Opinion ID: 895120
Heading Depth: 1
Heading Rank: 4

Heading: Was This Demand Adequate?

Text: The demand letter at issue here was directed to Lancer's board, and stated in its entirety as follows: We write to insist that you confirm to us, in writing, no later than noon on Wednesday, December 21, 2005, that, in light of a superior offer having been received for the Lancer Corporation (Lancer or the Company) at $23 per share, you are taking no further steps to consummate or in any way facilitate the previously announced sale to Hoshizaki America, Inc. (Hoshizaki) at $22 per share. Your fiduciary obligations require that you fully and fairly consider all potential offers and that you disclose to shareholders all of your analysis that leads to your recommendation regarding the pending sale to Hoshizaki or any other offers made. The Defendants assert the demand was insufficient because it failed to (1) state the name of a shareholder, or (2) describe the subject of the claim with particularity. We address each in turn.
Article 5.14 does not expressly state that a presuit demand must list the name of a shareholder. But because parts of the article and most of its purposes would be defeated otherwise, we hold that a demand cannot be made anonymously. The statute here provides that [n]o shareholder may commence a derivative proceeding until ... a written demand is filed. [20] It expressly limits standing to shareholders who owned stock at the time of the act or omission complained of. [21] It requires that the demand state the the subject of the claim or challenge that forms the basis of the suit. [22] And it tolls limitations for 90 days after a written demand is filed. [23] Given the interrelation between the demand and the subsequent suit, it is hard to see how or why the demand could be made by anyone other than the shareholder who will file the suit. Of course, requiring the demand to come from the putative plaintiff is not the same as requiring that it state the plaintiff's name. But for several reasons we believe it must. First, article 5.14 presumes that a corporation knows the identity of the shareholder making the demand. The article prohibits filing suit until 90 days after the demand unless the shareholder has earlier been notified that the demand has been rejected. [24] The tolling provision suspends limitations for the shorter of 90 days or 30 days after the corporation advises the shareholder that the demand has been rejected. [25] For a corporation to notify or advise the shareholder of rejection, it must know who the shareholder is. Second, the identity of the shareholder may play an important role in how the corporation responds to a demand. The identity of the complaining shareholder may shed light on the veracity or significance of the facts alleged in the demand letter, and the Board might properly take a different course of action depending on the shareholder's identity. [26] In other words, a demand from Warren Buffett may have different implications than one from Jimmy Buffett. Third, a corporation cannot be expected to incur the time and expense involved in fully investigating a demand without verifying that it comes from a valid source. Article 5.14 sets out a procedure for independent and disinterested directors to conduct an investigation and decide whether the derivative claim is in the best interests of the corporation. [27] If they determine in good faith that it is not, the court must dismiss the suit over the plaintiff's objection. [28] It would be hard to imagine requiring these procedures, especially in cases like this one involving an imminent corporation merger, at the instance of someone who could in no event file suit. Finally, we are concerned with the potential for abuse if demands can be sent without identifying any shareholder. The letter here was on the letterhead of a California law firm whose principal prosecuted hundreds of stockholder derivative actions, [29] and later pleaded guilty to paying kickbacks to shareholders recruited for that purpose. [30] His actions have been described by one federal court as the cause of much of the criticism about derivative suits: A direct target of Congress, singled out for much of the criticism of lawyers who manipulate the securities laws to serve their own interest, was Milberg Weiss Bershad Hynes & Lerach (Milberg), whose name partner, William Lerach, known as the King of Strike Suits, had boasted, I have the greatest practice in the world because I have no clients. I bring the case. I hire the plaintiff. I do not have some client telling me what to do. I decide what to do. [31] There are no such allegations in this case, but it would be unwise to wait for them to occur before taking the possibility into account. We agree with Dillingham that by writing article 5.14's demand requirement in the passive tense (barring suit until a written demand is filed ), the Legislature did not require that shareholders send the demand personally, as opposed to having someone do so on their behalf. But requiring the demand to state a shareholder's name costs nothing; typing a name into the demand is not expensive and can cause no delay, assuming a shareholder exists who is entitled to make the claim. Construing article 5.14 as a whole, we hold that the demand required by the article must name the shareholder on whose behalf it is made. [32] Because the demand here did not do so, and did not even purport to be made on behalf of any shareholder, it was inadequate.
Article 5.14 is based largely on the Model Business Corporation Act, whose eight sections all appear among the 12 sections of article 5.14. But one of the notable differences between the two is that the Model Act requires only that a presuit demand be in writing, while article 5.14 requires a written demand setting forth with particularity the act, omission, or other matter that is the subject of the claim or challenge and requesting that the corporation take suitable action. Given this deliberate insertion, the demand letter here cannot be what the Legislature had in mind. The only complaint and demand for action listed in this letter was that the Board stop the Hoshizaki merger in light of a superior offer ... at $23 per share. The demand gives no reason why the Hoshikazi offer was inferior other than what one can imply from the $1 difference in price. All other things being equal, shareholders should of course prefer $1 more rather than $1 less. But in comparing competing offers for a merger, all other things are rarely equal. A large number of variables may affect the inherent value of competing offers for corporate stock. A cash offer may prove more or less valuable than an offer of stock currently valued at the same amount. Competing bidders may be more or less capable of funding the offers they tender, or completing the transaction without antitrust or other obstacles. Competitors may attach conditions that make an offer more or less attractive in the short or long run. In a merger like this involving several hundred million dollars, one cannot say whether the $23 offer was superior to the $22 offer without knowing a lot more. A rule requiring that a corporation always accept nominally higher offers, in addition to sometimes harming shareholders, would replace the business judgment that Texas law requires a board of directors to exercise. [33] As a result, a board cannot analyze a shareholder's complaint about a higher competing offer without knowing the basis of that complaint. As this demand said nothing about that, it was not stated with particularity as required by article 5.14. [34] The second sentence of the demand here added that the Board should fully and fairly consider all potential offers and disclose to shareholders all of your analysis for recommending the Hosizaki sale. This bland statement of a corporate board's duties could be sent to any board at any time on any issue. The demand did not suggest how the board had failed to consider other offers, or what information it might be withholding. Thus, it gives no direction about what Lancer's board should have done here. On appeal, Dillingham alleges further details of the Hoshizaki merger that she says show Lancer's board chose this merger because of the benefits it gave them personally rather than the corporation. We agree a derivative suit can serve as one important means of preventing a corporate board from enriching themselves at the shareholders' expense. But the demand letter here said nothing about any of that. We do not attempt today to explore all the ways in which a demand might or might not meet article 5.14's with particularity requirement. Whether a demand is specific enough will depend on the circumstances of the corporation, the board, and the transaction involved in the complaint. But given the size of this corporation and the nature of this transaction, this demand was clearly inadequate.