Proctor v. Vishay Intertechnology Inc.

• Decision Date: 09 October 2009
• Docket Number: No. 07-16527.,07-16527.
• Citation: 584 F.3d 1208
• Parties: Rebecca PROCTOR; Rex Brooks; John Donovan; Robert Needles on behalf of Siliconix, Inc. themselves and on behalf of all minority shareholders of Siliconix, Inc., similarly situated, Plaintiff-Appellant, v. VISHAY INTERTECHNOLOGY INC.; Vishay Temic Semiconductor Acquisition Holdings Corporation; Siliconix, Inc.; Ernst & Young LLP; Felix D. Zandman, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

584 F.3d 1208

Rebecca PROCTOR; Rex Brooks; John Donovan; Robert Needles on behalf of Siliconix, Inc. themselves and on behalf of all minority shareholders of Siliconix, Inc., similarly situated, Plaintiff-Appellant, v. VISHAY INTERTECHNOLOGY INC.; Vishay Temic Semiconductor Acquisition Holdings Corporation; Siliconix, Inc.; Ernst & Young LLP; Felix D. Zandman, Defendants-Appellees.

No. 07-16527.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 10, 2009.

Filed October 9, 2009.

Maxwell M. Blecher and James Robert Noblin, Los Angeles, CA, and James A. Hennefer, San Francisco, CA, for plaintiffs-appellants.

Peter A. Wald and David M. Friedman, San Francisco, CA, and J. Andrew Heaton, Washington, DC, for defendant-appellee Ernst & Young LLP.

Alan R. Friedman and Jonathan M. Wagner, New York, NY, and Daniel H.

Bookin and Dhaivat H. Shah, San Francisco, CA, for defendants-appellees Vishay Intertechnology, Inc., et al.

Appeal from the United States District Court for the Northern District of California, Jeremy D. Fogel, District Judge, Presiding. D.C. No. CV-06-04134-JF.

Before: DAVID R. THOMPSON, MARSHA S. BERZON, and N. RANDY SMITH, Circuit Judges.

BERZON, Circuit Judge:

We consider a set of issues concerning the application of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub.L. No. 105-353, 112 Stat. 3227, codified in relevant part at 15 U.S.C. § 78bb (amending the Securities Exchange Act of 1934).¹ SLUSA provides for the removal to federal court and then dismissal of certain securities fraud cases, while allowing others to go forward in state court. In this case, the scope of both SLUSA's coverage and of the so-called "Delaware carve-out" exception is at stake, as is the delicate relationship between state and federal courts considering securities fraud questions.

More specifically, at the time this action was first filed in state court, plaintiffs Rebecca Proctor, Rex Brooks, John Donovan, and Robert Needles (collectively, "Proctor") were minority shareholders in Siliconix, Inc. ("Siliconix"). They brought suit against Siliconix's majority shareholder, Vishay Intertechnology, Inc., and other related defendants, alleging that over the course of several years Vishay misappropriated Siliconix's assets and breached its fiduciary duties to Siliconix and to the other shareholders. Vishay later acquired all the outstanding minority shares in Siliconix through a short-form merger, allegedly at a price unfair to Proctor and the other minority shareholders, and Proctor amended her complaint to include allegations related to this merger.

Proctor's suit thus began as a relatively straightforward class action and derivative shareholders' suit, stating claims under California law. The filing and settlement of a separate class action lawsuit against Vishay in the Delaware Court of Chancery, combined with subsequent changes to Proctor's own pleadings, have complicated matters substantially. Reflecting these developments, the federal district court held that Proctor's suit was properly removed to federal court under SLUSA, but then held that the suit was barred by an injunction filed against the plaintiffs in the Delaware Court of Chancery and so could not proceed.

We affirm in part, reverse in part, and remand. We agree with the district court that Proctor's suit was subject to removal under SLUSA and that removal was timely and procedurally proper. We affirm the district court's dismissal of Proctor's second claim on the alternative ground that it was precluded by SLUSA. But we reverse the district court's order granting Vishay's motion to dismiss and Ernst & Young's motion for summary judgment, because the district court erroneously gave effect to the Delaware injunction. Once Proctor's second claim was dismissed, the district court was required to remand the case to state court.

BACKGROUND

Siliconix was a publicly owned semiconductor manufacturer incorporated in Delaware and headquartered in Santa Clara, California. Vishay, a manufacturer of electronic components, became Siliconix's majority shareholder in 1998, when Vishay acquired control over 80.4% of Siliconix's shares. The remaining 19.6% of Siliconix's shares were held by approximately 600 minority shareholders, including Rebecca Proctor and the other named plaintiffs in this action.

