good morning your honour's may please the court roger lane for the appellants and playing us below and with me as my partner courtney if i may i'd like to reserve three minutes for rebuttal your honour's the direct clam of course your honor and the parametric sound case the supreme court of nevada adopted the tulay test from delaware which asked two questions who suffered the harm some subset of them or whether the harm is visited on the corporation as a whole in it diminution of its value and so in this case we have the conduct of issue falls the cash out merger is the easier case and i'll address it st if i may in cohen v mirage resorts in two thousand and three the nevada supreme court made clear that a claim brought by a dissenting shareholder that questions the validity of a merger as a result of wrongful conduct on the part of majority shareholders or directors is properly classified as an individual or direct claim therefore if the court as i said adopted the delaware tooley test to distinguish direct from derivative claims and said that under that house cohen was properly decided and the situation described in cohen is exactly what we have here honour's we have a cash out merger in which the minority the common holders who included the opponents or cashed out stripped of their shares for virtually no consideration without their consent and in that time period of one thousand months they secured the rights to a two hundred percent profit on their investment while the common was left with virtually nothing that is a classic stockholder direct claim and unfortunately the district court your honour's conflated this with the equity expropriation claim when it said the opponents do not allege how these actions cause the value of plaintiffs common and for further clarity on direct versus derivative if it helps the court the situation here and as described in co one should be distinguished from the situation actually before the court in parametric sound after the merger still held the same number of shares their shares have been diluted by the merger separate issue but that is not a direct claim it's not a cash out merger and the pair and the parametric court so harald so counseling one of the things in the complaint is detailed is the so called sleep mode yes so let's just just with that under your theory to sleep mode to say that was the only allegation in the case that would be derivative i take it that would be a piece of our equity expropriation theory separate and distinct from the cash merger so what i guess i'm saying is that if that were the only claim in the case let's say people were upset that they that the company wasn't expanding as fast as they did in the past and that was the only thing theory in the case would that be a derivative claim or direct claim your honor i want to answer them two parts if i may the sleep mode allegation was that was a of two parts that all public support was taken from the only stock that was publicly traded which was the comma and so the market starved of information discounts the stock that damages the value of  common shares but has no impact on fur cerys value it has no impact on the fundamental value of the company a lack of information would be the same for a stock as a bad rumor the company's rumor to something improper the stock temporarily drops but there is no impact on the fundamental value of the company its assets its cash flows which is what i tried to convey below so it's possible if you just stop derivative yes if a company is not expanding as fast as someone says it should expand wouldn't that be a mismanagement claim in this context your honor we say it is not the classic mismanagement claim is a breach of the duty of care when disinterested on conflicted independent directors just don't do their job they neglect doing their job and they're charged with a breach of the duty of care that's a classic mismanagement claim i should add the directors are typically shielded from liability for the out by the charter what we allege here and i may be going beyond your question but i just want to make it clear what we so that you get dividends upon dividends and liquidation preference upon liquidation preference instead of payment of a simple cash dividend you get a charter and then that which has to authorize hundreds of millions of shares because  anti pollution provision is keyed to the price of the common stock which you've artificially devalued we that in its totality as our equity expropriation client week knowledge it's novel it wasn't even acknowledged as a claim in nevada until parametric sound which had not been decided when we briefed our case before the district court that's a recently has been validated and we now have a k a decision  that the cash out merger has to be analyzed as such it has its own set of rules and principles we allege a conflict of interest and i should add because this may come up in challenging a merger nevada law says that the question is whether the merger was accomplished through fraud or the unlawful conduct of individuals controlling the corporation and what's critical here in this and grants in something them to sell the company and then fir tree as the controlling stockholder is on both sides three scipio of the benefits merger and it's the same with the equity expiration where the board and  and that for equity expropriation theory is the excess value element that the district court didn't think we had and then for the charter amendment the excess of value is that you have a depressed common pr it just doesn't fit well there are two things i have started by saying you can't lump it all together so there are two theories and i'm actually glad that your honor asked for a set of criteria to determine whether or not these theories actually rise to the question of director derivative because we're starting with the premise that all of the fiduciary claims that the plaintiffs have asserted are by default derivative in nature so to fit with these exceptions the  these claims are rising or falling on the plaintiffs being able to plead facts that show three things and that those are three things that have to be shown whether we're talking about a challenge to a stock issuance which is the equity tunnelling claim or whether it's with respect to a merger and that is st that there's a controlling shareholder that is improperly wielding that control nd that the control is being wielded in connection with the transactions being challenge and rd that improper action in connection with the challenge transaction is taken at the expense of the shareholder and not the company and this is