In Re: Newport Corp. Shareholder Litig. ( 2022 )

IN THE SUPREME COURT OF THE STATE OF NEVADA
IN RE: NEWPORT CORPORATION No. 80636
SHAREHOLDER LITIGATION.
HUBERT C. PINCON;
INTERNATIONAL UNION OF
OPERATING ENGINEERS-
EMPLOYERS CONSTRUCTION
INDUSTRY RETIREMENT TRUST, FILED
LOCAL 302; AND INTERNATIONAL
UNION OF OPERATING ENGINEERS- MAR 3 0 2022
EMPLOYERS CONSTRUCTION ELIZABETH k BROWN
OMR OzyUPREME COURT
INDUSTRY RETIREMENT TRUST, BY
").;LERI
DEPLJT A--"reV
LOCAL 612,
Appellants,
vs.
ROBERT J. PHILLIPPY; KENNETH F.
POTASHNER; CHRISTOPHER COX;
SIDDHARTHA C. KADIA; OLEG
KHAYKIN; AND PETER J. SIMONE,
Res • ondents.
ORDER OF AFFIRMANCE
This is an appeal from district court orders granting
respondents summary judgment, denying appellants motion to amend, and
striking appellants' jury demand in a breach-of-fiduciary-duty action.
Eighth Judicial District Court, Clark County; Nancy L. Allf, Judge.
I.
Newport Corporation—a once publicly traded Nevada
corporation—was a global provider of technology products and systems.
Appellants are a class of former shareholders of Newport common stock
(collectively, shareholders). Respondents are the individual members of
Newport's former board of directors (collectively, the Board).
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Amidst a market downturn and several years of lackluster
financial results, the Board turned to strategic alternatives for Newport,
specifically, a merger-of-equals or acquisition transaction. The Board
engaged financial and legal counsel, and merger discussions ensued over
nine months with nine potential parties. To guide the discussions,
Newport's management created two sets of five-year financial forecasts—
the "base case" and the "acquisition case." The base case assumed an
organic 3 percent compound annual growth rate, while the acquisition case
assumed a more aggressive 10 percent compound annual growth rate based
on a mix of organic and acquisition-based growth. The Board also directed
its financial counsel (J.P. Morgan) to conduct a market check to evaluate
Newport's current market value.
During this process, MKS Instruments, Inc. contacted Newport
about a potential transaction and eventually offered to acquire Newport for
$23 per share in cash. Meanwhile, Newport continued to explore
transactions with other interested parties. At Newport management's
direction, J.P. Morgan used the base case to value Newport, and based on
this evaluation, J.P. Morgan delivered an opinion that MKS's offer was fair
to Newport's shareholders. The Board then entered a brief period of
exclusivity with MKS before unanimously approving the merger agreement,
under which MKS agreed to purchase all of Newport's common stock at $23
per share in cash.1 The deal represented a 53 percent premium over
Newport's closing share price of $15.04.
1MKS formed PSI Equipment, Inc.—a Nevada corporation and a
wholly owned subsidiary of MKS—solely for the purpose of completing the
merger with Newport. Upon completion of the merger, Newport absorbed
PSI and became a wholly owned subsidiary of MKS.
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A group of plaintiffs different from those in this case filed, then
abandoned, a class action seeking to enjoin the merger. Ninety-nine percent
of shareholders approved the merger transaction. The shareholders then
initiated the class action suit underlying this appeal, alleging that the board
members breached their fiduciary duties, causing the merger share price to
be undervalued. Several years later, shareholders moved to amend their
second-amended complaint, which the district court denied. While the
shareholders motion to amend was pending, the Board moved for summary
judgment on all claims, and the district court granted their motion.
Shareholders appeal the district court's summary judgment decision and its
order denying their motion to amend.2
In granting the Board's motion for summary judgment, the
district court concluded that shareholders could not rebut the business
judgment rule as applied to the MKS acquisition because the Board
exercised due care during the nine-month sale process and shareholders
otherwise failed to show that self-interest or fraud motivated a voting
majority of the Board when it approved the transaction. Our review is de
novo, Wood v. Safeway, Inc., 121 Nev. 724, 729, 121 P.3d 1026, 1029 (2005),
and we affirm for two reasons.
