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refusing to excuse demand as futile where a transaction “could, at least as easily, serve a valid corporate purpose as an improper purpose”
Summary of this case from Shenk v. KarmazinOpinion
CONSOLIDATED Civ. Act. No. 11873.
August 10, 1992.
ROSENTHAL, MONHAIT, GROSS GODDESS, P.A. First Federal Plaza Wilmington, Delaware
Attorneys for Plaintiffs
WOLF POPPER ROSS WOLF JONES New York, New York
Lead Counsel
PLAINTIFFS' RESPONSE TO DEFENDANTS' MOTION FOR REARGUMENT
1. In its opinion granting in part and denying in part defendants' motion to dismiss the amended complaint ("Complaint"), In re Chrysler Corp. Shareholders Litigation, Del. Ch., Cons. C.A. No. 11873, Jacobs, V.C. (July 27, 1992) ("Opinion"), this Court determined that the Complaint alleges facts which create a reasonable doubt that the sole or primary purpose for defendants' amendment of Chrysler's Shareholder Rights Plan ("Rights Plan" or "Plan") was to entrench the defendants in office. As this Court recognized, the facts alleged in the Complaint are assumed to be true for the purposes of this motion, Grobow v. Perot, Del. Supr., 539 A.2d 180, 187 (1988), and the Complaint alleges that the Rights Plan amendments have a present and continuing adverse effect upon Chrysler shareholders' interests and thus states a present claim for rescission.
2. The Court should deny defendants' present motion for reargument for the following reasons which will be set forth more fully below: (a) Defendants raise no new legal or factual issues and no new case law which would change the decision, and they point to no issues which the Court has not already fully considered. Rather, they merely disagree with the Court's reading of the Complaint. (b) Defendants misstate the grounds this Court set forth for its decision and misinterpret the Court's citation of Moran v. Household International, Inc., Del. Ch., 490 A.2d 1059 (1985), aff'd, Del. Supr., 500 A.2d 1346 (1985). (c) Defendants misstate the holding and import of Moran itself and rely heavily on a case which, when read in its entirety, supports the Opinion. Chrysogelos v. London, Del. Ch., C.A. No. 11910, Jacobs, V.C. (March 25, 1992) (Exhibit A to Defendants' Motion).
The Standards For Granting Or Denying This Motion
3. "[A] motion for reargument will not be granted unless it appears that there is some decision or some principle of law which would have a controlling effect and which has been overlooked or there has been a misapprehension of the law or of the facts that would change the outcome of the decision."Merrill Lynch Pierce Fenner Smith, Inc. v. Shin, Del. Ch. C.A. No. 7424, slip op. at 2. Longobardi, V.C. (June 13, 1984) (court denied motion for reargument) (Exhibit C to Defendants' Motion). Defendants quote from that sentence (Defendants' Motion at ¶ 3), but omit the rest of the passage: "The motion is not designed to accommodate a reargument of matters which were previously considered and determined." Merrill Lynch, slip op at 2.
4. Defendants cite no overlooked or misapprehended matters of fact or law, but rather simply rehash arguments already raised and considered by the Court. The Court fully considered and applied the test for demand futility set forth in Aronson v. Lewis, Del. Supr., 473 A.2d 850 (1984), and Pogostin v. Rice, Del. Supr., 480 A.2d 619 (1984), which defendants cited in their Reply Brief. The Court fully examined the allegations in the Complaint, fully explored the applicability of the Moran case thereto, and concluded that the alleged facts were so close to those in Moran that, when taken with other facts not found inMoran, they raised a reasonable doubt that the defendants' sole or primary purpose was to entrench themselves in office. Defendants simply disagree with the Court's description of the Complaint and the Court's application of Moran to the alleged facts. In effect, they merely ask this Court to change its mind — an insufficient ground for granting a motion for reargument. For this reason alone, the Court should deny the motion. At any rate, the Court's findings were correct, as shown below.
