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.