A.
First, summary judgment was proper because shareholders
failed to- produce sufficient evidence to rebut the business judgment rule.
Under NRS 78.138(7)(a) & (b), to proceed with their breach-of-fiduciary-
2Shareho1ders also challenge the district court's order striking their
jury deniand; we do not consider this alleged error because we conclude that
summary judgment was proper.
3
duty claim shareholders must (1) rebut the business judgment rule, and (2)
show both that the directors breached their fiduciary duties and that those
breaches "involved intentional misconduct, fraud or a knowing violation of
law." Chur v. Eighth Judicial Dist. Court, 136 Nev. 68, 71-72, 458 P.3d 336,
340 (2020); see also Guzman v. Johnson, 137 Nev., Adv. Op. 13, 483 P.3d
531, 537 (2021) (overruling the inherent fairness standard applied in Foster
v. Arata, 74 Nev. 143, 156, 325 P.2d 759, 765 (1958), and the gross
negligence standard applied in Shoen v. SAC Holding Corp., 122 Nev. 621,
640, 137 P.3d 1171, 1184 (2006)). Nevada's business judgment rule
presumes that corporate directors and officers complied with their fiduciary
duties when making a business decision, including their duty "to maintain,
in good faith, the corporation's and its shareholders best interests over
anyone elses interests," (i.e., the duty of loyalty). Shoen, 122 Nev. at 632,
137 P.3d at 1178; see also NRS 78.138 (stating Nevada's business judgment
rule).
To rebut the business judgment rule via an allegation of a
breach of the duty of loyalty, shareholders must show that self-interest
impacted a voting majority of the Board. See Wynn Resorts, Ltd. v. Eighth
Judicial Dist. Court, 133 Nev. 369, 376, 399 P.3d 334, 342-43 (2017)
(applying the business judgment rule to the board as a whole); Cinerama,
Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1995). When self-interest
is only alleged as to a single director, plaintiffs must show that the director
had a material interest in the transaction and that the director failed "to
disclose 'his [or her] interest in the transaction to the [B]oard and a
reasonable board member would have regarded the existence of the
material interest as a significant fact in the evaluation of the proposed
transaction." Cinerama, 663 A.2d at 1168 (emphases and internal
quotation marks omitted); .see also La. Mun. Police Emps.' Ret. Sys. v. Wynn,
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829 F.3d 1048, 1059-60 (9th Cir. 2016) (applying Nevada law and
concluding that plaintiffs failed to show that a material conflict of interest
impacted a majority of the board). Shareholders attempt to make such a
showing here by arguing that board member Robert Phillippy (Newport's
CEO) had several conflicts of interest—(1) he feared being terminated, (2)
his change-in-control severance package was more lucrative than in other
scenarios, and (3) he secured post-merger employment with MKS—that
motivated him to commit fraud on the remainder of the Board to achieve
approval of the MKS acquisition.
Shareholders fail to adduce evidence to support their claim that
Phillippy's above-cited interests amount to actionable conflicts. Orman v.
Cullman, 794 A.2d 5, 23 (Del. Ch. 2002) (holding that a conflict of interest
exists when a director has a material financial or other interest in a
transaction different from other shareholders interests). Unrebutted
record eidence shows that Phillippy did not seek a transaction with MKS
out of fear of being fired: The Board testified that it never considered
terminating Phillippy or asking him to resign as CEO, and Phillippy
testified' that he never feared losing his job; while there were activist
shareholders who criticized Phillippy, they lacked the votes to oust him
from the Board. Similarly, unrebutted record evidence shows that Phillippy
did not force a transaction with MKS to achieve a more lucrative severance
package *because a transaction with any party, not just MKS, would have
triggered Phillippy's change-in-control severance package. And the Board
(including Phillippy) consistently considered retaining Newport's
independence alongside transaction options and concluded that remaining
independent carried significant risk because market conditions vary and
achieving $23 per share would take many years without a transaction.