The Court Correctly Found That The Complaint Raises A Reasonable Doubt That Defendants' Sole Or Primary Purpose Was To Entrench Themselves
5. Defendants rely almost totally on their argument that, whereas in Moran the complaint alleged that an amended "poison pill" deterred all hostile takeover attempts, the Complaint here does not so allege. The Opinion, of course, found that the Complaint does allege that the Rights Plan amendment, which lowered the poison pill "trigger" to 10% of Chrysler common stock, deters all hostile takeover attempts by limiting the exercise of proxy rights and is therefore very similar to the complaint in Moran. However, defendants misread the Opinion when they argue that this finding was the sole basis for the Court's holding that the Complaint met the demand futility requirement set forth in Aronson and Pogostin. In fact, the Opinion held that defendants' lowering of the trigger as inMoran, plus the fact that even a combination of shareholders holding 10% would trigger the Plan, plus the allegation that the amendment was in direct response to Kerkorian's purchase of Chrysler shares, plus the allegation that Kerkorian was a passive investor who posed no threat to Chrysler or its shareholders, when taken together, raised a reasonable doubt as to defendants' entrenchment motives. Opinion at 8-9. Thus,Moran was not, nor need it be, the sole basis for the Court's holding.
6. Moreover, the Opinion was correct to find that, as inMoran, the Complaint alleges that the Rights Plan amendment deters all takeover attempts. Defendants argue that because the Complaint uses words like "impair," "hinder," and "limit," to describe the effect of the Rights Plan amendment on takeover attempts and proxy contests, it amounts to alleging that the amendments only deter some proxy contests. Defendants' Motion at ¶ 5. But this is playing with semantics. Defendants ignore that the Rights Plan amendment, and the allegations concerning it, closely parallel those in Moran; indeed, this case presents an even stronger basis than Moran for holding that the Complaint alleges that the amendments deter all takeover attempts. The shareholder rights plan amendment in Moran, like the amendment in this case, was a "poison pill" which plaintiffs alleged (1) abridged fundamental rights of stock ownership byrestricting the alienability and marketability of shares and (2) severely limiting the ability of shareholders to engage in proxy contests. 490 A.2d at 1063-64. The Moran amendment, as in this case, was also alleged to be in response to an individual's acquisition of company shares, and, as in this case, it was alleged that there was "no indication that Moran ever intended a hostile takeover." Id. at 1065.
7. The Moran poison pill was, in many respects, less entrenching than the amendment in this case. The Moran amended rights plan was triggered by a party's acquisition of 20% of the company's shares or by a tender offer for 30% of the shares. Here, the trigger was lowered to only 10% of Chrysler shares by any person or even any group of persons. Id. at 1066. Also, the Moran poison pill was only a right to purchase one one-hundredth of a share of participating preferred stock, whereas the Chrysler pill is the right to buy a whole share.Id. Defendants ignore these facts because they show that the Rights Plan amendment in this case presents an even stronger basis than that in Moran for the Court's conclusion that the Complaint adequately alleges that the amendment deters all takeover attempts.
Defendants also argue that under Moran, this Court could not find, as a matter of law, that the amendment deters all proxy contests, because of a quote in Moran noting instances in which insurgents with less than 10% control were able to secure corporate control. Defendants' Motion at ¶ 7. However, the factual finding there discussed was made after trial, not on a motion to dismiss; the effect of the amendment in this case has not yet been factually developed through discovery and trial.
8. Defendants rely heavily on the Chrysogelos case to distinguish Moran from the present case. But Chrysogelos only supports the Opinion's conclusions. In that case, this Court denied defendants' motion to dismiss the Complaint under Rule 23.1. The Court held that, although a number of alleged facts, ifconsidered separately, could not create a sufficient doubt as to the directors' entrenchment motives, they could together create such doubt. The relevant alleged facts were that, shortly after the death of the company's major shareholder, which significantly altered the structure of the company and defendants' hold on the company's directorships, defendants took the following actions: (1) reduction of a poison pill trigger from 20% to 15%; (2) repurchase of the deceased's estate's shares at a premium over market; (3) failure to disclose an acquisition overture and its rejection by the board. This Court stated:
These circumstances, viewed in combination, create a reasonable doubt that in approving the Karr Estate stock repurchase and rejecting the LHN [acquisition] proposal, the defendant directors were acting for the primary purpose of maintaining themselves in office. Chrysogelos, slip op. at 21. Similarly in this case, this Court held that the reduction of the Rights Plan trigger to 10%, plus the fact that even a combination of shareholders holding 10% would trigger the Plan, plus the allegation that the amendment was in direct response to Kerkorian's purchase of Chrysler shares, plus the allegation that Kerkorian was a passive investor who posed no threat to Chrysler or its shareholders, when taken together, raised a reasonable doubt as to defendants' entrenchment motives.
