Opinion

Alison Frankel

Wachtell plays shareholder savior in weird National Interstate case

By Alison Frankel
March 17, 2014

There is probably no law firm more closely associated with corporate charter and bylaw provisions requiring shareholders to litigate their claims in Delaware Chancery Court than Wachtell, Lipton, Rosen & Katz. Wachtell didn’t defend the Chevron and FedEx cases that led then Chancellor Leo Strine to uphold the validity of forum selection clauses, but Wachtell partners Theodore Mirvis and William Savitt (among others) have been ardent boosters of the tactic as a means of curbing the expensive and duplicative shareholder suits that almost inevitably now follow deal announcements.

That’s what makes Wachtell’s role in the litigation over American Financial’s tender offer for the 48 percent stake in National Interstate that it doesn’t already own so notable. In representing a shareholder seeking to squelch the deal – National Interstate founder Alan Spachman, who owns more than 9 percent of the outstanding shares – Wachtell engaged in the sort of forum selection gamesmanship we usually see from shareholder class action firms, leading to accusations of forum shopping that Wachtell is more accustomed to tossing than receiving. After two different state court judges in Ohio refused to enjoin American Financial’s $30 per share tender offer to National Interstate’s minority shareholders, despite widespread criticism of the sale process, Wachtell and Baker & Hostetler sued on Spachman’s behalf in federal court in Akron, adding federal securities claims to the breach of duty assertions in the two previous cases.

The third time turned out to be the charm for National Interstate’s minority shareholders. Despite American Financial’s arguments that Spachman and his lawyers were blatantly shopping for a friendly judge and that a single shareholder should not be permitted to block a $300 million deal, U.S. District Judge James Gwin was willing to grant what his state-court cohorts were not. At the end of a long hearing Friday, Gwin said he would enjoin the tender offer from closing Monday. On Sunday, American Financial announced that it was dropping the offer and returning shares already tendered.

So how did Wachtell and Baker & Hostetler manage to obtain what the shareholder class action bar could not? As I’ve previously reported, National Interstate’s minority shareholders were blessed (at least for litigation purposes) with unusually egregious facts. The board of the small trucking industry insurer is controlled by its majority owner, the insurance megalith American Financial. Yet when American Financial decided to make a surprise $28-per-share offer for the minority shares, the board didn’t even bother to establish a special committee to evaluate the offer. The company did bring in a financial advisor, Duff & Phelps, which concluded $28 per share was inadequate. Conflicted board members supposedly leaked the Duff analysis to American Financial, which then sweetened the offer to $30 per share – at the very low end of the Duff & Phelps valuation. Duff & Phelps then resigned from the assignment, and the National Interstate board, without any advisor to opine on the offer, voted not to make a recommendation to shareholders. Spachman, who sits on the National Interstate board, was so incensed by the tender offer process that he filed an extremely rare denunciation of the deal with the Securities and Exchange Commission.

Inevitably, the public messiness of the deal attracted shareholder lawyers. Wolf Popper struck first, alleging in a breach of duty class action in state court in Cincinnati that American Financial’s offer was both inadequate and coercive, since it included provisions to disadvantage stockholders who refused to tender their shares. A week later, Labaton Sucharow and Friedman Oster filed their class action in Akron state court, fleshing out the allegations from the first suit and adding National Interstate’s supposedly conflicted directors as defendants. The fight to retain control of the shareholder litigation was even more brutal than usual, but eventually the Akron judge concluded that she didn’t have jurisdiction because the Cincinnati case was filed first. The Cincinnati judge, meanwhile, refused to grant Wolf Popper’s motion for a preliminary injunction because she concluded there was no irreparable harm to shareholders if the deal went through: If they were indeed underpaid for their shares, they could be compensated by money damages after the tender offer closed. She set a trial schedule for the damages case but said the deal could proceed.