Moreover, even if Phillippy's interests were conflicted, shareholders offer no
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evidence of his financial circumstances to show that the interests were
material to him and therefore impacted his impartial judgment. See Wynn,
829 F.3d at 1059-60 (interpreting Nevada law and applying a subjective
actual-person standard to grant summary judgment because plaintiffs did
not show that directors were individually impacted by alleged interests);
Orman, '794 A.2d at 24 (applying a subjective "actual person" test to
determine whether an interest is financially material to a director).
Furthermore, PhiHippy's alleged self-interest does not alone
rebut the business judgment rule, Guzman, 137 Nev., Adv. Op. 13, 483 P.3d
at 537 (holding that merely alleging that a director had an interest in the
transaction is not enough to rebut the business judgment rule and shift the
burden to the defendant under NRS 78.138); shareholders also bore the
burden of showing that genuine issues of material fact existed regarding
PhiHippy's concealment of these interests from the Board, thus impacting
the Board's overall independence. Telxon Corp. v. Meyerson, 802 A.2d 257,
264 (Del. 2002); see also Orman, 794 A.2d at 25 n.50 (reasoning that a
director's self-interest alone is not enough to challenge a director's
indepenctence, and a plaintiff must show that such interest compromised
the director's independence and valid business judgment when voting on
the challenged transaction). Shareholders do not meet this burden either
because the record shows that the Board knew •of pressure from activist
shareholders regarding Phillippy's performance and of the tension between
Phillippy and Newport's CFO, Charles Cargile, regarding the CEO position
and still testified that it did not consider terminating Phillippy. The record
also shows that the Board knew of Phillippy's change-in-control severance
package because it approved it years earlier and included this information
in its shareholder proxy statement. FinallS7, Phillippy's post-close
employment negotiations with MKS are immaterial to the propriety of the
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transaction's approval because those discussions occurred after the Board
voted to approve the merger. English v. Narang, C.A. No. 2018-0221-AGB,
2019 WL 1300855, at *12 (Del. Ch. Mar. 20, 2019) (reasoning that post-close
employment discussions are not material unless they occur before the
merger agreement is signed).
B.
Second, summary judgment was proper because, even if
shareholders raised a material issue of fact as to whether Phillippy was
compromised, and assuming that PhiHippy's self-interest called the other
board members judgment into question sufficient to set aside the business
judgment rule, shareholders still do not show an actionable injury—i.e.,
that the' board members breached their fiduciary duties and that those
breaches involved intentional misconduct, a knowing violation of law, or
fraud. • NRS 78.138(7); Chur, 136 Nev. at 71-72, 458 P.3d at 340.
Shareholders do not argue how the independent board members committed
intentional misconduct amounting to a breach of fiduciary duty, a knowing
violation of law, or fraud, and these arguments are accordingly waived.
Powell v. Liberty Mut. Fire Ins. Co., 127 Nev. 156, 161 n.3, 252 P.3d 668,
672 n.3 (2011); Edwards v. Emperor's Garden Rest., 122 Nev. 317, 330 n.38,
130 P.3d 1280, 1288 n.38 (2006) (holding that an argument is waived on
appeal if not cogently argued or properly supported with legal authority).
Rather, shareholders argue that Phillippy breached his
fiduciary duty of loyalty by intentionally concealing Newport's Strategic
Plan (the Plan)—and the Plan's disclosure to J.P. Morgan and MKS—from
the Board based on his self-interest. But record evidence does not support
these allegations: To demonstrate a breach of the duty of loyalty, a plaintiff
may shOw that a director acted in bad faith or self-interest to cause the
plaintiff•damages. See Guzman, 137 Nev., Adv. Op. 13, 483 P.3d at 538; In
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re Gaylord Container Corp. S'holders Litig., 753 A.2d 462, 476 (Del. Ch.
