By Alison Frankel
Feb 28 (Reuters) – If the allegations of the minority shareholders of a small Ohio property insurer called National Interstate are true, the conduct of National Interstate’s majority owner, Great American Insurance, is egregious enough to make even Charles Ergen blush. A subsidiary of the insurance megalith American Financial, Great American proposed in early February a surprise $28-per-share tender offer to acquire the 48 percent stake in National Interstate that it doesn’t already own. Even its own financial advisor, Duff & Phelps, considered that price inadequate, as did the four independent board members of National Interstate, who urged Great American to establish a special committee to negotiate a fair price. That suggestion went nowhere, but earlier this month Great American and American Financial boosted the bid to $30 – so long as the independent directors agreed to support the sweetened offer. They protested to no avail: Six National Interstate directors in the sway of Great American and American Financial voted to announce a neutral position on the tender offer, according to an account of the dispute by The Wall Street Journal’s Liz Hoffman, and the bid went public.
In the tumultuous week that followed the tender offer’s announcement, Duff & Phelps resigned as Great American’s financial advisor and one of the independent directors, National Interstate founder Alan Spachman, filed an extremely rare denunciation of the bid with the Securities and Exchange Commission. Spachman, who owns about 9 percent of National Interstate’s shares, called Great American’s tender offer a “brazen attempt by a majority shareholder to force minority shareholders of the company to sell their shares at a price that is unfairly low, pursuant to a flawed process orchestrated by the majority shareholder, on terms which are designed to be extremely coercive and with inadequate disclosure to the public holders of shares.”
I am sure that when the time comes, Great American, American Financial and their lawyers – at Keating Muething & Klekamp; Calfee, Halter & Griswold and Day Ketterer – will explain why the tender offer is perfectly fair and the process that produced it is beyond reproach, but it’s not entirely clear where they will ultimately have the opportunity to do so. Will it be in Cincinnati’s Hamilton County, where the plaintiffs firm Wolf Popper filed a shareholder derivative class action on Feb. 11, before National Interstate’s board even took a vote on the offer? Or will it be in Summit County Court in Akron, Ohio, where National Interstate is based and where Labaton Sucharow and Friedman Oster filed their shareholder complaint on Feb. 18?
Plaintiffs lawyers aren’t often blessed with facts like those alleged in the National Interstate tender offer, which the shareholder advisory firm Institutional Shareholder Services described as raising “every red flag in the semaphore.” So you would expect more than one plaintiffs firm to angle for a piece of such promising litigation. But even by the street-brawling standards of lead counsel battles, the fight to control the National Interstate litigation has been brutal, with the dreaded C-word – collusion – being flung about and two big defense firms, Wachtell, Lipton, Rosen & Katz and Baker & Hostetler, making unusual appearances in the middle of the shareholder scrum. As of Friday afternoon, it appeared that Wolf Popper’s Hamilton County case would move forward, but that could change Monday, after a scheduled hearing in Labaton’s Summit County class action. I have a feeling the shareholder-on-shareholder nastiness in this litigation hasn’t yet hit its peak (or nadir, depending on your perspective).
This dual-track case has moved fast. Wolf Popper filed its suit, on behalf of a former National Interstate employee named Robert Bernatchez, on Feb. 11, naming only American Financial, Great American and National Interstate. On Feb. 18, Wolf Popper moved for expedited discovery. The same day, Labaton and Friedman Oster filed the second shareholder class action in Akron and the defendants, according to an affidavit by Great American counsel James Burke of Keating Muething, agreed to begin producing documents to Wolf Popper. A few days later, they moved to dismiss the second case, arguing that under Ohio state law, the judge presiding over the first-filed case retains jurisdiction.