Zalvin v. Ayers

• Decision Date: 10 August 2020
• Docket Number: NO. C-190285,C-190285
• Citation: 157 N.E.3d 256,2020 Ohio 4021
• Parties: Joel ZALVIN, Plaintiff-Appellant, v. Andrea J. AYERS, Cheryl K. Beebe, Richard R. Devenuti, Jeffrey H. Fox, Joseph E. Gibbs, Joan E. Herman, Robert E. Knowling, Jr., Thomas L. Monahan, III, Robert L. Nelson, and Convergys Corp., Defendants-Appellees.
• Court: Ohio Court of Appeals

157 N.E.3d 256

2020 Ohio 4021

Joel ZALVIN, Plaintiff-Appellant,

v.Andrea J. AYERS, Cheryl K. Beebe, Richard R. Devenuti, Jeffrey H. Fox, Joseph E. Gibbs, Joan E. Herman, Robert E. Knowling, Jr., Thomas L. Monahan, III, Robert L. Nelson, and Convergys Corp., Defendants-Appellees.

NO. C-190285

Court of Appeals of Ohio, First District, Hamilton County.

Date of Judgment Entry on Appeal: August 10, 2020

The Brualdi Law Firm, P.C., Richard B. Brualdi and John F. Keating, Jr., and Altick & Corwin Co. L.P.A. Dayton, and Steven E. Bacon, for Plaintiff-Appellant.

Dinsmore & Shohl LLP and Mark A. Vander Laan, and Pillsbury Winthrop Shaw Pittman LLP and Bruce A. Ericson, San Francisco, for Defendants-Appellees.

OPINION.

Zayas, Judge.

{¶1} Plaintiff-appellant Joel Zalvin appeals from the judgment of the Hamilton County Court of Common Pleas, which dismissed his second amended complaint. Defendants-appellees in this case are Convergys Corporation ("Convergys") and nine of its directors ("defendant directors"): Andrea J. Ayers, Cheryl K. Beebe, Richard R. Devenuti, Jeffrey H. Fox, Joseph E. Gibbs, Joan E. Herman, Robert E. Knowling, Jr., Thomas L. Monahan, III, and Robert L. Nelson. Zalvin, on behalf of a class of nominal shareholders, filed a shareholder derivative class action against Convergys and the defendant directors alleging improprieties in the sale of Convergys to Synnex Corporation. For the following reasons, we affirm the trial court's judgment.

I. Facts and Procedural History

{¶2} In June 2018, the Cincinnati-based Convergys publicly announced its decision to merge with Synnex. In August 2018, Convergys and Synnex filed with the Securities and Exchange Commission ("SEC") a proxy statement, which was over 300-pages, explaining the merger, and asked their respective shareholders to vote on it. In September 2018, Zalvin, who owned shares of Convergys' common stock continuously since May 2016, sued for breach of fiduciary duty and failure to disclose. Zalvin alleged that the defendant directors had conflicts of interest in favor of the transaction and that Convergys's proxy statement was materially deficient. Zalvin moved to enjoin the shareholder vote.

{¶3} Following a hearing on Zalvin's motion for a preliminary injunction, the motion was denied. The sale of Convergys to Synnex closed in early October 2018. For each share they owned, Convergys shareholders received $13.25 cash and 0.1263 shares of Synnex common stock, for a total value of $24.51 at closing.

{¶4} In November 2018, Zalvin filed his second amended complaint, adding additional claims regarding the defendant directors' alleged self-dealing and omissions from the proxy statement. Zalvin also complained that the shareholders were deprived of over $2 per share (as they received $24.51 per share rather than $26.66, the high closing price of Convergys stock in 2017), or $600 million collectively, because the defendant directors failed to include a floating exchange ratio in the sale agreement. Zalvin asked the court to, among other things, rescind the sale, award compensatory damages, and order the defendant directors to disgorge the sums paid to them as a result of the sale.

{¶5} Convergys and the defendant directors (collectively, "appellees") filed a motion to dismiss Zalvin's second amended complaint pursuant to Civ.R. 12(B)(1) and 12(B)(6). Appellees argued that the court did not have jurisdiction because Zalvin had failed to bring a claim under R.C. 1701.85, Ohio's appraisal statute, which appellees contended provided the sole relief available to Zalvin for his complaint over an "inadequate price." Appellees argued that Zalvin did not state a claim upon which relief can be granted because the conclusions in Zalvin's second amended complaint were unsupported. And, appellees argued that Zalvin had not properly pleaded all of the requirements of Civ.R. 23.1 (governing shareholder derivative actions) because he did not adequately establish demand futility—a requirement that a shareholder exhaust his intra-corporate remedies before filing a derivative suit. See In re Lubrizol Shareholders Litigation , 2017-Ohio-622, 79 N.E.3d 579, ¶ 33 (11th Dist.).

{¶6} In April 2019, the trial court granted appellees' motion to dismiss on all three bases put forth in the motion. Zalvin now appeals, asserting two assignments of error.

II. Analysis

{¶7} In his first assignment of error, Zalvin argues that the trial court erred in dismissing the complaint with prejudice. Zalvin contends that the trial court's ruling was a decision otherwise than on the merits and thus the trial court should have indicated that it was a dismissal without prejudice. In his second assignment of error, Zalvin argues that the trial court erred in granting appellees' motion to dismiss pursuant to Civ.R. 12(B)(1) and 12(B)(6). We address Zalvin's assignments of error out of order.