2000). Here, Newport management began its internal financial planning
processes in November 2015, including creation of the Plan, independent
and apart from merger negotiations. The Plan included a detailed
compilation of Newport's business units operational initiatives, strategies,
and top-down financial forecasts for the next three years. Newport
management gave the Plan to J.P. Morgan for reference and to MKS with
the major caveat that the Plan was an incomplete work in process.
Newport's management did not finish the Plan ahead of the merger's close
in February 2016 and therefore did not present it to the Board as planned
for March 2016.
The organic timing of Newport's internal strategic forecasting
process, overlaid with the timing of merger negotiations, does not amount
to concealment. And no record evidence shows that Phillippy directed J.P.
Morgan to conceal from the Board that Newport provided MKS with the
Plan. Indeed, shareholders conceded at oral argument before this court that
the Board could have accessed the diligence data room—where Newport
indicated that it provided the Plan to MKS—thus answering any question
about whether Phillippy concealed the Plan, or its disclosure to MKS, from
the Board. To the extent that Phillippy did not reveal the Plan and its
contents- to shareholders in the proxy statement, this omission was not
improper because the Plan was incomplete and historically unreliable. See
Chen v. Howard-Anderson, 87 A.3d 648, 688 (Del. Ch. 2014) CRIt is not our
law that every extant estimate of a company's future results, however stale
or however prepared, is material. Rather, because of their essentially
predictive nature, our law has refused to deem projections material -unless
the circumstances of their preparation support the conclusion that they are
reliable • enough to assist the stockholders in making an informed
8
judgment.") (internal quotation marks omitted). Again, shareholders
conceded at oral argument that Newport did not provide the Plan to
shareholders in past years, presumably for these reasons. Further, the Plan
was immaterial to shareholders (and the Board) in evaluating the merger
because the base and acquisition cases encompassed the Plan's forecasted
growth figures, and the proxy included both the base and acquisition cases.
Cf. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (An omitted
fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.").
With regard to shareholders allegation that Phillippy
purposefully undervalued Newport by submitting the base case forecast to
the Board and J.P. Morgan, record evidence shows the opposite; even if
Phillipp3.7 believed the base case to be undervalued, and failed to share his
opinion with the Board (and shareholders), his opinion is irrelevant because
the Board evaluated potential transactions against both the base case and
the higher-valued acquisition case. The proxy statement also included both
the base and acquisition cases for the shareholders' review. Finally,
shareholders fail to provide any evidence supporting their allegation that
Phillippy intentionally concealed that MKS would have paid more to
acquire Newport from the Board; again, record evidence shows the opposite.
Shareholders further failed to produce record evidence showing that the
above aátions amounted to more than timing, much less that Phillippy
intentionally, knowingly, or fraudulently induced the Board to rely on
incomplete information, as is required to be actionable under NRS 78138(7).
Chur, 136 Nev. at 71-72, 458 P.3d at 340.
The cases shareholders provide do not substantiate their claims
because ihey apply Delaware's less-forgiving inherent-fairness standard to
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assess the directors actions, which Nevada does not.3 Compare Mills
Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989)
(applying Delaware's inherent-fairness standard to evaluate the propriety
of a transaction), and Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983)
(same), with Guzman, 137 Nev., Adv. Op. 13, 483 P.3d at 537 (declining to
apply the inherent-fairness standard). And, as discussed, shareholders fail
to provide facts suggesting "that the merger was accomplished through the
wrongful conduct of . . . directors . . . or officers of the corporation." See
Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 11, 62 P.3d 720, 727 (2003).
- Shareholders therefore failed to rebut the business judgment
rule as a matter of law and the board members retain the presumption that
they acted in good faith when they approved the instant merger transaction.
Summaiy judgment was proper. Wynn, 133 Nev. at 375, 399 P.3d at 341-
42. In any case, shareholders fail to raise a material issue of fact regarding
the board members' intentional breach of their fiduciary duties; summary
judgment was alternatively proper on these grounds.