what ties it back to the tuli notion that the harm has to be something that can be harm to the shareholder separate and apart from harm to the company so how does this come about in cases where and i agree with mr lane this is this is new and it's narrow it's a very narrow escape hatch to the default rule that these claims are derivative so where does that come about well in the equity tunnelling sense it comes about where you have someone for example genteel is sort of the quintessential case in delaware so there you have an example where you've got a controlling shareholder got three million dollars of debt so should to the company you've got a conversion contract that says i'm going to be able to convert my debt into equity and it's going to be able to dollars fifty cents you know person or so basically for each dollar of debt that i'm converting i'm going to get two shares of equity and the allegation there is he coerces the board with takes action as controller and causes the board to completely disregard the contractual conversion claim and cashes in exchanges two million two hundred thousand dollars of debt for the company not for the four million four hundred thousand shares he should have but for forty four million dollars shares with no additional consideration that then has now taken that value from shareholders that otherwise would have had payment for those shares in a merger and his expropriated it that shareholder so that's an example that's genteel the roads that you see the same kind of thing in the carson are ok so with respect financings where the controlling shareholder is dominating the board and causing transactions that are tunneling this value away on the merger side of things it's the same thing you're going to have somebody who's and i agree now with respect to a merger you're only going to be able to have a direct claim if you're attacking the validity of the merger that implicates some kind of fraud and the cases that have allowed this exception for it to be a direct claim in a cash out merger have basically said that this happens when you have side deals so mr lane cited cohen versus mirage while you are in cohen versus mirage you've got a new to where the acquirer is trying to get a deal to to buy this boardwalk on the strip in las vegas you have controlling shareholders that own separate property separate and apart from the deal to acquire the boardwalk and the allegation there is that what's the challenge transaction it's the negotiation of the merger that's how you're tacking attacking the validity of the merger process the allegation was that in connection with the negotiation of the merger the controlling shareholders used in wielded that position to extract a unique benefit by going getting side deals they went to the acquirer and said you know basically the allegation was buy our separate land for  overvalued prices and we'll sort it even it out because we're going to vote in favor of this acquisition of the target company an undervalued price well that's a unique not readable benefit that was only given to the controlling shareholder so in this agree with your honor it just because it's different doesn't mean that it might not fit the theory but here it doesn't even come close for a couple of different reasons and one important thing to remember is that you know again whether you're on the equity tunnelling theory or whether you're on the attack the validity of the merger theory you've got a controlling shareholder that is improperly wielding that control in connection with that challenge transaction to cause the unique harm to the shareholder here what's being alleged is dilution right that's the harm the harm that the plaintiffs are complaining about is the fact that they were out of the money when they were cashed out of the merger being out of the money in this case i a direct effect of the liquidation waterfall that exists in the financing agreement and the reason the financing agreement is so important to this case is because this is an agreement that set forth all the terms every single issuance that could be challenged stock issuance or the liquidation waterfall that caused them to be out of the money these are the things that are complained about these were provided for in the financing agreement that is in operation of an agreement it is not a controlling shareholder exercising discretionary authority to cause something that happened and the other reason it's important is that financing agreement and you might want to look at it and say you know they say oh my gosh you know for a tree got two hundred percent of it's of it's investment back well yes that's how a capital transaction works when you are putting sixty million dollars at risk and you have to d some returns you're putting money at risk you're getting some return the critical issue here is that if you want to characterize the return that they were able to get as a steep return it wasn't negotiated by a controlling shareholder that deal was negotiated when for a tree was a total stranger to cia g w so you don't have a conflicted transaction you have you have an outsider rd furred tree negotiating these contractual provisions and you in fact have plaintiffs consenting to them and that's also a really important issue here because they consented to approved in all respects as fair and ratified the financing agreement and all of the related transactions including the certificate of designation that's filed with the f c c that's their letter consenting to it the certificate of designation for the preferred shares contains the ante dilution provision and council talked about well you know this charter w unilaterally amended because it had to be because the company didn't have enough shares to satisfy the requirements of the mt dilution provision again these really important facts in this case because that that they're complaining about happened as a direct result of the fact that the plaintiffs in this case which is another interesting fact they voluntarily gave up their superior position in the capital structure as creditors and exchange subordinate equity position they then again this is before shareholder before for free was a shareholder at all they made an agreement with the company that said these loans are going to convert to equity over time in the future ok at the time that fir tree came in and was an outsider and negotiated the financing agreement that had these equity dilution protect these dilution protections and the liquidation priorities and waterfall the plaintiffs knew that that there are agreements after that we're going to convert all of these