Ohio's Appraisal Statute – R.C. 1701.85

{¶8} We first consider the trial court's dismissal of Zalvin's complaint for lack of subject-matter jurisdiction pursuant to Civ.R. 12(B)(1). The trial court concluded that Zalvin did not act in accordance with Ohio's appraisal statute, R.C. 1701.85, and thus the court was without jurisdiction over the subject matter. Appellees maintain, and the trial court agreed, that Zalvin's complaint was in essence a challenge to the value paid for his shares in the cash-out merger and was merely disguised as a complaint for breach of fiduciary duty and failure to disclose. Such an action must be brought under the appraisal statute. See Stepak v. Schey , 51 Ohio St.3d 8, 553 N.E.2d 1072, 1075 (1990).

{¶9} " R.C. 1701.85, is designed to provide compensation for those shareholders who dissented from the merger." Stepak at 11, 553 N.E.2d 1072, citing Armstrong v. Marathon Oil Co. , 32 Ohio St.3d 397, 513 N.E.2d 776 (1987). "It provides for the payment of fair cash value to a shareholder for his or her shares as of the day prior to the vote of the shareholders." Id. "[A]n action for breach of fiduciary duty may be maintained notwithstanding R.C. 1701.85 ; however, such action may not seek to overturn or modify the fair cash value determined in a cash-out merger." Stepak at 10, 553 N.E.2d 1072. "A cause of action outside of the appraisal statute will not be recognized ‘where the shareholder's objection is essentially a complaint regarding the price which he received for his shares.’ " Smith v. Robbins & Myers, Inc. , 969 F.Supp.2d 850, 861-862 (S.D. Ohio 2013), quoting Stepak at 11, 553 N.E.2d 1072. The plaintiff in Stepak "did not allege that his shares were undervalued—rather he alleged that he should have received more money for his shares—thus ‘[s]uch action, merely asking for more money, per Armstrong must be brought under the appraisal statute.’ " Smith at 862, quoting Stepak at 11, 553 N.E.2d 1072.

{¶10} Here, Zalvin alleges that the shares were in fact undervalued. The direct and derivative breach-of-fiduciary-duty claims challenge the defendant directors' fair dealing and the substantive fairness of the merger process. The second amended complaint alleges that defendant directors breached their fiduciary duties by approving the merger in order to secure personal benefits unrelated to the merits of the transaction. Additionally, the second amended complaint alleges that the defendant directors secured the unfair merger by soliciting shareholder votes with a misleading and materially deficient proxy statement. See Smith at 862, citing Terry v. Carney , 6th Dist. Ottawa No. OT-94-054, 1995 WL 763971, *6.

{¶11} Accordingly, considering the second amended complaint in the light most favorable to Zalvin, we find that his allegations are not simply disguised attempts to modify the cash value received, and therefore the appraisal statute does not bar this action.¹

Dismissal for Failure to State a Claim

{¶12} We next consider the trial court's decision to dismiss Zalvin's second amended complaint for the failure to state a claim upon which relief can be granted pursuant to Civ.R. 12(B)(6).

{¶13} The standard of review applied to dismissals for failure to state a claim is de novo. Corrado v. Lowe , 11th Dist. Geauga No. 2014-G-3239, 2015-Ohio-1993, 2015 WL 3370136, ¶ 22. When considering a Civ.R. 12(B)(6) dismissal, the court must presume that all factual allegations of the complaint are true, and it must make all reasonable inferences in favor of the nonmoving party. It must then appear beyond doubt that the nonmoving party can prove no set of facts entitling it to the requested relief in the complaint. Avery v. Rossford, Ohio Transp. Improvement Dist. , 145 Ohio App.3d 155, 164, 762 N.E.2d 388 (6th Dist.2001), citing Mitchell v. Lawson Milk Co. , 40 Ohio St.3d 190, 192, 532 N.E.2d 753 (1988). However, the court is not required to presume the truth of conclusions in the complaint unsupported by factual allegations. Guess v. Wilkinson , 123 Ohio App.3d 430, 434, 704 N.E.2d 328 (10th Dist.1997) ; Swint v. Auld , 1st Dist. Hamilton No. C-080067, 2009-Ohio-6799, 2009 WL 4986736, ¶ 3 ; Maternal Grandmother v. Hamilton Cty. Dept. of Job & Family Services , 1st Dist. Hamilton No. C-180662, 2020-Ohio-1580, 2020 WL 1983759, ¶ 21. Additionally, the court may not rely upon evidence outside of the complaint when considering a Civ.R. 12(B)(6) motion, but "[m]aterial incorporated in a complaint may be considered part of the complaint for purposes of determining a Civ.R. 12(B)(6) motion to dismiss." State ex rel. Crabtree v. Franklin Cty. Bd. of Health , 77 Ohio St.3d 247, 249, 673 N.E.2d 1281 (1997), fn. 1, citing State ex rel. Edwards v. Toledo City School Dist. Bd. of Edn. , 72 Ohio St.3d 106, 109, 647 N.E.2d 799 (1995) ; see Henkel v. Aschinger , 167 Ohio Misc.2d 4, 2012-Ohio-423, 962 N.E.2d 395, ¶ 8 (C.P.) (considering proxy statement referred to in plaintiff's complaint and publicly filed with the SEC in ruling on a motion to dismiss).²

{¶14} Zalvin's second amended complaint alleges four causes of action: two direct...