3These cases are also factually distinct: Phillippy only sat on
Newport's board, he had no pre-signing promise of employment with MKS,
he did nót "tip" other parties' offers to MKS, and he did not use Newport's
internal "information to enhance MKS's position because the Plan did not
contain an analysis of Newport's value that the base and acquisition cases—
which were disclosed to the Board and competing parties—did not already
cover. Cf. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1275-77
(Del. 1989) (holding that officers breached their fiduciary duties by enabling
their preferred buyer to win a shares auction by tipping it with the highest
bid); Weinberger v. UOP, Inc., 457 A.2d 701, 705, 709 (Del. 1983) (holding
that directors that sat on both the buyer's and seller's boards of directors
violated their fiduciary duties of loyalty by creating a value analysis for the
buyer with the seller's internal information without disclosing the same
analysis to the buyer).
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• - . - •
We further conclude that the district court did not abuse its
discretion by denying shareholders effort to avoid summary judgment by
moving for leave to amend their second-amended complaint. See Holcomb
Condo. Homeowners' Ass'n v. Steward Venture, LLC, 129 Nev. 181, 191, 300
P.3d 124, 130-31 (2013) (reviewing an appeal from an order denying a
motion for leave to amend under an abuse of discretion standard). In their
motion fo amend, shareholders sought to add (1) a claim for rescissory
damages, (2) Cargile as a defendant, and (3) several new breach-of-
fiduciary-duty theories. Shareholders filed the motion before the deadline
specified in the scheduling order for such motions, but after discovery closed
and just weeks before the deadline for summary judgment motions.
Leave to amend should be freely granted when justice so
requires, but the district court retains wide discretion to deny such a motion
if it finds undue delay, dilatory motive, or prejudice to the opposing party.
NRCP 15(a)(2); Kantor v. Kantor, 116 Nev. 886, 891, 8 P.3d 825, 828 (2000).
A motion for leave to amend can be timely under an NRCP 16.1 scheduling
order, yet fail to meet the criteria specified in NRCP 15(a)(2). See
AmerisourceBergen Corp. v. Dialysist West, Inc., 465 F.3d 946, 953 (9th Cir.
2006). Further, a motion to amend cannot be used as a "last-ditch effort to
avoid summary judgment that otherwise might have been imminently
granted." Cf. Nutton v. Sunset Station, Inc., 131 Nev. 279, 293. 357 P.3d
966, 976 (Ct. App. 2015).
The district court did not abuse its discretion when it held that
shareholders unduly delayed seeking leave to amend to add a claim for
rescissory damages. Cf. MEI-GSR Holdings, LLC v. Peppermill Casinos,
Inc., 13.4 Nev. 235, 239, 416 P.3d 249, 254-55 (2018) (holding that undue
delay albne constitutes sufficient grounds to deny a motion to amend).
Before the merger closed, different plaintiffs filed a putative class action
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lawsuit seeking to enjoin the merger. Those plaintiffs abandoned their
claim in favor of a post-merger lawsuit. But the pre-merger plaintiffs
included a claim for rescissory damages in their original 2016 complaint, so
shareholders knew (or should have known) of this potential claim when they
replaced that complaint with their own. See AmerisourceBergen, 465 F.3d
at 953 ([I]n evaluating undue delay, we also inquire 'whether the moving
party knew or should have known the facts and theories raised by the
amendment in the original pleading.) (quoting Jackson v. Bank of Hawaii,
902 F.2d 1385, 1388 (9th Cir. 1990)). Shareholders claim that they required
an expert report to support these damages does not excuse their delayed
disclosure, via amendment, of a whole new category of damages. See NRCP
16.1(a)(1)(C) (2012) (stating that "a party must, without awaiting a
discovery request, provide to other parties: . . . [a] computation of any
category.' of damages claimed by the disclosing party")4; Pizarro-Ortega v.