shares of equity and they knew that those into dilution provisions were going to be triggered so what they're basically alleging is that the company should have breached the certificate of designation for the preferred shares and this is somehow extra contractual or discretionary and they knew it was going to happen and that happened and again with respect to the merger when you really look at the well played allegations of the complaint what they are complaining about is the allocation of proceeds just as at the start of this where you have current for tree not being a controlling shareholder on the side of the financing agreement negotiation well now you've got a merger where and again going back to what are our three criteria for having an exception to the to the derivative rule to be direct you have the controlling shareholder improperly wielding that control in the cases that allow this and th bally and the delaware court case and straight path you have the controlling shareholder dominating the transaction that's being complained of to expropriate some value virtually wasn't on the other side of th transaction this was a merger to sell the company to an unofficial heated rd party the fact that fir tree got all of the proceeds and that they didn't flow through is only me in relation to the waterfall that was in the agreement and i'll just say one other thing because they see i'm short on time but counsel talked about the fact that the shares are issued relative to the common stock and devaluing the common stock you know allowed these things to mushroom and i think it's very interesting if you look at their if you look at their own complaints with respect to the stock issuances they allege in paragraph forty five dollars their complaint that's that you are ninety nine dollars in the record they themselves allege that each of the transactions and these are the initial transactions that also pay for three more shares in exchange for consideration for for financing that it's that liquidation preference that was reflected in the plummeting share price that please the court corinne mccann trainer on behalf of palm again i join in the arguments asserted to affirm the district court order i limit my argument to why dismissal of count three for aiding and abetting should be affirmed even if the court decides that pla have standing assuming argue end of that count two is not dismissed count three still fails because plaintiffs must plead in a non conclusory manner facts demonstrating the director's knowing participation  in action only amounts to participation is that an action was consciously intended to assist for a tree breach of duty an illicit state of mind is required plaintiff chose not to substantively respond to our argument that count three should be dismissed and they waived the point their allegations about what the directors did or did not do are never paired with any well planned facts illustrating that the directors acted with actual knowledge that the conduct allegedly advocated or assisted constitutes a breach any of these requirements but it's especially clear they haven't satisfied the rd point of stone even attempt to argue that they pleaded facts from which might be concluded that the individual directors and gave an intentional misconduct instead they argue that they need not satisfy this requirement at all but  last point on the intentional misconduct point i had said that in parametric sound the nevada supreme court said and i quote the term fraudulent in this context is a term of art encompassing the breach of an officers directors or majority shareholders fiduciary duties that's what them about a supreme court says and that is that for a one pacific rd eleven o six and it is also quote  respectfully i believe attorney siddig is conflating the cash out merger analysis with the equity expropriation analysis there is no requirement to challenge a merger where controller benefits that there be side deals and one case i would point you to is the trade of decision from the dollar chancery court which is cited in our briefs the allegation is that the comptroller with its liquidation preference has an incentive to sell the company in the near term and realize on that gain rather than growing it for the long term for the benefit of all stakeholders what is your response specifically to the argument that nothing that was done was outside the preexisting terms of a financing and remain and thus there was no discretion for of the controlling shareholders to exercise st your honor i submit that is wholly false as regards the merger the financing agreement did not know any way shape or form call for a merger at any particular time or require that the company be sold liquidated go public or any other liquidity of that at any particular time that was a wholly discretionary decision on the part of a board that we allege is conflicted for the benefit of the controller who could take a quick profit off the table that can be the incentive for private equity firms the courts recognize it and that's the point there the merger is wholly outside the terms of the financing it's true the proceeds follow the preference in terms of distribution but that's not what we're challenging we're challenging the fact of the merger occurring when it occurred in the short term for the benefit of the controller knowing it would leave the common holding the back that's the claim as regards the anti dilution and charter provisions as ike knowledge they are included in the financing agreement my issue is that on anti pollution the board elected not to declare cash dividends as they could have and instead  d the dividends and preferred stock which resulted in more liquidation preference and more dividends rights that wasn't dictated by the financing as to the charter money the issuance of shares was so high at the time that was done and the moment had to be done because the depressed common price meant that many more shares were needed than were originally anticipated and so that charter had to be amended basically at the last minute to accommodate the share count and so that's our point there ok for the merger respectfully for a free was on both sides on the company and affecting the merger too and i wish to make that clear attorney siggy point out that the merger in the merger of the company was sold to a rd party company that's true but st tree thr board that it dominated approve the merger and then furniture unilaterally and soley voted for stockholders without soliciting any votes from a minority so there was a real lack of protection procedural been extremely helpful thank you