Opinion

Alison Frankel

Brutal accusations fly in fight to lead juicy M&A derivative case

By Alison Frankel
February 28, 2014

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.

You may be wondering here why Labaton and Friedman Oster filed their own case instead of teaming up with Wolf Popper, as plaintiffs lawyers often do in shareholder derivative litigation. Wolf Popper, after all, was the first to file a suit, but its name plaintiff isn’t ideal: He’s a former National Interstate employee who sued the company for wrongful termination in 2012. (He subsequently dropped the suit.) The lead shareholder in the Akron suit is an institutional investor, Cambridge Retirement System. Carl Stine of Wolf Popper told me he’s worked with Labaton in the past and wouldn’t have been averse to joining forces again. “But instead of asking us to work together,” he said, “they did everything they could to get ahead of us.”

In their Feb. 25 response to the defendants’ motion to dismiss, Labaton and Friedman Oster laid out the reasons they didn’t support the Cincinnati case. In addition to Bernatchez’s potential deficiencies as a lead plaintiff, they pointed out, the original Wolf Popper complaint didn’t name National Interstate’s non-independent directors. The controlled board members, according to Labaton and Friedman Oster, were only added to the Cincinnati suit in a hastily-drafted amended complaint after they moved for a temporary restraining order. Moreover, they said, the timing of the defendants’ agreement to produce documents to Wolf Popper was fishy. American Financial and Great American are major businesses in Cincinnati. Once the defendants realized they might have to litigate instead in National Interstate’s hometown of Akron, according to Labaton and Friedman Oster, they made a deal with Wolf Popper in order to stay in Cincinnati. “Defendants co-opted the (Cincinnati) plaintiff in order to avoid facing claims in this county,” their brief said. “Defendants have engaged in plainly collusive conduct.” (The filing does not flat-out accuse Wolf Popper of collusion, but that’s the implication.)

On Tuesday, Feb. 25, the Akron judge, Alison McCarty, said she was inclined to dismiss the Labaton and Friedman Oster case. The firms asked her to reconsider.They also went to court in Cincinnati on Thursday for a hearing on Wolf Popper’s motion to bar the tender offer from moving ahead. Jeremy Friedman of Friedman Oster told me he was stunned to hear Stine of Wolf Popper inform the Cincinnati judge, Beth Myers, that the class was deep in settlement negotiations with American Financial and the other defendants and that a deal might be completed by Friday. “He told the judge it would be a disclosure settlement with tweaks,” Friedman said. (Stine did not actually describe any such settlement at the hearing, according to a transcript of the hearing. He did tell the judge that changes in the proxy materials could resolve the deficiencies that prompted the injunction motion.)

That announcement sent Alan Spachman – the National Interstate founder and director who had disclosed his opposition to the tender offer to the SEC – over the edge. Spachman is represented by Wachtell Lipton and Baker Hostetler, which are usually on the opposite side from plaintiffs firms like Labaton. But on Friday, Baker Hostetler sent an extraordinary letter to Judge Myers in Cincinnati, joining in the attack on Wolf Popper.

“One would hope and expect that lawyers litigating the case on behalf of minority shareholders would do so vigorously,” the letter said. “Here, however, putative class counsel appears to have negotiated a settlement that would purport to release claims of enormous value to the class just four days after adding the interested directors as defendants in this litigation and without having taken any meaningful discovery. Not a single defendant has been deposed. Nor has counsel spoken to any of the independent directors about what happened. In short, counsel has made no meaningful investigation into what has transpired.” The letter went on to discuss what it called the “troubling history” of Wolf Popper as class counsel in a 2010 Delaware derivative case, In re Revlon, in which the firm reached a quick settlement. “In all likelihood, (Stine) is attempting to cause the class to release enormous damages claims for little more than additional disclosures so that he may earn a fee for himself,” the Baker letter said. “In short, we believe he is violating his obligations to Mr. Spachman and the other minority shareholders he is claiming to represent.”

Judge Myers called another hearing Friday morning, at which Stine said the class and the defendants had not reached a settlement. The judge entered the Baker letter in the record but refused to consider its allegations because Spachman hasn’t intervened in Wolf Popper’s case. Myers also denied Wolf Popper’s motion to enjoin the tender offer because she said money damages would adequately compensate shareholders for any harm. The judge did, however, set a trial schedule for the case, which suggests that Myers has no qualms that she has jurisdiction over shareholder claims against National Interstate’s majority owners.

Stine of Wolf Popper told me that as far as he’s concerned, he’ll be litigating the minority shareholders’ case. He also said the accusations against him and his firm are “unprofessional mudslinging,” and untrue to boot: Stine said he discussed settlement with the defendants only because the judge strongly encouraged discussions, not because he’s colluding. He didn’t agree to any disadvantageous deal, either in this case or in Delaware, where he said he’s been appointed class counsel numerous times after the 2010 case cited in the Baker Hostetler letter. “That letter was offensive to me,” he said. “And I had the feeling in court that the judge was offended by it. I love this litigation. I love this kind of case. I did not love the Baker Hostetler letter.”

Friedman, meanwhile, said he is still hoping to persuade Judge McCarty to entertain a TRO motion in the Akron class action. Because the Cincinnati case didn’t name the controlled director defendants until after the Akron suit was filed, he said, “we have a pretty strong argument that our judge should not have divested herself of jurisdiction.” There’s also a public policy argument that courts should not favor shareholders who rush to court with underdeveloped arguments over those who wait until facts are clearer, he said, nor should judges permit defendants to forum shop and strike supposedly collusive deals. “It would be a miscarriage of justice to let (the Cincinnati case) go forward,” Friedman said.

Great American counsel Burke declined to comment on the merits of the case, but gave me a statement on the fight between the plaintiffs firms. “American Financial Group and Great American are pleased the Hamilton County court has denied the motions for a temporary restraining order and preliminary injunction,” he said. “Others are apparently disappointed and are attempting inappropriately to litigate this matter in the press. We deny any allegation of collusion.”

(This story has been updated to include information from the transcript of the hearing on Feb. 27. That transcript was not available at the time the story was originally published.)

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