1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 SAN JOSE DIVISION United States District Court For the Northern District of California 10 11 IRENE DIXON, on behalf of herself and all others similarly situated, 12 13 14 Plaintiff, v. COST PLUS, et al., Defendants. 15 16 ) ) ) ) ) ) ) ) ) ) ) Case No.: 12-CV-02721-LHK ORDER DENYING MOTION TO STRIKE; GRANTING MOTION TO INTERVENE; DENYING MOTION FOR PRELIMINARY INJUNCTION 17 Plaintiff Irene Dixon (“Plaintiff” or “Dixon”) filed a motion for preliminary injunction on 18 June 4, 2012 to enjoin a tender offer scheduled to expire on June 28, 2012, in connection with the 19 planned sale of Cost Plus, Inc. (“Cost Plus”) to Bed Bath & Beyond, Inc. (“Bed Bath & Beyond”) 20 (collectively “Defendants”). On June 8, 2012, Defendants filed an opposition, in which Bed Bath 21 & Beyond joined. Plaintiff filed a reply in support of the preliminary injunction motion on June 22 11, 2012. Additionally, a putative intervenor in this action, Gary Ogurkiewicz (“Ogurkiewicz” or 23 “Intervenor”), moved to intervene on June 7, 2012. Plaintiff filed an opposition to the motion to 24 intervene on June 18, 2012. The Intervenor filed a reply in support of the motion to intervene on 25 June 20, 2012. 26 Ogurkiewicz was given the opportunity to file additional briefing in support of Plaintiff’s 27 motion for a preliminary injunction. The Intervenor filed a brief in support of the preliminary 28 injunction on June 18, 2012. Defendants filed a response to the Intervenor’s brief regarding the 1 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 preliminary injunction on June 20, 2012. The Intervenor filed a reply on June 21, 2012. A hearing 2 was held on June 25, 2012, at which Plaintiff, Intervenor, and Defendants appeared. For the 3 reasons explained below, Plaintiff’s motion for a preliminary injunction is DENIED. Additionally, 4 the Court GRANTS Ogurkiewicz’s motion to intervene.1 In light of the impending expiration of 5 the tender offer and the parties’ need for an expedited ruling, the Court will keep its analysis brief. 6 I. BACKGROUND Cost Plus, a California Corporation headquartered in Oakland, California, specializes in 8 retail of casual home furnishings and entertaining products. Compl. ¶ 14. Bed Bath & Beyond, 9 incorporated in New York and headquartered in Union, New Jersey, is a chain retail store that sells 10 United States District Court For the Northern District of California 7 a range of domestics merchandise and home furnishings. Compl. ¶ 25. In 2010, Cost Plus and Bed 11 Bath & Beyond formed a strategic partnership in which Bed Bath & Beyond opened four Cost Plus 12 “World Market” stores within existing Bed Bath & Beyond stores. Compl. ¶ 7. On February 2, 2012, after this “World Market” store-within-Bed Bath & Beyond store 13 14 concept was met with success, Bed Bath & Beyond expressed interest in the possibility of 15 acquiring Cost Plus. At the next regular meeting of the Cost Plus Board of Directors (“the 16 Board”), Mr. Feld, who serves as Cost Plus’s Chief Executive Officer and President, discussed Bed 17 Bath and Beyond’s interest with the rest of the Board. Mr. Feld is an employee of Cost Plus, while 18 the eight other Board members are independent outside directors. Feld Decl. ¶ 3. The board 19 created a special committee comprised of directors Genender, Pound, Roberts, and Stevens (the 20 “Committee”). Feld Decl ¶ 11. The Board also engaged Peter J. Solomon Company (“PJSC”), an 21 investment banking firm, as Cost Plus’s financial advisor and further instructed Mr. Feld to engage 22 in preliminary discussions with Bed Bath & Beyond. Feld Decl. ¶ 10. On April 27, 2012, Bed Bath & beyond made an initial offer to purchase Cost Plus at 23 24 $21.50 per share. Feld Decl. ¶ 13; Pound Dep. at 89:14-23. The Cost Plus Board debated 25 1 26 27 28 Defendants also moved to strike the Declaration of David E. Bower in Support of Plaintiff’s Motion for a Preliminary Injunction because the Bower Declaration did not adequately set forth the basis for the declarant’s knowledge. ECF No. 28. Because the motion to strike is essentially an “evidentiary or procedural objection” to the preliminary injunction motion, it must be contained within the opposition brief and subject to the opposition brief’s page limitations. See Civ. L. R. 73(a). Because Defendants’ filed the motion to strike separately from the opposition, Defendants’ motion to strike is DENIED. See Civ. L. R. 7-3(a). 2 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 contacting potential bidders and concluded that doing so might put at risk the fully valued offer in 2 hand. Feld Decl. ¶ 15; Pound Decl. 0020 ¶¶6-9. The Committee agreed to proceed with the 3 transaction without a go-shop provision, but also required extending the tender offer period so that 4 it would not expire until 50 days following the execution of the merger agreement to provide for 5 additional time for possible competing third party offers. Schedule 14D-9 at 12, Bower Decl. Ex. 6 B. The Committee also negotiated to lower the termination fee to $16.25 million, approximately 7 2.97% of the equity value of the transaction. Id. Bed Bath & Beyond also agreed to eliminate the 8 fee payable to Bed Bath & Beyond if the Proposed Merger failed to obtain shareholder support, 9 and instead agreed to a capped expense reimbursement of up to $1.5 million. Id. On May 8, 2012, United States District Court For the Northern District of California 10 the Cost Plus Board unanimously recommended approval of the Proposed Merger. 