Cervantes-Lopez, 133 Nev. 261, 265, 396 P.3d 783, 787 (2017) (holding that
NRCP 16.1(a)(2)(B) disclosures and any "perceived difficulty in providing a
precise [damages] dollar figure" do not excuse a party from its Rule
16.1(a)(1) initial disclosure obligations).
Likewise, shareholders unduly delayed their attempt to add
Cargile as a defendant. Although shareholders argue that they did not
learn of Cargile's potential liability until the Board produced certain text
messageS in February and March 2019, these text messages only added
color to existing substance. Shareholders knew or should have known of
their pOtential claims against Cargile years ahead of the requested
4The
parties made initial disclosures before the 2019 amendments to
the Nevada Rules of Civil Procedure, so the former rules control. See NRS
2.120 (establishing that court rules must apply prospectively).
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amendm.ent given that they already knew that Cargile was Newport's CFO
and assisted in creating the base and acquisition cases, that Newport
management directed J.P. Morgan to use the base case in rendering its
fairness opinion, that internal tension was mounting between Cargile and
Phillippy, and that Cargile intended to seek additional compensation in
connection with a potential acquisition of Newport.
Undue delay also marred many of shareholders newly proposed
theories of liability. From the record, it appears shareholders knew of the
facts underlying these theories years before the attempted 2019
amendment—for example, shareholders knew that Phillippy disclosed a
reorganizational plan for Newport to the Board and to MKS as early as
2016. And, collectively, the late-stage amendments would have prejudiced
the Board by forcing them to reopen discovery and defend against
longstanding claims after fact discovery closed and on the eve of the
summary-judgment deadline. See State, Univ. & Cmty. Coll. Sys. v. Sutton,
120 Nev.. 972, 988, 103 P.3d 8, 19 (2004) (holding that the court did not
abuse its discretion by denying amendment after the close of discovery, on
a nontrivial matter, and when the movant knew of the facts underlying
amendment nine months earlier); Ennes v. Mori, 80 Nev. 237, 242-43, 391
P.2d 737, 740 (1964) (holding that NRCP 15(a)'s liberal amendment
standard is not without restraint); 61A Am. Jur. 2d Pleading § 664 (2021)
([P]rejudice means that the party opposing the amendment would be
hindered in the preparation of its case, or would have been prevented from
taking some measure in support of its position."). Amendment would be
especially prejudicial to Cargile because shareholders told him at his
deposition that he was not a party to this case. See Servatius v. United
Resorts Hotels, Inc., 85 Nev. 371, 373, 455 P.2d 621, 622-23 (1969)
(considering whether a defendant was "misled to its prejudice when
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determining whether amendment is proper), holding modified on other
grounds by Bender v. Clark Equipment Co., 111 Nev. 844, 846, 897 P.2d 208,
209 (1995). The district court therefore did not abuse its discretion by
denying shareholders motion to amend for undue delay and prejudice to the
Board and Cargile.
IV.
In sum, shareholders fail to rebut the business judgment rule
as a matter of law, and the presumption that the Board acted in good faith
when it approved the MKS acquisition remains in place. Wynn, 133 Nev. at
375, 399P.3d at 341-42. Shareholders further fail to raise a material issue
of fact as to the board members' breach of their fiduciary duties. Summary
judgment was therefore proper. Further, the district court did not abuse its
discretion by denying shareholder& motion to amend their second-amended
complaint. Accordingly, we
ORDER the judgments of the district court AFFIRMED.
•
Cadish
J. J.
Pickering Herndon
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cc: Hon. Nancy L. Allf, District Judge
Stephen E. Haberfeld, Settlement Judge
Robbins Geller Rudman & Dowd, LLP
Hone Law
Brownstein Hyatt Farber Schreck, LLP/Las Vegas
Gibson, Dunn & Crutcher LLP/Washington DC
Gibson, Dunn & Crutcher, LLP/San Francisco
Gibson, Dunn & Crutcher LLP/Irvine
Eighth District Court Clerk
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