Pincon v. Phillippy (In re Newport Corp. S'holder Litig.)

• Decision Date: 30 March 2022
• Docket Number: 80636
• Parties: IN RE: NEWPORT CORPORATION SHAREHOLDER LITIGATION. v. ROBERT J. PHILLIPPY; KENNETH F. POTASHNER; CHRISTOPHER COX; SIDDHARTHA C. KADIA; OLEG KHAYKIN; AND PETER J. SIMONE, Respondents. HUBERT C. PINCON; INTERNATIONAL UNION OF OPERATING ENGINEERS-EMPLOYERS CONSTRUCTION INDUSTRY RETIREMENT TRUST, LOCAL 302; AND INTERNATIONAL UNION OF OPERATING ENGINEERS-EMPLOYERS CONSTRUCTION INDUSTRY RETIREMENT TRUST, LOCAL 612, Appellants,
• Court: Nevada Supreme Court

IN RE: NEWPORT CORPORATION SHAREHOLDER LITIGATION.

HUBERT C. PINCON; INTERNATIONAL UNION OF OPERATING ENGINEERS-EMPLOYERS CONSTRUCTION INDUSTRY RETIREMENT TRUST, LOCAL 302; AND INTERNATIONAL UNION OF OPERATING ENGINEERS-EMPLOYERS CONSTRUCTION INDUSTRY RETIREMENT TRUST, LOCAL 612, Appellants, v. ROBERT J. PHILLIPPY; KENNETH F. POTASHNER; CHRISTOPHER COX; SIDDHARTHA C. KADIA; OLEG KHAYKIN; AND PETER J. SIMONE, Respondents.

No. 80636

Supreme Court of Nevada

March 30, 2022

UNPUBLISHED OPINION

ORDER OF AFFIRMANCE

This is an appeal from district court orders granting respondents summary judgment, denying appellants' motion to amend and striking appellants' jury demand in a breach-of-fiduciary-duty action. Eighth Judicial District Court, Clark County; Nancy L. Allf, Judge.

I.

Newport Corporation-a once publicly traded Nevada corporation-was a global provider of technology products and systems. Appellants are a class of former shareholders of Newport common stock (collectively, shareholders). Respondents are the individual members of Newport's former board of directors (collectively, the Board).

Amidst a market downturn and several years of lackluster financial results, the Board turned to strategic alternatives for Newport, specifically, a merger-of-equals or acquisition transaction. The Board engaged financial and legal counsel and merger discussions ensued over nine months with nine potential parties. To guide the discussions, Newport's management created two sets of five-year financial forecasts- the "base case" and the "acquisition case." The base case assumed an organic 3 percent compound annual growth rate, while the acquisition case assumed a more aggressive 10 percent compound annual growth rate based on a mix of organic and acquisition-based growth. The Board also directed its financial counsel (J.P. Morgan) to conduct a market check to evaluate Newport's current market value.

During this process, MKS Instruments, Inc. contacted Newport about a potential transaction and eventually offered to acquire Newport for $23 per share in cash. Meanwhile, Newport continued to explore transactions with other interested parties. At Newport management's direction, J.P. Morgan used the base case to value Newport, and based on this evaluation, J.P. Morgan delivered an opinion that MKS's offer was fair to Newport's shareholders. The Board then entered a brief period of exclusivity with MKS before unanimously approving the merger agreement, under which MKS agreed to purchase all of Newport's common stock at $23 per share in cash.^[1] The deal represented a 53 percent premium over Newport's closing share price of $15.04.

A group of plaintiffs different from those in this case filed, then abandoned, a class action seeking to enjoin the merger. Ninety-nine percent of shareholders approved the merger transaction. The shareholders then initiated the class action suit underlying this appeal, alleging that the board members breached their fiduciary duties, causing the merger share price to be undervalued. Several years later, shareholders moved to amend their second-amended complaint, which the district court denied. While the shareholders' motion to amend was pending, the Board moved for summary judgment on all claims, and the district court granted their motion. Shareholders appeal the district court's summary judgment decision and its order denying their motion to amend.^[2]

II.

In granting the Board's motion for summary judgment, the district court concluded that shareholders could not rebut the business judgment rule as applied to the MKS acquisition because the Board exercised due care during the nine-month sale process and shareholders otherwise failed to show that self-interest or fraud motivated a voting majority' of the Board when it approved the transaction. Our review is de novo, Wood v. Safeway, Inc., 121 Nev. 724, 729, 121 P.3d 1026, 1029 (2005), and we affirm for two reasons.

