Jan. 30, 2012 – A shareholder who claimed that seven corporate directors violated both federal and state law by failing to disclose material facts to investors before selling the corporation won’t get any damages, the U.S. Court of Appeals for the Seventh Circuit has ruled.
In 2011, Pittsburgh-based Allegheny Technologies Inc. bought Ladish Co., a Wisconsin corporation based in Cudahy with about 800 employees, for $778 million. Under the deal, Ladish shareholders received $24 plus 0.4556 shares of Allegheny common stock per share.
No Ladish shareholders dissented or demanded an appraisal of Ladish stock, which jumped to $46.75 per share after announcement of the deal.
One Ladish shareholder sued for damages, claiming that Ladish and its directors did not disclose material information in proxy and registration statements when attempting to sell the company, such as facts relied upon by the company’s financial advisor in assessing the deal.
The shareholder, Irene Dixon, said the company and its directors had a “duty of candor” under Wisconsin law to reveal all material information, even if not liable under federal securities law.
The federal district court in Wisconsin dismissed the federal claims and ruled that Wisconsin’s business judgment rule protected the directors from liability because they acted in good faith.
In Dixon v. ATI Ladish LLC et. al., No. 11-1976 (Jan. 26, 2012), a panel for the Seventh Circuit Court of Appeals affirmed on other grounds.
The panel ruled that Dixon’s damages claim was not moot even though the transaction could not be reversed. It also ruled that federal securities law did not preempt the state law claims because the defendant directors forfeited a right to preemption as a defense. Finally, the court ruled that Wisconsin statute, not the business judgment rule, precluded damages.
“The business judgment rule is a common-law doctrine, and there is no need to decide how Wisconsin’s courts would apply the common law when there is a statute on the topic,” wrote Judge Frank Easterbrook, referring to Wis. Stat. section 180.0828 (limited liability of directors).
Under section 180.0828, directors are not liable to shareholders unless the person asserting liability proves a director willfully failed to deal fairly with the corporation or its shareholders, violated criminal law, derived an improper personal profit, or engaged in willful misconduct.
Dixon could not meet her burden to prove violations under the statute, the appeals court concluded, noting the directors sold their own Ladish shares under the same terms as outside investors and golden-parachute arrangements were properly disclosed.