Spachman, however, wasn’t satisfied to be a member of the shareholder class in Cincinnati, with his interests represented by lawyers not of his choosing. (He had supported the Labaton group, and his Baker lawyers made their opinion of the other case all too clear in a letter the Cincinnati judge ultimately refused to consider.) On March 3, after American Financial changed the terms of the deal to increase the risk to shareholders inclined to refuse to tender their shares, Wachtell and Baker & Hostetler filed Spachman’s complaint in federal court. A couple of days later, they moved to block the offer from closing, asserting newly uncovered evidence that American Financial didn’t tell shareholders about National Interstate’s optimistic five-year projections and only disclosed its own darker three-year projections to make its offer appear more reasonable.

To establish the jurisdiction of a federal judge, Wachtell and Baker claimed that American Financial’s inadequate revelations violated the Williams Act, an amendment to the Securities Act of 1933 that covers disclosures in tender offers. In this era of multiforum deal litigation, adding a federal securities claim to get a breach-of-duty M&A class action into federal court has become a standard device for shareholder lawyers looking for a way to make deal litigation more burdensome for defendants. Sometimes federal judges permit these hybrid cases to move ahead; sometimes they defer to state court judges, usually in Delaware.

Here, American Financial’s lawyers at Keating Muething & Klekamp; Calfee, Halter & Griswold; and Skadden, Arps, Slate, Meagher & Flom contended in their opposition to Spachman’s injunction motion that Wachtell and Baker were engaged in particularly offensive forum shopping because two Ohio state judges had already refused to grant the very restraint Spachman wanted the federal judge to award. “The Williams Act claim is a ruse,” said American Financial counsel Mitchell Blair of Calfee at Friday’s hearing. “The only reason (it was) put forth in this action is that Mr. Spachman is forum shopping. He didn’t get what he wanted in the two cases below.”

American Financial also argued that Spachman is part of the shareholder class whose case is already under way before the state judge in Cincinnati. Wachtell and Baker & Hostetler said he’s not, since no class has yet been certified in that litigation (and they have doubts about the lead plaintiff’s adequacy).

By the evidence of the transcript of Friday’s hearing, Judge Gwin was quite intrigued by the question of his jurisdiction but was so thoroughly convinced by Spachman’s lawyers that he told them not to bother addressing the issue in their closing argument. Gwin found that the Ohio state-court denial of a preliminary injunction didn’t mean the question was resolved because it wasn’t a final judgment. The Spachman case asserted two causes of action that weren’t in the Cincinnati case, he said – the Williams Act claim and a claim under Ohio securities law that the tender offer violated anti-coercion provisions – so the two suits were distinct. He also agreed that Spachman wasn’t precluded from seeking an injunction because he was not a party in the Cincinnati case. Given the irreparable harm to shareholders if American Financial were permitted to complete the tender offer and the substantial likelihood that Spachman would prevail in proving that the disclosures were inadequate and the terms coercive, the judge said that the equitable course was to stop the offer. Gwin said Friday that he’d later issue a formal opinion because the intersection of the state and federal cases is “something of an interesting question.”

Shareholder lawyer Carl Stine of Wolf Popper told me Monday that the National Interstate case shows what a difference a judge can make in these shareholder M&A cases. Wachtell and Baker & Hostetler put forth basically the same allegations for Spachman that he made for the class in Cincinnati, Stine said. Judge Gwin was persuaded; the state judge was not. According to Stine, his money damages case is now mooted since American Financial pulled the tender offer. He said it’s unlikely he’ll end up with any compensation for his work on the class action.

I suspect that Wachtell and Baker & Hostetler would point out that they argued causes of action that weren’t in Wolf Popper’s class action, and that Judge Gwin seemed particularly troubled by the new allegation that American Financial failed to inform shareholders about the National Interstate projections that were the basis of Duff & Phelps’ optimistic valuation of the company. Wachtell would also probably say that there’s nothing unusual about the firm fending off an unwanted takeover, since that’s Wachtell’s usual role. Nevertheless, I’m sticking by my premise that it’s exceedingly rare for Wachtell to be on the plaintiff’s side of the “v.” in a shareholder suit.

Wachtell partner David Silk declined to comment, as did American Financial counsel James Burke of Keating Muething.

(Reporting by Alison Frankel)

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