Vestcom Intern. v. Chopra

• Decision Date: 14 September 2000
• Docket Number: No. CIV.A. 99-5935.,CIV.A. 99-5935.
• Parties: VESTCOM INTERNATIONAL, INC., Plaintiff, v. Harish CHOPRA, Timetrust, Inc. and R-Squared Limited, Defendants.
• Court: U.S. District Court — District of New Jersey

114 F.Supp.2d 292

VESTCOM INTERNATIONAL, INC., Plaintiff, v. Harish CHOPRA, Timetrust, Inc. and R-Squared Limited, Defendants.

No. CIV.A. 99-5935.

United States District Court, D. New Jersey.

September 14, 2000.

COPYRIGHT MATERIAL OMITTED

Lawrence M. Rolnick, Gavin J. Rooney, Thomas E. Redburn, Jr., Lowenstein Sandler, Roseland, NJ, for Plaintiff.

Andrew P. Napolitano, Andrew W. Schwartz, Eric I. Abraham, Esq., Sills Cummis Radin Tischman Epstein & Gross, Newark, NJ, for Defendants.

OPINION

WOLIN, District Judge.

This matter is opened before the Court upon the motions of defendants Harish Chopra, Timetrust, Inc., and R-Squared Limited for summary judgment dismissing counts one and two of the two-count complaint against them and for summary judgment on their counterclaim against plaintiff Vestcom International, Inc. The motions have been decided upon the written submissions of the parties pursuant to Federal Rule of Civil Procedure 78. For the reasons set forth below, the motion for summary judgment to dismiss counts one and two of the complaint will be granted and the complaint will be dismissed in its entirety. The motion for summary judgment on the counterclaim will be denied.

BACKGROUND

The backdrop of this dispute is an attempt to gain control over the plaintiff Vestcom by defendant Chopra. Vestcom is a publicly traded corporation listed on the NASDAQ. By the close of the year 1999, Chopra, and the other defendants whom Chopra allegedly controls, had accumulated a significant portion of the outstanding Vestcom stock. He also had campaigned among other Vestcom shareholders for support in his efforts to oust Vestcom's current Board.

Persons acquiring greater than five percent of a corporation's stock are required to file Schedule 13D with the Securities and Exchange Commission pursuant to the section 13(d) of Securities and Exchange Act of 1934 (the "1934 Act"). Defendants filed a Schedule 13D indicating that they intended at a future date to seek representation on the board of directors, but that they had formed no specific plan to do so and that "there can be no assurance that any such plan or proposal will be developed." Also in the Schedule 13D, defendants indicated that they had no intent to cause a merger, reorganization or other material structural change to Vestcom.

Meanwhile, plaintiff has alleged, Chopra was campaigning among other Vestcom shareholders for support to oust the current board of directors and take control of the company. The scope of this campaign, the specific form the campaign took, and whether Chopra's contacts with Vestcom shareholders may be characterized as proxy solicitations, is disputed. Vestcom claims that Chopra contacted more than ten shareholders. No proxy statement was filed by defendants prior to this lawsuit.

On December 17, 1999, Vestcom filed its complaint. Count one alleges that defendants have violated section 13(d) of the 1934 Act in that their Schedule 13D failed to disclose that defendants had a present intent and plan to oust Vestcom's board. Count two alleges that defendants had violated the proxy rules by soliciting proxies from more than ten shareholders without filing a written proxy statement as required by section 14(a) of the 1934 Act and SEC Rule 14a.

Extensive procedural maneuvering ensued, none of which has any enduring relevance. Two subsequent, substantive events, are significant, however. On December 29, 1999, and in January 2000 defendants filed amended Schedule 13D's. These amended schedules disclosed that defendants did in fact intend to take control of Vestcom. Next, on January 24, 2000, the SEC promulgated new proxy rules under Section 14(a). The new rules removed the limitation on the number of shareholders one could solicit without triggering the obligation to file a written proxy statement.

Vestcom's defensive action with respect to Chopra was not confined to the institution of this litigation, however. On December 16, 1999, the day before the complaint was filed, Vestcom adopted a "Shareholder Protection Rights Agreement" (the "Shareholder Agreement") commonly referred to as a "poison pill" defense. In summary, and greatly simplified, the Shareholder Agreement provided that all shareholders would be issued transferrable rights (the "Rights") to purchase additional shares of Vestcom stock at a reduced price. These Rights would be triggered upon any person acquiring ten percent of Vestcom stock. The acquiring person's Rights, however, would be void.

