New York Trial Court Rules in City Trading Fund v. Nye

The case, City Trading Fund, et al. v. Nye, et al., No. 651668/2014, NY Slip Op 50008(U) (N.Y. Sup. Ct. Jan. 7, 2015) (Kornreich, J.), arose out of the acquisition of Texas Industries by Martin Marietta Materials. As happens in almost every public company merger, a shareholder filed litigation challenging the transaction. The lawsuit alleged that Martin Marietta's disclosures regarding the proposed merger were inadequate, thereby breaching the directors' fiduciary duties to the shareholders.

The lawsuit was filed in New York, but, because Martin Marietta is a North Carolina corporation, the claims were governed by North Carolina law. North Carolina law is very similar to Delaware law with respect to the fiduciary duties of corporate directors.

To avoid the expense of litigation and any potential delay in closing the deal, the defendants ultimately agreed to a "disclosure only" settlement that required Martin Marietta to make some minimal additional disclosures in advance of the shareholder vote on the merger. Based on those disclosures, and in connection with their motion to approve the settlement, the shareholders' lawyers sought an award of substantial attorney fees.  Such settlements are common in merger litigation and are generally approved by courts. 

In this case, however, the trial court refused to approve the proposed settlement. The court began by examining each of the ways in which Martin Marietta's disclosures were allegedly lacking.  The court concluded in each instance that the omitted information was not material, and thus the omissions did not violate the directors' fiduciary duties. Accordingly, the additional disclosures required by the proposed settlement did not create any real value for the shareholders. The court also discussed the shareholder who brought the lawsuit, a small partnership formed for the sole purpose of bringing shareholder lawsuits, and concluded that it was not an adequate representative for other shareholders because it is "essentially a fictitious entity." More generally, the court lamented the current state of merger litigation, recognizing that it has effectively created a "merger tax." The court concluded that it should not countenance "frivolous litigation," and therefore rejected the settlement and ordered the defendants to respond to the complaint—presumably by way of a successful motion to dismiss the lawsuit.

The ruling generated substantial publicity, including an article on the front page of the New York Law Journal, for its thorough excoriation of the shareholder and law firm bringing the lawsuit. It comes on the heels of the rejection by another justice of the same court, for similar reasons, of a merger settlement in connection with the Verizon/Vodafone merger. See Gordon v. Verizon Communications, Inc., No. 653084/2013, 2014 NY Slip Op 33367(U) (N.Y. Sup. Ct. Dec. 19, 2014). 

The judicial scrutiny by the courts in City Trading Fund and Gordon potentially represents another approach to minimizing the unnecessary costs imposed on companies by merger litigation. In the past couple of years, efforts to control such costs have focused on litigation management provisions in a company's bylaws or articles of incorporation, particularly provisions limiting shareholder litigation to a single forum. If, as in City Trading Fund and Gordon, courts scrutinize settlements more closely and refuse to reward meritless claims, shareholders (and the law firms representing them) will have less incentive to bring such litigation in the first place.

Keywords: commercial and business litigation, merger litigation, shareholder litigation, class actions, settlements

_{Clifton L. Brinson is with Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., in Raleigh, North Carolina.}

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