Over the past several years, shareholder litigation challenging mergers and acquisitions has become a virtual certainty in any sizeable deal. A recent decision from a state court in Pittsburgh illustrates how Pennsylvania law treats such litigation differently.
On April 29, 2013, Judge Christine Ward of the Allegheny County Court of Common Pleas issued an opinion dismissing several lawsuits challenging the proposed $28 billion transaction in which Berkshire Hathaway and 3G Capital would acquire all of the outstanding shares of H.J. Heinz Co.’s (“Heinz”) common stock for $72.50 per share (the “Proposed Merger”). Relying on the Pennsylvania Supreme Court’s decision in Cuker v. Mikalauskas, 692 A.2d 1042 (1997), Judge Ward held that the Heinz Board of Directors had properly exercised its business judgment in seeking to terminate the pending lawsuits based on a report by a Special Litigation Committee (“SLC”), which concluded that the claims alleged in the lawsuits were without merit. Heinz and its Board (the “Heinz Defendants”) were represented by Reed Smith LLP and Davis Polk & Wardwell LLP in the lawsuits.
The Proposed Merger was announced February 14, 2013. Beginning the very next day, lawsuits were filed in state and federal court in Pittsburgh challenging the Proposed Merger. The Heinz Board also received several demand letters from purported shareholders requesting that the Board take action to remedy alleged breaches of fiduciary duty in connection with the Proposed Merger. The claims alleged in the lawsuits and demand letters were those typically seen in shareholders cases challenging mergers: attacks on certain deal terms, including so-called deal protection devices, allegations of inadequate price, and challenges to the disclosures made to shareholders in connection with the Proposed Merger.
In Cuker, the Pennsylvania Supreme Court established the bedrock principles of Pennsylvania corporate law that: (1) “[d]ecisions regarding litigation by or on behalf of a corporation, including shareholder derivative litigation, are business decisions as much as any other financial decisions”; (2) such decisions are “within the province of the board of directors”; and (3) such decisions are “within the scope of the business judgment rule” in the absence of “fraud or self-dealing.” 692 A.2d at 1048. The Supreme Court further set out in Cuker the process to be applied in deciding whether the business judgment rule protected a given board’s decision to terminate pending shareholder litigation. Id., at 1048-49. The court in Cuker also specifically adopted sections 7.02-7.10 and 7.13 of the ALI Principles of Corporate Governance governing shareholder derivative actions. Id. In doing so, the Pennsylvania Supreme Court explicitly declined to follow Delaware law on many of these issues.
Shortly after the filing of the lawsuits challenging the Proposed Merger and the receipt of the shareholder demand letters, the Heinz Board created the SLC to investigate the allegations in the shareholder lawsuits and the demand letters. The SLC retained two law firms to serve as independent counsel in the SLC’s investigation. On April 12, 2013, the SLC issued a written report, in which the SLC recommended that the Heinz Board seek dismissal of the shareholder derivative lawsuits because the alleged claims, and the issues raised in the demand letters, were without merit. Based upon the recommendations set forth in the SLC’s report, the Heinz Defendants moved to dismiss the lawsuits based on Cuker and the provisions of the ALI Principles of Corporate Governance adopted in Cuker.
In the meantime, the plaintiffs in the cases filed in federal court voluntarily dismissed their cases, informing the federal judge that upon further investigation they believed they lacked grounds to stop the Proposed Merger. Some of the plaintiffs in the state court cases likewise voluntarily dismissed their claims. Lead plaintiffs’ counsel in state court elected to forge ahead, however, and filed a motion seeking a preliminary injunction to stop the Heinz shareholder vote on the Proposed Merger, which had been scheduled for April 30, 2013.
On April 29, Judge Ward heard argument on the Heinz Defendants’ motion to dismiss and plaintiffs’ motion for preliminary injunction. Later that day, the court issued an opinion and order dismissing the cases.
In a thorough and well-reasoned opinion, Judge Ward applied the analysis outlined in Cuker for evaluating a board’s decision to terminate shareholder litigation. “Pursuant to Cuker,” Judge Ward wrote, “at this stage in the litigation with regard to Defendants’ Motion to Dismiss, this Court is only permitted to examine the Heinz Board’s decision to terminate the action in light of the findings of the SLC, and to determine whether the decision was proper.” Judge Ward then examined each of the six factors outlined in Cuker to determine whether the Heinz Board appropriately exercised its business judgment when determining that the shareholder derivative lawsuits should be terminated upon the SLC’s recommendation: specifically, whether the SLC (1) was independent, (2) was disinterested, (3) was assisted by counsel, (4) conducted an adequate investigation, (5) prepared a written report, and (6) rationally believed its decision was in the best interest of the corporation. Judge Ward concluded that each Cuker factor was satisfied by the SLC’s investigation and report. Accordingly, the court held that “the business judgment rule protects each of the conclusions reached by the SLC in its report.”
The Heinz decision illustrates that:
In the appropriate circumstances, the propriety of a lawsuit challenging the business judgment of a Pennsylvania corporation’s board of directors can be evaluated, in the first instance, by the formation of an SLC by that corporation’s board.
Under Pennsylvania law, a court will defer to the business judgment of the SLC process, and a Pennsylvania corporation’s board of directors’ adoption of the SLC’s conclusion, so long as the SLC is conducted in accordance with the six Cuker factors.
Pennsylvania law provides for a greater degree of deference to the determinations of a Pennsylvania corporation’s board of directors (as compared with other states such as Delaware), provided that the board of directors exercises its duties in accordance with the business judgment rule and in the absence of fraud, self-dealing or other misconduct or malfeasance.
In addition to representing the Heinz Defendants in the litigation related to the Proposed Merger, Reed Smith LLP regularly represents corporations and their boards of directors in shareholder derivative lawsuits challenging proposed mergers and acquisitions and/or lawsuits alleging a breach of fiduciary duty by a corporation’s board of directors. For more information, please contact the Reed Smith attorneys listed to the left, or your regular contact at the firm.