2020 Ohio 4021
Ohio Ct. App.2020Background
- Convergys (Cincinnati) announced a merger with Synnex in June 2018; an extensive proxy statement was filed in August 2018 to solicit shareholder approval.
- Joel Zalvin, a Convergys common shareholder since May 2016, sued in September 2018 alleging directors breached fiduciary duties and failed to disclose material facts; his preliminary-injunction motion to enjoin the vote was denied and the sale closed in October 2018.
- Closing consideration was $13.25 cash plus 0.1263 Synnex shares per Convergys share (total $24.51 at closing); Zalvin alleged shareholders were deprived of roughly $2.15 per share due to defendants’ conduct and the absence of a floating exchange ratio.
- Zalvin’s November 2018 second amended complaint pleaded direct and derivative claims for breach of fiduciary duty and failure to disclose, alleging CEO Ayers pursued the sale to avoid forfeiture of unvested equity, directors were self-interested, and proxy disclosures were materially deficient.
- Defendants moved to dismiss under Civ.R. 12(B)(1) and 12(B)(6), arguing (1) R.C. 1701.85 (Ohio’s appraisal statute) provided the exclusive remedy for price complaints and (2) the complaint failed to plead demand futility or material omissions/particularized facts.
- The trial court dismissed the second amended complaint in April 2019; the court of appeals affirmed, holding the appraisal statute did not bar the suit but the complaint failed to state viable fiduciary-duty or disclosure claims and dismissal with prejudice was proper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether R.C. 1701.85 (appraisal) bars Zalvin's claims | Zalvin alleged unfair process and nondisclosures distinct from a pure price claim; thus appraisal statute does not bar fiduciary-duty/disclosure claims | The complaint is essentially a disguised claim challenging the adequacy of the sale price and so must be brought under the appraisal statute | Court: Appraisal statute did not bar the suit because Zalvin pleaded claims attacking process, conflicts, and disclosures—not solely the cash value received |
| Whether the complaint states a claim for breach of fiduciary duty | Directors acted in bad faith/self-dealing (e.g., Ayers’s conduct, vesting of equity, appeasing Elliott Management) and rigged the process | Proxy and public disclosures contradict allegations; factual allegations are speculative or inconsistent; no plausible facts showing directors lacked disinterest or acted unfairly | Court: Claims insufficiently pleaded; allegations conflicted with (or were unsupported by) the proxy and did not show a conceivable breach |
| Whether the complaint states a claim for failure to disclose material facts | Omitted material facts: whether Ayers had board authorization, rationale for not using a fixed exchange ratio, fuller details about Elliott Management and Centerview, and full financial projections used for fairness opinion | The proxy (300+ pages) disclosed the timeline, rationale for the collar/floating ratio, dealings with Elliott, Centerview’s potential ties, and summary projections; omissions were speculative and immaterial | Court: Disclosure claims failed for lack of pleaded materiality; proxy, read as a whole, was sufficiently informative |
| Whether dismissal should be with or without prejudice | Zalvin argued the dismissal was not on the merits and should be without prejudice | Defendants argued dismissal under Civ.R. 12(B)(6) operates as adjudication on merits and supports dismissal with prejudice | Court: Dismissal for failure to state a claim operates as an adjudication on the merits under Civ.R. 41 and was properly entered with prejudice |
Key Cases Cited
- Stepak v. Schey, 51 Ohio St.3d 8, 553 N.E.2d 1072 (Ohio 1990) (appraisal statute governs price challenges; fiduciary-duty suits cannot seek to modify fair-cash-value determined in a cash-out merger)
- Armstrong v. Marathon Oil Co., 32 Ohio St.3d 397, 513 N.E.2d 776 (Ohio 1987) (appraisal statute compensates dissenting shareholders for fair cash value)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality standard for securities disclosures — "total mix" test)
- TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (U.S. 1976) (definition of materiality in proxy/disclosure context)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (U.S. 2011) (materiality and limits on disclosure obligations)
- Radol v. Thomas, 772 F.2d 244 (6th Cir. 1985) (plaintiff must make prima facie showing directors acted in bad faith or without objectivity before business-judgment protections are displaced)
- In re General Motors (Hughes) Shareholder Litigation, 897 A.2d 162 (Del. 2006) (courts may consider actual disclosure language when complaints quote or characterize proxy materials)
- In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) (shareholders entitled to a fair summary of banker work product relied on by the board, but not exhaustive detail)
- Smith v. Robbins & Myers, Inc., 969 F. Supp. 2d 850 (S.D. Ohio 2013) (distinguishing claims seeking merely more money from viable fiduciary claims; price complaints belong in appraisal proceedings)