4} Claiming that 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. In addition, plaintiffs sued Avnet and its merger subsidiary. Plaintiffs claim that 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 shareholders' rights” statute for anyone voting against the merger. R.C. 1701.85. Absent standing to sue for some individual-focused claim specifically affecting one or more individual plaintiffs, of course, a Civ.R. 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 BackgroundA. 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 [Ohio Misc.2d 11] 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 referred to the preliminary proxy statement. 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 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 plaintiff's 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 (6th 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, Section 1357 (2d 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, 10th Dist. No. 08AP–473, 2008-Ohio-6967, 2008 WL 5423555, 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.P.A., 168 Ohio App.3d 715, 2006-Ohio-4785, 861 N.E.2d 834, at ¶ 6 (10th Dist.).” Wagner–Smith Co. v. Ruscilli Constr. Co., 139 Ohio Misc.2d 101, 2006-Ohio-5463, 861 N.E.2d 612, at ¶ 23 (Franklin 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 led PDSi's board's to unanimously recommend it to shareholders at $2.40 per share.

[Ohio Misc.2d 13] {¶ 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 while 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 percent or more of the documents that plaintiffs initially sought in discovery. As discussed below, 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 so-called merger sub, which is an Ohio corporation named AIR Acquisition Corp.

{¶ 14} Individual defendants in these cases include five nonemployee directors: Messrs. Aschinger, Brussell, Cathey, O'Leary, and Roberts. Also sued is John Bair, president, chief executive officer, and a director.

D. The Information in the Proxy Statement

{¶ 15} The...