11 On May 9, 2012, Cost Plus and Bed Bath & Beyond issued a joint press release announcing 12 that they had entered into a merger agreement valued at approximately $554 million. Compl. ¶ 42, 13 52; see Leung Decl. Ex. 6. Under the terms of the merger, Cost Plus shareholders will receive $22 14 for each share of Cost Plus that they own. Compl. ¶ 7, 42. 15 On May 11, 2012, Gary Ogurkiewicz, a shareholder who owns over 45,000 shares of Cost 16 Plus stock, filed an action in California Superior Court alleging a California state law cause of 17 action for breach of fiduciary duty and aiding and abetting. Seaver Decl. Ex. A at 12-14. 18 Ogurkiewicz owns 0.2% of Cost Plus outstanding shares valued at approximately $1 Million. Mot. 19 to Intervene at 5. 20 On May 25, 2012, Cost Plus filed with the Securities and Exchange Commission, and 21 distributed to shareholders, a Schedule 14D-9 Recommendation Statement (“Recommendation 22 Statement”) in connection with the proposed sale of Cost Plus to Bed Bath & Beyond. Compl. ¶ 8; 23 Bower Reply Decl. Ex. B. In the Recommendation Statement, the Board recommended that 24 shareholders tender their shares to Bed Bath & Beyond for the price of $22 per share. The 25 Recommendation Statement also set forth detailed disclosures, including background about the 26 transaction and descriptions of the fairness opinion and financial analysis provided by PJSC in 27 support of its opinion. Bower Reply Decl. Ex. B. 28 3 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 On the same day the Recommendation Statement was filed, Plaintiff Irene Dixon filed a 2 shareholder class action on behalf of the public shareholders of Cost Plus. Plaintiff owns 100 3 shares of Cost Plus, which she purchased in March 2012. Leung Decl. ¶ 13 and Ex. 9; Opp’n to 4 preliminary injunction at 5-6. Plaintiff’s complaint names eleven corporate and individual 5 defendants including: Cost Plus, Inc., Joseph H. Coulombe, Clifford J. Einstein, Barry J. Feld, 6 Danny W. Gurr, John C. Pound, Kim D. Robbins, Fredric M. Roberts, Kenneth T. Stevens, Bed 7 Bath & Beyond Inc., and Blue Coral Acquisition Corp. Compl. ¶ 1. Plaintiff’s causes of action 8 arise out of the same tender offer that forms the basis of Ogurkiewicz’s complaint, but Plaintiff’s 9 complaint includes claims not included in Ogurkiewicz’s state law action, including the Federal United States District Court For the Northern District of California 10 claims arising out of SEC filings that post-date Ogurkiewicz’s state court action. Plaintiff alleges 11 two federal causes of action: (1) a claim against Cost Plus and the Individual Defendants for 12 violations of Sections 14(d)(4) and 14(e) of the Securities Exchange Act (“SEA”); and (2) a claim 13 against the Individual Defendants for violations of Section 20(a) of the SEA. Plaintiff also brings 14 two state law causes of action: (1) a claim against the Individual Defendants for breach of fiduciary 15 duty; and (2) a claim against Bed Bath & Beyond and Merger Sub for aiding and abetting the 16 Individual Defendants’ breach of fiduciary duty. 17 Plaintiff filed a motion for preliminary injunction on June 4, 2012. On June 6, 2012, Cost 18 Plus filed Amendment No. 1 to the Recommendation Statement, which contains the Support and 19 Tender Agreement between Bed Bath & Beyond and Cost Plus. Bower Reply Decl. Ex. F. 20 Additionally, Ogurkiewicz moved to intervene in Plaintiff’s federal action on June 7, 2012. 21 On June 7, 2012, Ogurkiewicz’s state law action was stayed, pursuant to Defendants’ 22 stipulation that they would not oppose Ogurkiewicz’s Motion to Intervene in Plaintiff’s federal 23 action. The Intervenor filed a brief in support of a preliminary injunction on June 18, 2012. 24 Defendants filed a response to the Intervenor’s brief regarding the preliminary injunction on June 25 20, 2012. On June 21, 2012, Cost Plus filed Amendment No. 2 to the Recommendation Statement. 26 Plaintiff Supp. to Record Ex. A. Amendment No. 2 disclosed certain information identified by 27 Plaintiff and Intervenor as material omissions in the briefing on the motion for a preliminary 28 injunction. 4 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION As the basis of the pending motion for a preliminary injunction, Plaintiff alleges that the 1 2 Individual Defendants failed to take steps to maximize the value of Cost Plus to its public 3 shareholders and failed to disclose all material information to enable shareholders to make an 4 informed vote on the Proposed Merger. Compl. ¶¶ 29-32. Plaintiff alleges that the $22 per share 5 offer undervalues Cost Plus stock. Compl. ¶¶ 44-46. Plaintiff alleges that the Cost Plus Board 6 made no effort to look into bids from other prospective bidders, but instead employed preclusive 7 deal protection devices to prevent an open auction of the company. Compl. ¶¶ 7; 47-51. Plaintiff 8 argues that the termination fee in the deal is unreasonably high for this type of transaction, such 9 that it thwarts alternate bidders from providing shareholders with a superior offer. Compl. ¶¶ 52- United States District Court For the Northern District of California 10 54. 11 Plaintiff also claims that the Recommendation Statement failed to provide shareholders 12 with material information to allow them to make an informed decision on whether to vote their 13 shares in favor of the Proposed Merger. In particular, Plaintiff alleges that the Recommendation 14 Statement fails to fully describe the sales process leading up to the merger and fails to disclose the 15 underlying methodologies and data relied upon by Cost Plus’s financial advisor, PJSC, in 16 recommending the deal. Compl. ¶¶ 57, 60. Any other facts necessary for the resolution of the pending motions will be discussed 17 18 below. 