Thus, an acquiring person's holdings would be immediately diluted and an attempt to purchase control foiled. The board retained an "out," however, and could redeem the Rights at a nominal cost. In this way, the board would be able to thwart a hostile takeover, but permit an acquisition of which it approved.

The vulnerability of this simple poison pill device is that insurgent shareholders and/or takeover artists may combine their stock purchases with a proxy fight. By replacing the board by election before triggering the pill by an acquisition of the stated percentage of stock, the insurgents can redeem the Rights and complete their purchase of the company. The response to this technique is either a so-called "dead hand" or "no hand" provision. A dead hand provision provides that only continuing directors, i.e., directors in place when the poison pill was adopted, may vote to redeem the Rights. A no hand poison pill lacks any right of redemption at all, barring a purchase of the company by anyone. Of course, should all the continuing directors be ousted, the pill becomes a de facto no hand poison pill because no-one will remain that can vote to redeem the Rights.

Vestcom's Shareholder Agreement was a modified dead hand poison pill. Where the acquiring person intends a business combination, a majority of independent directors or a majority of continuing directors could vote to redeem the Rights. Independent directors were defined in the Shareholder Agreement as directors who are not 1) officers of Vestcom, 2) a party to the transaction, or 3) nominated by a party to the transaction. Where the acquiring person does not disclose an intention to cause a business combination, the pill was of the pure dead hand variety; it required a majority of continuing directors to redeem the Rights.

The Vestcom poison pill contains one last quirk. As noted, ten percent was the threshold for triggering the Rights, and acquiring that percentage or greater made one an Acquiring Person for the purposes of the poison pill. This threshold applied only to persons who owned less than ten percent when the pill was adopted. Persons who already owned greater than ten percent on the date the Shareholder Agreement was adopted could increase their holdings up to an additional two percent without triggering the Agreement. Defendants claim that this only includes two entities, a firm called Brookside Capital Partners Fund, L.L.P., (who appears to have no connection to this litigation), and Joel Cartun, the CEO and chairman of Vestom's incumbent board of directors.

Defendants' riposte in the struggle was a counterclaim seeking a declaration that the Shareholder Agreement is contrary to New Jersey law. The counterclaim alleged that the Shareholder Agreement 1) creates classes of directors without amending the certificate of incorporation, 2) disenfranchises shareholders because they cannot vote in a board with the power to redeem the poison pill, and 3) creates an improper obstacle to shareholder's statutory right to call a meeting of shareholders.

The last event of significance occurred on April 19, 2000, well after this motion had been briefed. Vestcom amended the Shareholder Agreement to remove the continuing director provision. In light of the fact that the primary focus of the papers was the dead hand provision of the poison pill, the Court called for a supplemental round of letter briefs regarding the continued viability of defendants' motion with respect to the counterclaim.

Defendants maintain that the Shareholder Agreement, even as amended, still violates New Jersey law. Plaintiff contends that its claims too are still alive, and that defendants' revised Schedule 13D and the amendment of SEC Regulation 14a do not moot its complaint. These are the issues presented by the instant motions.

DISCUSSION

1. The Summary Judgment Standard

The standard for deciding a motion for summary judgment has been stated many times by this Court and will be addressed only briefly here. Summary judgment shall be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see Hersh v. Allen Products Co., 789 F.2d 230, 232 (3d Cir.1986).

In this case, the basic facts are not in dispute. The contested issues are primarily legal, involving only interpretation of the relevant documents and their legality in light of the applicable law. Plaintiff's contend that additional discovery would reveal factual issues in support of their position, and cite Federal Rule of Civil Procedure 56(f)(summary judgment may be denied where party explains why it cannot present evidence in support of its position without further discovery). On the other hand, where the Court finds that the issue to which the requested Rule 56(f) discovery would be relevant is not material to the dispute, a Rule 56(f) objection will not defeat a motion for summary judgment.

2. Mootness of Count One and Two of the Complaint

Under Article III of the United States Constitution, this Court lacks subject matter jurisdiction over a dispute that is moot. International Bhd. of Boilermakers, Iron Ship Builders, Blacksmiths Forgers & Helpers v. Kelly, 815 F.2d 912, 914-15 (3d Cir.1987)(hereinafter "Boilermakers"). Among other formulations, it is...