Vishay made a tender offer to the minority shareholders in 2001, but the offer was not supported by a majority of the minority shareholders. According to the plaintiffs' Second Amended Complaint, after the failure of its first tender offer, Vishay "had strong incentives ... to drain assets from Siliconix," because so doing would both enrich Vishay and "keep the price of the remaining 19.6% of Siliconix stock as low as possible, thus reducing the cost of any future acquisition of the remaining Siliconix shares by Vishay."² The complaint goes on to allege that Vishay did in fact take various actions that appropriated or depleted Siliconix's assets while enhancing Vishay's financial position.

Concerned about Vishay's actions as Siliconix's majority shareholder, the plaintiffs filed a complaint in California Superior Court on August 12, 2002, naming Vishay, its subsidiaries, and its chief executive officer Felix Zandman as defendants (collectively, "Vishay"). Plaintiffs pleaded two claims for relief: (1) a derivative shareholder claim on Siliconix's behalf for breach of fiduciary duty and waste of corporate assets, and (2) a class action claim on behalf of two classes of minority shareholders for breach of fiduciary duty. The complaint also named Vishay's auditor, Ernst & Young, LLP, as a defendant, alleging that after Ernst & Young became Siliconix's auditor at Vishay's initiative, the auditing firm conspired to hide Vishay's misappropriations from the minority shareholders and the SEC.

After filing and service, proceedings in the California Superior Court were stalled for over two years while the plaintiffs sought "to obtain corrective action" via "communications with Siliconix's counsel, officers and directors, and ... formal requests under the Federal Securities Acts and regulations to Siliconix." These attempts failed. In January 2005, the plaintiffs filed a First Amended Complaint containing more detailed factual allegations and exhibits regarding Vishay's alleged unlawful actions.

In March 2005, Vishay announced a plan to make a tender offer of 2.64 shares of Vishay common stock for each share of Siliconix stock, an offer later increased to 2.90 Vishay shares per Siliconix share. Some of the minority shareholders believed that the tender offer price was unfairly low. Under Delaware law, however, if Vishay was able to obtain through such a tender offer enough shares of Siliconix stock to hold more than 90% in all, Vishay could execute a "freeze-out" or "short form" merger, forcing the sale of any remaining shares to Vishay. See 8 Del. C. § 253.

Shortly after the tender offer announcement, several class-action shareholder suits against Vishay, later consolidated, were filed in the Delaware Court of Chancery, all alleging that the tender offer was unfair and that Vishay had breached its fiduciary duties to the minority shareholders. See In re Siliconix, Inc. Shareholders Litig., C.A. No. 1143-N (Del. Ch. filed Apr. 18, 2005). The class representatives in the Delaware litigation soon reached an agreement in principle with Vishay to settle the class action in return for additional disclosures and an increase in the tender offer share price from 2.90 shares of Vishay stock per Siliconix share to 3.075. The parties executed a Memorandum of Understanding with Vishay late in April 2005, and the final settlement agreement was filed with the Delaware Court of Chancery in September. The stipulation of settlement filed with the chancery court specified that the Delaware class action should be dismissed with prejudice and provided for the release of liability ("the Release") as to a broad swath of other existing and potential claims:

Any known or unknown claims that have been, could have been, or in the future can or might be asserted in any court ... by on or behalf of any member of the class, whether individual, class, derivative, representative, legal, equitable, or any other type or in any other capacity against defendants or any of their ... affiliates or subsidiaries and each and all of their respective past, present or future officers, directors, stockholders, principals ... employees, attorneys, financial or investment advisors, insurers, consultants, accountants ... advisors or agents, heirs, ... predecessors, successors and assigns (collectively, the "Released Persons") which have arisen, arise now or hereafter may arise out of or relate in any manner to the allegations, facts, events, transactions, acts, occurrences, statements, representations, omissions or any other matter whatsoever set forth in or otherwise related, directly or indirectly to (i) the allegations in the complaints in the Action, (ii) the Tender Offer (including all amendments and supplements) (iii) the Short-Form Merger, or (iv) the fiduciary obligations or disclosure duties of any of the Released Persons in connection with the Tender Offer of Short-Form Merger, but excluding any claims to enforce the Settlement or any claims by Siliconix stockholders for appraisal pursuant to 8 Del. C[ode] § 262, are hereby released, discharged and settled....

Meanwhile, Vishay's tender offer closed in May after attracting enough sales of shares to allow the short-form merger, with the result that each remaining Siliconix share was converted into the right to receive 3.075 Vishay shares.

The Delaware court issued an order and final judgment in October 2005. The order certified a class under Court of Chancery Rules 23(b)(1) and (b)(2) as "consisting of all record and beneficial owners of the common stock of Siliconix during the period beginning on and including...