19 II. MOTION TO INTERVENE 20 A. Standard 21 Federal Rule of Civil Procedure 24(a)(2) requires that a court permit anyone to intervene 22 who “claims an interest relating to the property or transaction that is the subject of the action, and 23 is so situated that disposing of the action may as a practical matter impair or impede the 24 movant’s ability to protect its interest, unless existing parties adequately represent that interest.” 25 In determining whether a party may intervene, the Ninth Circuit has identified four factors: 26 27 (1) the applicant’s motion must be timely; (2) the applicant must assert an interest relating to the property or transaction which is the subject of the action; (3) the applicant must be so situated that without intervention the disposition of the action may, as a practical matter, 28 5 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION impair or impede his ability to protect that interest; and (4) the applicant’s interest must be inadequately represented by the other parties. 1 2 United States v. State of Oregon, 839 F.2d 635, 637 (9th Cir. 1988). “[W]hile an applicant seeking 3 to intervene has the burden to show that these four elements are met, the requirements are 4 interpreted broadly, in favor of intervention.” Prete v. Bradbury, 438 F.3d 949, 954 (9th Cir. 5 2006). 6 Alternatively, under Fed. R. Civ. P. 24(b), “on a timely motion, the court may permit anyone to intervene who . . . has a claim or defense that shares with the main action a common 8 question of law or fact.” “[I]n exercising its discretion, the court is to consider ‘whether the 9 intervention will unduly delay or prejudice the adjudication of the rights of the original parties.’” 10 United States District Court For the Northern District of California 7 Kootenai Tribe of Idaho v. Veneman, 313 F.3d 1094, 1128 n. 10 (9th Cir. 2002) (quoting Fed. R. 11 Civ. Proc. 24(b)(2)). 12 B. Discussion 13 Ogurkiewicz seeks to intervene as a matter of right under Fed. R. Civ. Proc. 24(a), or in the 14 15 16 17 alternative, permission to intervene under Fed. R. Civ. Proc. 24(b). 1. Intervention under Fed. R. Civ. Proc. 24(a) a. Timeliness of Motion to Intervene Ogurkiewicz argues that his Motion is timely because it will not prejudice Dixon or alter 18 the case schedule. Mot. to Intervene at 4-5. In determining timeliness under Rule 24, a court 19 should consider “(1) the stage of the proceeding; (2) prejudice to other parties; and (3) the reason 20 for and the length of the delay.” Alaniz v. Tillie Lewis Foods, 572 F.2d 657, 659 (9th Cir. 1978). 21 Dixon argues that Ogurkiewicz’s Motion is untimely for two reasons: (1) Ogurkiewicz has been 22 dilatory in pursuing intervention sufficiently in advance of the preliminary injunction hearing, and 23 (2) Plaintiff might be prejudiced by intervention, because Ogurkiewicz’s attorneys are self- 24 interested and have shown insufficient “willingness to aggressively litigate.” Opp’n at 6-7. 25 The Court is unpersuaded by Plaintiff’s arguments. The record establishes that 26 Ogurkiewicz has proceeded expeditiously in joining this suit. Ogurkiewicz filed his Motion to 27 Intervene the same day his state court action was stayed, filed his Motion to Shorten Time only one 28 6 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 week later, and filed his Putative Intervenor’s Brief in Support of Preliminary Injunction four days 2 after the Motion to Shorten Time was granted. The Court does not find Ogurkiewicz’s actions 3 dilatory. 4 Moreover, there is no evidence that Ogurkiewicz will not aggressively litigate this case. 5 Indeed, Ogurkiewicz filed the first action regarding this merger on May 11, 2012. Two weeks 6 later, on May 25, 2012, Dixon filed a lawsuit alleging the same state law causes of action as 7 Ogurkiewicz, plus two federal causes of action that will be discussed below. The Court notes that 8 Ogurkiewicz was present at the preliminary injunction hearing and appears to be actively engaged 9 in this case. Additionally, the Intervenor has indicated that he will petition the Court for United States District Court For the Northern District of California 10 appointment of his counsel as class counsel. As a long time shareholder who owns 45,000 shares, 11 a 0.2% stake in Cost Plus, valued at approximately $1 million, Ogurkiewicz has a strong claim for 12 appointment as lead plaintiff relative to Dixon who purchased 100 shares three months ago. Any 13 alleged deficiencies of Ogurkiewicz’s counsel are properly addressed at that time. Dixon’s 14 preference to be represented by her own counsel in a class action does not suggest that intervention 15 by a party with different counsel will prejudice Dixon. Because Ogurkiewicz’s Motion to Intervene 16 is not dilatory, will not require alteration of the case schedule if granted, and will not prejudice 17 Dixon, the Court finds Ogurkiewicz’s Motion to Intervene timely. 18 19 b. Potential impairment of Intervenor’s Interest Ogurkiewicz has also established that he has an asserted interest in the subject of the 20 transaction and that failure to intervene may impair or impede his ability to protect that interest. 21 See State of Oregon, 839 F.2d at 637. As explained above, the Intervenor has a large financial 22 stake in the outcome of this litigation. Moreover, Ogurkiewicz’s state court action could be 23 extinguished by the present action, which seeks class-wide injunctive relief to halt the Proposed 24 Transaction. See Mot. at 5-6; see also Intervenor Brief in Support of Preliminary Injunction 25 (discussing Ogurkiewicz’s asserted claims). In light of these facts, the Court finds Ogurkiewicz’s 26 interest is sufficient to support intervention. 