Although this Court in Chrysogelos held that the trigger reduction from 20% to 15% was not in itself enough to raise such a reasonable doubt, that was because the complaint, unlike the present Complaint, did not allege that the reduction deterred all takeover attempts by effectively precluding proxy contests as well as tender offers. Slip op. at 20 n. 11.
9. Defendants also quibble with this Court's findings regarding Kerkorian's purchase of Chrysler shares, asking that this Court now hold it as a fact that Kerkorian never suggested that he was a passive investor until his 13D filing on December 17, 1990. Defendants' Motion at ¶ 10. They argue that the only reasonable inference from the allegations is that none of the defendants knew of Kerkorian's passivity before the 13D filing, and state bluntly that this Court was simply wrong to hold that "it is inferable from the complaint that Kerkorian had made his intentions known [before the 13D filing]." Opinion at 9 n. 6. Again, this is simply a disagreement with the Court's characterization of the Complaint and an improper basis for this motion. Moreover, defendants again forget that the Opinion dealt with a motion to dismiss; they ask the Court to make factualconclusions from the Complaint's allegations. Plaintiffs did not need to show on the motion to dismiss that the only reasonable inference is that Kerkorian's passivity was known to defendants before December 17, only that that is a reasonable inference. The Court, accordingly, correctly held that it was reasonable to infer that Kerkorian's first expression of passivity was before the 13D filing, and there is no reason to disturb this finding on a motion for reargument, particularly since defendants have adduced no new facts or law in support of their argument. Moreover, defendants again treat this one fact as though it were the only basis for concluding that there is a reasonable doubt as to defendants' entrenchment motives. Id. at ¶ 11. Obviously, such is not the case. Kerkorian's passivity was only one of several factors for the Court's conclusion.
Defendants also inexplicably argue that Kerkorian could become non-passive in the future. True, and the Board could rescind the Rights Plan amendment in the future, too. That simply is no reason for the Court now to alter its conclusion that, at the time of the amendment, Kerkorian was passive and that defendants' actions raise a reasonable doubt about their motives. As defendants themselves note, the "validity of stock rights must be measured at the time of the corporate actions taken and not in light of future events after issuance." Defendants' Motion at ¶ 10, citing Stahl v. Apple Bancorp, Del. Ch., C.A. No. 11510, Allen, C., slip op. at 13 (August 9, 1990) (Exhibit D to Defendants' Motion).
10. Defendants' position apparently is that no shareholder rights plan, anytime, any place, could be even a partial basis for raising a reasonable doubt about directors' entrenchment motives unless the plan were unequivocally to "prohibit a change in control." Defendants' Motion at ¶ 13. Obviously, as this Court already has recognized, and as Moran and Chrysogelos show, that is not the law and is certainly no basis for granting defendants' motion.
11. Finally, defendants ignore the fact that, because the Court held that the Complaint satisfied the stringent standards for demand futility set forth in Aronson and Pogostin, the Court did not even decide whether the Complaint stated individual and class claims as well as derivative claims under Avacus Partners, L.P. v. Brian, Del. Ch., C.A. No. 11001, Allen, C. (Oct. 24, 1990), or whether it should apply the less stringent standards for derivative complaints set forth in Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d (1985). Defendants do not even address these two fully adequate independent grounds for denying the motion to dismiss.
Conclusion
12. Defendants' arguments boil down to a simple disagreement with the Court's interpretation of the facts alleged in the Complaint. As noted above, this is an inadequate reason for granting a motion for reargument. For all of the above reasons, the motion for reargument should be denied.