First summary judgment was proper because shareholders failed to produce sufficient evidence to rebut the business judgment rule. Under MRS 78.138(7)(a) & (b), to proceed with their breach-of-fiduciary- duty claim shareholders must (1) rebut the business judgment rule, and (2) show both that the directors breached their fiduciary duties and that those breaches "involved intentional misconduct, fraud or a knowing violation of law." Chur v. Eighth Judicial Dist. Court, 136 Nev. 68, 71-72, 458 P.3d 336, 340 (2020); see also Guzman v. Johnson, 137 Nev._} Adv. Op. 13, 483 P.3d 531, 537 (2021) (overruling the inherent fairness standard applied in Foster v. Arata, 74 Nev. 143, 156, 325 P.2d 759, 765 (1958), and the gross negligence standard applied in Shoen v. SAC Holding Corp,, 122 Nev. 621, 640, 137 P.3d 1171, 1184 (2006)). Nevada's business judgment rule presumes that corporate directors and officers complied with their fiduciary duties when making a business decision, including their duty "to maintain, in good faith, the corporation's and its shareholders' best interests over anyone else's interests," (i.e., the duty of loyalty), Shoen, 122 Nev. at 632, 137 P.3d at 1178; see also NRS 78.138 (stating Nevada's business judgment rule).

1 To rebut the business judgment rule via an allegation of a breach of the duty of loyalty, shareholders must show that self-interest impacted a voting majority of the Board. See Wynn Resorts, Ltd. v. Eighth Judicial Dist. Court, 133 Nev. 369, 376, 399 P.3d 334, 342-43 (2017) (applying the business judgment rule to the board as a whole); Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1995). When self-interest is only alleged as to a single director, plaintiffs must show that the director had a material interest in the transaction and that the director failed "to disclose his [or her] interest in the transaction to the [B]oard and a reasonable board member would have regarded the existence of the material interest as a significant fact in the evaluation of the proposed transaction." Cinerama, 663 A.2d at 1168 (emphases and internal quotation marks omitted); see also La. Mun. Police Emps.' Ret. Sys. v. Wynn, 829 F.3d 1048, 1059-60 (9th Cir. 2016) (applying Nevada law and concluding that plaintiffs failed to show that a material conflict of interest impacted a majority of the board). Shareholders attempt to make such a showing here by arguing that board member Robert Phillippy (Newport's CEO) had several conflicts of interest-(1) he feared being terminated, (2) his change-in-control severance package was more lucrative than in other scenarios, and (3) he secured post-merger employment with MKS-that motivated him to commit fraud on the remainder of the Board to achieve approval of the MKS acquisition.

Shareholders fail to adduce evidence to support their claim that Phillippy's above-cited interests amount to actionable conflicts. Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002) (holding that a conflict of interest exists when a director has a material financial or other interest in a transaction different from other shareholders' interests). Unrebutted record evidence shows that Phillippy did not seek a transaction with MKS out of fear of being fired: The Board testified that it never considered terminating Phillippy or asking him to resign as CEO, and Phillippy testified that he never feared losing his job; while there were activist shareholders who criticized Phillippy, they lacked the votes to oust him from the Board. Similarly, unrebutted record evidence shows that Phillippy did not force a transaction with MKS to achieve a more lucrative severance package because a transaction with any party, not just MKS, would have triggered Phillippy's change-in-control severance package. And the Board (including Phillippy) consistently considered retaining Newport's independence alongside transaction options and concluded that remaining independent carried significant risk because market conditions vary and achieving $23 per share would take many years without a transaction. Moreover, even if Phillippy's interests were conflicted, shareholders offer no evidence of his financial circumstances to show that the interests were material to him and therefore impacted his impartial judgment. See Wynn, 829 F.3d at 1059-60 (interpreting Nevada law and applying a subjective actual-person standard to grant summary judgment because plaintiffs did not show that directors were individually impacted by alleged interests); Orman, 794 A.2d at 24 (applying a subjective "actual person" test to determine whether an interest is financially material to a director).

Furthermore Phillippy's alleged self-interest does not alone rebut the business judgment rule, Guzman, 137 Nev., Adv. Op. 13, 483 P.3d at 537 (holding that merely alleging that a director had an interest in the transaction is not enough to rebut the business judgment rule and shift the burden to the defendant under NRS 78.138); shareholders also bore the burden of showing that genuine issues of material fact existed regarding Phillippy's concealment of these interests from the Board, thus impacting the Board's overall independence. Telxon Corp. v. Meyerson, 802 A.2d 257, 264 (Del 2002); see also Orman, 794 A.2d at 25 n.50 (reasoning that a director's self-interest alone is not enough to challenge a director's independence, and a plaintiff must show that such interest compromised the director's independence and valid business judgment when voting on the challenged transaction). Shareholders do not meet this burden either because the record shows that the Board knew of pressure from activist shareholders regarding Phillippy's performance and of the tension between Phillippy and Newport's CFO, Charles Cargile, regarding the CEO position and still testified that it did not consider...