27 28 c. Adequate representation of Ogurkiewicz’s interest by Dixon In determining adequacy of representation, courts consider: 7 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 (1) whether the interest of a present party is such that it will undoubtedly make all the intervenor's arguments; (2) whether the present party is capable and willing to make such arguments; and (3) whether the would-be intervenor would offer any necessary elements to the proceedings that other parties would neglect. 2 3 Southwest Ctr. for Biological Diversity v. Berg, 268 F.3d 810, 822 (9th Cir. 2001) (quoting 4 Northwest Forest Resource Council v. Glickman, 82 F.3d 825, 838 (9th Cir. 1996)). “[T]he burden 5 of showing inadequacy is ‘minimal,’ and the applicant need only show that representation of its 6 interests by existing parties ‘may be’ inadequate.” Southwest Ctr. for Biological Diversity, 268 7 F.3d at 823 (quoting Trbovich v. United Mine Workers, 404 U.S. 528 (1972)). 8 Ogurkiewicz argues that Dixon cannot adequately represent his interests. Mot. to Intervene 9 at 6-7. Ogurkiewicz has raised arguments and issues in his brief in support of the motion for a United States District Court For the Northern District of California 10 preliminary injunction that were not raised by Dixon. Several of Ogurkiewicz’s arguments appear 11 to have prompted additional disclosures by Defendants in the June 21, 2012 amendment to 12 Schedule 14D-9. 13 Furthermore, Ogurkiewicz’s interests potentially diverge from Dixon’s in two respects. See 14 Reply at 4 (discussing Ogurkiewicz’s divergent interests), cf. Mot. at 7 (arguing that Ogurkiewicz 15 will be a superior class representative). Ogurkiewicz owns significantly more shares than Dixon, 16 and Ogurkiewicz has owned his shares for significantly longer than Dixon. Reply at 4. Because 17 Ogurkiewicz has offered arguments not raised by Dixon, and Ogurkiewicz’s interest in the 18 Proposed Transaction differs from Dixon’s in potentially material respects, the Court finds that 19 Ogurkiewicz’s interests might not be adequately represented by the Plaintiff in this action. 20 Therefore, the Court finds that Ogurkiewicz’s Motion to Intervene meets the Ninth 21 Circuit’s four-part test for intervention as of right under Fed. R. Civ. Proc. 24(a). See State of 22 Oregon, 839 F.2d at 637. The Court need not address whether intervention is proper under Rule 23 24(b). 24 2. Compliance with Fed. R. Civ. Proc. 24(c) 25 Dixon also argues that Ogurkiewicz’s proposed intervention is procedurally deficient 26 because Ogurkiewicz “failed to attach a pleading setting forth the claims for which intervention is 27 sought,” pursuant to Fed. R. Civ. P. 24(c). Ogurkiewicz’s Motion specifically states that 28 8 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 intervention is sought on claims already included in the Dixon Complaint. Mot. at 3. A Rule 24(c) 2 attachment is not required “where . . . the movant describes the basis for intervention with 3 sufficient specificity to allow the district court to rule. Beckman Indus., Inc. v. Int’l Ins. Co., 966 4 F.2d 470, 475 (9th Cir. 1992); cf. Charles Alan Wright, Arthur R. Miller, and Mary K. Kane, 5 Federal Practice and Procedure § 1914 (“If the intervenor is content to stand on the pleading an 6 existing party has filed, it is difficult to see what is accomplished by adding to the papers in the 7 case a new pleading that is identical in its allegations with one that is already on file.”) Moreover, 8 Ogurkiewicz attached his complaint. Seaver Decl. Ex. A. Dixon incorporated Ogurkiewicz’s state 9 law cause of action in Dixon’s complaint. Ogurkiewicz has provided the Court with sufficient United States District Court For the Northern District of California 10 information to rule on his Motion. Ogurkiewicz has met all of the requirements to intervene in this 11 action, and therefore his motion is GRANTED. 12 III. MOTION FOR PRELIMINARY INJUNCTION 13 A preliminary injunction is an extraordinary remedy, never granted as a matter of right. 14 Winter v. Natural Res. Def. Council, 555 U.S. 7, 24 (2008). “A plaintiff seeking a preliminary 15 injunction must establish that he is likely to succeed on the merits, that he is likely to suffer 16 irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, 17 and that an injunction is in the public interest.” Id. at 20. The party seeking the injunction bears the 18 burden of proving these elements. Klein v. City of San Clemente, 584 F. 3d 1196, 1201 (9th Cir. 19 2009). The issuance of a preliminary injunction is at the discretion of the district court. Alliance 20 for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011). 21 A. Likelihood of Success on the Merits 22 Plaintiff’s complaint alleges four causes of action. The two federal causes of action allege 23 violations of 14(e) and 20(a) of the SEA. The two state law causes of action allege breach of 24 fiduciary duty against the Individual Defendants and against the corporate entities for aiding and 25 abetting the Individual Defendants’ breach of fiduciary duty. The Court will discuss the likelihood 26 of success on each of the asserted claims. 27 1. Federal Claims 28 9 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION Plaintiff is unlikely to succeed on the merits of her federal claims because Plaintiff has 1 2 failed to allege, let alone prove, that Defendants acted with scienter. Under Section 14(e)2 of the 3 Securities and Exchange Act, Plaintiff must show that Defendants made a material 4 misrepresentation or omission with scienter in connection with a tender offer. Rubke v. Capitol 5 Bancorp Ltd., 460 F. Supp. 2d 1124, 1131, 1150 (N.D. Cal. 2006), aff’d by 551 F.3d 1156, 1167 6 (9th Cir. 2009). Under PSLRA, a plaintiff must establish facts giving rise to a strong inference that 7 the defendant acted with intent or deliberate recklessness. Gompper v. VISX, Inc., 298 F.3d 893, 8 895 (9th Cir. 2002); In re Silicon Graphics Inc. Sec. Litig., 183 F. 3d 970 (1999). Moreover, if a 9 statement is not false or misleading, “it does not become actionable merely because it is United States District Court For the Northern District of California 10 incomplete.” Rubke, 460 F. Supp. 2d at 1131. At best, Plaintiff has pled that Defendants’ conduct was negligent. The Complaint asserts 11 12 that “in the exercise of reasonable care, Cost Plus and the Individual Defendants should have 13 known that the Recommendation Statement is materially misleading and omits material facts that 14 are necessary to render them non-misleading.” Compl. ¶ 65 (emphasis added). Similarly, the 15 Intervenor argues that the board of directors “buried its head in the sand,” with respect to the 16 appropriateness of the deal. Moreover, neither Plaintiff, nor the Intervenor, has cited sufficient 17 evidence from which this Court could find that Plaintiff is likely to prove scienter at trial. Finally, 18 when pressed at the hearing as to whether Plaintiff had alleged scienter, Plaintiff conceded that she 19 had not. Hr’g Tr. at 31-32. As scienter is a necessary element of Plaintiffs’ PSLRA claims, 20 Plaintiff is unlikely to succeed on her Section 14(e) claim. Plaintiff also alleges liability under Section 20(a), which provides for joint and several 21 22 liability amongst Defendants for violations of the Securities and Exchange Act of 1934. Because 23 Plaintiff has not established a basis for liability under Section 14(e) as discussed above, Plaintiff 24 has not established a claim under Section 20(a). See Heliotrope General, Inc. v. Ford Motor Co., 25 189 F.3d 971, 978 (9th Cir. 1999) (finding no secondary liability without primary violations). 26 2 27 28 Plaintiff also purports to bring a Section 14(d)(4) claim, but that provision does not give rise to a private right of action. See, e.g., Erickson v. Wheatley Ventures, No. C–96 2934, 1997 WL 119849, *5 (N.D. Cal. Mar. 4, 1997); Washburn v. Madison Square Garden Corp., 340 F.Supp. 504, 508 (S.D.N.Y. 1972) 10 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 2 2. Breach of Fiduciary Duty The Court follows the choice-of-law rules of the forum state – California – to determine the substantive law that applies to Plaintiff’s state law breach of fiduciary duty claim. See Erie R.R. 4 Co. v. Tompkins, 304 U.S. 64, 78 (1938); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 5 487, 496 (1941) (district court must follow substantive law, including choice-of-law rules, of forum 6 state). Under the “internal affairs” doctrine, which is followed in most states, the law of the state 7 of incorporation governs liabilities of officers or directors to the corporation and its shareholders. 8 Shaffer v. Heitner, 433 U.S. 186, 215 n. 44 (1977); see also CTS Corp. v. Dynamics Corp. of 9 America, 481 U.S. 69, 89 (1987); First Nat’l City Bank v. Banco Para El Comercio Exterior de 10 United States District Court For the Northern District of California 3 Cuba, 462 U.S. 611, 621 (1983); Rest. (Second) of Conflict of Laws § 309 and comment (a). In 11 general, California courts follow this rule and apply the law of the state of incorporation in 12 considering claims relating to internal corporate affairs. See Batchelder v. Kawamoto, 147 F.3d 13 915, 920 (9th Cir. 1998). Cost Plus is incorporated in California, and the parties agree that 14 California law applies. See Mot. at 5-6; Opp’n at 19-20. California law recognizes that officers 15 and directors owe a fiduciary duty to stockholders, and controlling stockholders owe a fiduciary 16 duty to minority stockholders. Small v. Fritz Companies, Inc., 30 Cal. 4th 167, 179 (2003). With 17 this understanding, the Court turns to the main arguments raised by the parties. 18 19 Price and Process Arguments Plaintiff first argues that the directors breached their fiduciary duty to obtain the best price 20 reasonably available for shareholders in the merger process. Under Revlon, when a board has 21 decided to engage in a change of control transaction, it must act reasonably in order to secure the 22 highest price reasonably available. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 23 173, 184 n.16 (Del. 1986). Plaintiff urges the Court to apply a heightened standard in reviewing 24 the board’s actions because this case involves a merger that will result in a change of control. See 25 Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003), citing Revlon, Inc., 506 26 A.2d at 182. Defendants, on the other hand, argue that Plaintiff is barred by California 27 Corporations Code § 1312(a) from seeking injunctive relief based on the “unfair price” and “unfair 28 11 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 process” arguments. Specifically, Defendants argue that Section 1312(a) provides that an appraisal 2 proceeding is the exclusive remedy for challenges to mergers. California Corporations Code § 1312(a) is a unique statute. The California Supreme Court 4 has noted that it is aware “of no other jurisdiction which has a statute similar to section 1312(a).”3 5 Steinberg v. Amplica, Inc., 42 Cal. 3d 1198, 1213 (1986). Section 1312(a) states “[n]o shareholder 6 of a corporation who has a right under this chapter to demand payment of cash for the shares held 7 by the shareholder shall have any right at law or in equity to attack the validity of the 8 reorganization or short-form merger, or to have the reorganization or short-form merger set aside 9 or rescinded, except in an action to test whether the number of shares required to authorize or 10 United States District Court For the Northern District of California 3 approve the reorganization have been legally voted in favor thereof.” Id. (emphasis added). 11 California courts have interpreted this provision to limit the availability of relief for 12 allegations that directors “breached their fiduciary obligation in agreeing to the merger terms, and 13 in the process engaged in self-dealing and other breaches of duty.” Steinberg, 42 Cal. 3d at 1206. 14 In Steinberg, the California Supreme Court concluded that Section 1312(a) “acts as a bar” to suits 15 challenging the appropriateness of a merger where the “plaintiff was aware of all the facts leading 16 to his cause of action for alleged misconduct in connection with the terms of the merger prior to the 17 time the merger was consummated but deliberately opted to sue for damages instead of seeking 18 appraisal.” Id. at 1214. Thus, plaintiffs are barred by section 1312(a) from seeking monetary 19 damages for breaches of fiduciary duty and fraud in the course of a merger. Similarly, suits 20 seeking to enjoin or unwind a merger are prohibited by section 1312(a). See id. at 1213. Appraisal 21 proceedings constitute an exclusive remedy “by which minority shareholders might seek to enjoin 22 or attack changes such as a merger or consolidation, except on the question of an insufficient vote 23 to authorize a merger or consolidation.” Giannini Controls Corp. v. Superior Ct. for L.A. County, 24 240 Cal. App. 2d 142, 154 (1966). Although the Court has not found any case directly on point that establishes that Plaintiff is 25 26 barred from seeking preliminary injunctive relief in the situation presented here, the California 27 3 28 Colorado at one time had a similar statute, which has since been repealed. See Steinberg, 42 Cal. 3d at 1213; Colo. Rev. Stats. § 7-4-123(4). 12 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 courts have clearly established that the relief available to minority shareholders that wish to attack 2 a merger is strictly circumscribed. Moreover, as a matter of policy, California has established a 3 statutory bar to merger challenges by minority shareholders outside of appraisal proceedings in an 4 effort to avoid “strike suits” by minority shareholders. California’s appraisal statute was instituted 5 “to protect the majority against strike suits by abrogating equitable remedies by way of injunction 6 or rescission to litigate charges of fraud or unfairness, which may be used to extort a settlement by 7 obstruction of a transaction duly authorized.” Giannini Controls Corp., 240 Cal. App. 2d at 154 8 (citing Ballantine on Corporations at 703 (1946) (“The crucial point at issue in equitable suits for 9 rescission and also for preventive relief against merger or consolidation is after all usually one of United States District Court For the Northern District of California 10 price, as to the true exchange value of the dissenting shares, perhaps of only a small number of 11 shares. The confining of litigation with dissenters to the question of value and compensation 12 simplifies the issues to be tried and protects all parties.”)). In light of the statutory language of 13 section 1312(a), the relevant authority interpreting the statute, and the policy behind the enactment 14 of the statute, the Court finds that Plaintiffs are likely precluded from seeking preliminary 15 injunctive relief barring the merger because the price or process of the merger was arguably unfair. 16 Accordingly, Plaintiff has not established that she is likely to succeed on the merits of her breach of 17 fiduciary duty claim to the extent that this claim relies on arguments that the merger price is unfair, 18 or the process employed by the directors was inadequate. Disclosure Claims 19 20 Plaintiff also alleges that Defendants have failed to properly disclose information in its 21 Schedule 14D-9 Recommendation Statement filed with the SEC. Defendants contest that 22 California law recognizes a duty of candor, and in the alternative, argue that any omissions or 23 misstatements are not material. 24 As discussed above, California Corporations Code § 1312(a) provides the exclusive remedy 25 for minority shareholders seeking to challenge a proposed merger. Although Section 1312(a) 26 generally bars attempts to enjoin proposed mergers by minority shareholders, it appears that there 27 may be a recognized exception to this bar for challenges based on “the question of an insufficient 28 vote to authorize a merger or consolidation.” Giannini Controls Corp., 240 Cal. App. at 154. In 13 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 other words, “[a] action to test whether the shares were legally voted arguably might permit 2 challenges such as whether the meeting was properly called, and proper notice given to all 3 shareholders; whether there were adequate disclosures made in soliciting proxy votes; the 4 validity of proxy votes, the correctness of the vote tallies, etc.” Singhania v. Uttarwar, 136 Cal. 5 App. 4th 416, 427 (2006) (internal quotation marks omitted) (emphasis added). Thus, challenges 6 related to sufficient disclosures made during the course of a proxy vote may be exempted from the 7 remedial bar of Section 1312(a). At this point, the Court need not make a final determination 8 regarding whether Plaintiff’s disclosure claim is barred by 1312(a), because even if it is not barred, 9 Plaintiff has not shown that she is likely to succeed on the merits of her disclosure claim. United States District Court For the Northern District of California 10 California Corporations Code § 25401 prohibits anyone from selling, or offering to sell a 11 security “by means of any written or oral communication which includes an untrue statement of a 12 material fact or omits to state a material fact necessary in order to make the statements made, in the 13 light of the circumstances under which they were made, not misleading.” Directors are under a 14 fiduciary duty to disclose fully and fairly all material information within the board’s control when 15 it seeks shareholder action. Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992); Oakland Raiders v. 16 National Football League, 93 Cal. App. 4th 572, 586 n.5 (2001) (citing Shields v. Singleton, 15 17 Cal. App. 4th 1611, 1621 (1993) (permitting California courts to rely on Delaware corporate law 18 where it is not materially different)). 19 “[T]he question of materiality, it is universally agreed, is an objective one, involving the 20 significance of an omitted or misrepresented fact to a reasonable investor.” Lynch v. Cook, 148 21 Cal. App. 3d 1072, 1081-82 (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 445 22 (1976)). The test of materiality requires “a substantial likelihood that, under all the circumstances, 23 the omitted fact would have assumed actual significance in the deliberations of the reasonable 24 shareholder. Put another way, there must be a substantial likelihood that the disclosure of the 25 omitted fact would have been viewed by the reasonable investor as having significantly altered the 26 ‘total mix’ of information made available.” TSC Industries, Inc., 426 U.S. at 449. Plaintiff and the 27 Intervenor have alleged that several misstatements or omissions in the Schedule 14D-9 Disclosure 28 14 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 are material and a preliminary injunction should issue to require Defendants to cure the defective 2 disclosures. The Court has reviewed the Schedule 14D-9 filed on May 25, 2012, the Amendments to the 4 Schedule 14D-9 filed on June 6, 2012 and June 21, 2012, as well as the briefs of the parties. At the 5 hearing on the motion for the preliminary injunction, the Court reviewed with the parties each of 6 the allegedly material omissions contained in Schedule 14D-9 and its amendments. The Court 7 finds that neither Plaintiff nor the Intervenor has met the burden of establishing a likelihood of 8 success on the merits. All of the allegedly material non-disclosures or misstatements were either 9 not, in fact material, or were subsequently disclosed and remedied in the June 6 or June 21 filing. 10 United States District Court For the Northern District of California 3 For example, the reasoning behind the financial advisor’s use of a 33 month forecasted future cash 11 flow was not material information that would have been viewed by the reasonable investor as 12 having significantly altered the ‘total mix’ of information made available.” TSC Industries, Inc., 13 426 U.S. at 449. Similarly, the Plaintiff and Intervenor’s allegations that the range of values for 14 “Selected Publicly Traded Comparable Companies” and “Selected Precedent Transactions” were 15 originally not disclosed, were remedied when these ranges were subsequently disclosed in the June 16 21 amendment to the Recommendation Statement. 17 18 In sum, Plaintiff has failed to establish that she is likely to succeed on the merits as to any of her claims for relief. 19 B. Irreparable Harm and Balancing of Hardships 20 In order to obtain a preliminary injunction, Plaintiff and Intervenor must establish that they 21 are likely to suffer irreparable harm in the absence of the requested relief. Winter, 555 U.S. at 19 22 (“[P]laintiffs seeking preliminary relief [must] demonstrate that irreparable injury is likely in the 23 absence of an injunction.”). As a general rule, plaintiffs seeking injunctive relief must demonstrate 24 that “remedies available at law, such as monetary damages, are inadequate to compensate for that 25 injury.” eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006). Moreover, “[i]n each case, 26 courts ‘must balance the competing claims of injury and must consider the effect on each party of 27 the granting or withholding of the requested relief.’” Winter, 555 U.S. at 24 (quoting Amoco Prod. 28 Co. v. Gambell, 480 U.S. 531, 542 (1987)). “The factors examined above—the balance of equities 15 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 and consideration of the public interest—are pertinent in assessing the propriety of any injunctive 2 relief, preliminary or permanent.” Winter, 555 U.S. at 32. 3 4 Unfair Price and Process Claims As explained above, Plaintiff and Intervenor have not established that they are likely to 5 succeed on the merits of their claim that Defendants breached their fiduciary duty to act reasonably 6 in order to secure the highest price reasonably available in the merger process. Nor have Plaintiff 7 and Intervenor established that they will be irreparably harmed absent an injunction based on their 8 allegations of unfair price and process. Where, as here, Plaintiff and Intervenor are not “thwarted 9 bidders,” they do not face the unique harm of losing an opportunity to acquire Cost Plus. Plaintiff United States District Court For the Northern District of California 10 and Intervenor merely face the loss of the dollar value from the theoretical possibility that there 11 may have been a better deal available. “This seems to be harm that can be rectified adequately in a 12 later appraisal proceeding” and is thus not likely “irreparable.” In re Toys “R” Us, Inc. 13 Shareholder Litig., 877 A.2d 975, 1023 (Del. Ch. 2005). Moreover, where there is no rival bid 14 available, it would be imprudent to grant injunctive relief to “enjoin the only deal on the table, 15 when the stockholders can make that decision for themselves.” In re Netsmart Techs., Inc. 16 Shareholders Litig., 924 A.2d 171, 208 (Del. Ch. 2007) (“By contrast, when this court is asked to 17 enjoin a transaction and another higher-priced alternative is not immediately available, it has been 18 appropriately modest about playing games with other people’s money.); In re Pennaco Energy, 19 Inc., 787 A.2d 691, 715 (2001) (“After all, even when a sufficient merits showing is made by a 20 plaintiff, this court is justifiably reluctant to enjoin a premium-generating transaction when no 21 other option is available, except insofar as is necessary for the disclosure of additional information 22 to permit stockholders to make an informed decision whether to tender.”). In light of these 23 considerations, Plaintiff and Intervenor have not established that they are entitled to a preliminary 24 injunction based on their claims that Defendants breached their duties in extracting the highest 25 price reasonably available in the merger process. 26 27 28 Disclosure Claims Courts have recognized that the right of a stockholder to an informed vote in a merger can be an irreparable harm. In re Netsmart Techs., Inc. Shareholders Litig., 924 A.2d at 207 (“Because 16 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 this feature of our law is so centrally important, this court has typically found a threat of irreparable 2 injury to exist when it appears stockholders may make an important voting decision on inadequate 3 disclosures. By issuing an injunction requiring additional disclosure, the court gives stockholders 4 the choice to think for themselves on full information, thereby vindicating their rights as 5 stockholders to make important voting and remedial decisions based on their own economic self- 6 interest.”). Where, as here, however, Plaintiff and the Intervenor have failed to establish a 7 likelihood of success on the merits of the disclosure claims, there is no similar threat that the 8 shareholders will not be able to make an informed decision on an important voting decision. Moreover, in this case, the balance of the equities weighs against issuing an injunction. 10 United States District Court For the Northern District of California 9 Courts are reluctant to enjoin premium generating transactions, particularly when a competing 11 offer is not available. See e.g., In re Pennaco Energy, Inc. S’holders Litig., 787 A.2d at 715. “In 12 tender offer cases, there is a strong public policy in favor of preserving shareholders’ freedom to 13 choose between selling stock at a tender offer price and retaining their securities. As such, requests 14 for injunctions against tender offers are frequently denied because the hardships to the moving 15 party do not often outweigh this strong policy of shareholder freedom. This is particularly true in 16 cases, such as the present one, where enjoining the transaction might result in the permanent 17 withdrawal of the offer due to the loss of the offeror’s financing. Therefore, the public policy 18 favoring competitive freedom outweighs any purported harm to the moving party for purposes of 19 granting injunctive relief.” Jewel Companies, Inc. v. Pay Less Drug Stores Nw., Inc., 510 F. Supp. 20 1006, 1010 (N.D. Cal. 1981). 21 Here, enjoining the proposed transaction as demanded by Plaintiff and the Intervenor would 22 threaten the ability of thousands of other shareholders to tender their shares at a 22% premium. 23 Moreover, enjoining the transaction could create a real threat to Cost Plus shareholders since the 24 Merger Agreement stipulates that Bed Bath and Beyond is exempt from purchasing any tendered 25 shares if consummation of the merger is enjoined. Leung Decl. Ex. 3 at Annex I(c). Moreover, 26 even a limited, more tailored remedy of requiring further disclosures is not warranted in this case 27 because Plaintiff and the Intervenor have failed to establish they are likely to succeed on the merits 28 of their disclosure claim. 17 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION 1 Finally, in light of California’s public policy, “to protect the majority against strike suits . . . 2 which may be used to extort a settlement by obstruction of a transaction duly authorized,” it would 3 not be in the public interest to enjoin the proposed transaction here. Giannini Controls Corp., 240 4 Cal. App. 2d at 154. Plaintiff and Intervenor have failed to establish a likelihood of success on the 5 merits of any of their claims, have not shown that they are likely to suffer irreparable harm, and 6 have not shown that either the balance of the equities or the public interest favors an injunction. 7 Accordingly, Plaintiff’s motion is DENIED. 8 9 United States District Court For the Northern District of California 10 11 IT IS SO ORDERED. Dated: June 27, 2012 _________________________________ LUCY H. KOH United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 Case No.: 12-CV-02721-LHK ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION