Irene Dixon v. Ladish Company Incor

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1976
IRENE D IXON,
Plaintiff-Appellant,
v.
ATI L ADISH LLC, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 10-C-1076—J.P. Stadtmueller, Judge.
A RGUED D ECEMBER 1, 2011—D ECIDED JANUARY 26, 2012
Before E ASTERBROOK, Chief Judge, C UDAHY, Circuit Judge,
and P RATT, District Judge.Œ
E ASTERBROOK, Chief Judge. In November 2010 Ladish
Co. agreed to be acquired by Allegheny Technologies,
Inc. The offer for each share of Ladish’s stock was
$24 cash plus 0.4556 shares of Allegheny’s stock. At the
closing price of Allegheny stock after the merger’s an-
Œ
Of the Southern District of Indiana, sitting by designation.
2 No. 11-1976
nouncement, the package was worth $46.75 per Ladish
share, a premium of 59% relative to Ladish’s trading
price before the announcement. Investors over-
whelmingly approved the transaction, which closed on
May 9, 2011. Ladish Co. became ATI Ladish LLC.
Investors’ reactions implied that Allegheny bid too
high: the price of its shares fell when the merger was
announced. If Allegheny had been getting an unantic-
ipated bargain, by contrast, its price should have gone
up. (Allegheny was and is traded on the New York Stock
Exchange; Ladish was traded on the NASDAQ. Both
firms’ market capitalizations were large enough to
attract a following by professional investors and
produce reasonably efficient pricing.) Not a single
Ladish shareholder dissented and demanded an ap-
praisal. But one shareholder—just one—filed a suit
seeking damages and other relief. Irene Dixon
contended that Ladish and its seven directors violated
both federal securities law and Wisconsin corporate
law (the state where Ladish had been incorporated)
by failing to disclose material facts in the registration
statement and proxy solicitation sent to its investors.
According to the complaint, these documents omitted
four sets of material facts: (1) details about Ladish’s “long-
term strategic plan for growth and expansion”; (2) the
process that Ladish used to select Baird & Co. as its
financial adviser for the transaction; (3) the reason
Ladish had broken off discussions with a potential
acquirer other than Allegheny; and (4) all facts that
Baird relied on when issuing its opinion that the trans-
action is fair to Ladish’s investors. (The fairness opinion
itself was disclosed.)
No. 11-1976 3
The district court granted judgment on the pleadings
in defendants’ favor. Dixon v. Ladish Co., 785 F. Supp. 2d
746 (E.D. Wis. 2011). First the court dismissed the
claims under federal law, ruling that Dixon’s complaint
did not satisfy the Private Securities Litigation Reform
Act of 1995 (PSLRA), 15 U.S.C. §78u–4(b). See Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).
Then the court concluded that the business judgment
rule blocks Dixon’s claim under state law. Dixon con-
ceded that the business judgment rule—which precludes
liability for honest mistakes (in the lingo of corporate
law, breaches of the duty of care)—covers negligent
acts and omissions by directors of Wisconsin corpora-
tions. But she maintained that the rule does not apply
to public statements and material omissions. According
to Dixon, Wisconsin creates a “duty of candor” that is
outside the business judgment rule, just as the duty of
loyalty is, and that directors violate this duty when
they fail to reveal all material information, even if they
do not act with the state of mind required for liability
under federal securities law. The district judge rejected
this argument and held that the business judgment
rule prevents an award of damages against corporate
directors who, in good faith, fail to publish all informa-
tion that a court might later think should have been
disclosed.
Dixon has abandoned all claims under federal law
and on appeal contends only that the business judgment
rule does not apply in Wisconsin to disputes about dis-
closure. Defendants respond that the litigation is moot:
the merger closed last May, and it is too late to require
4 No. 11-1976
them to issue improved proxy materials. But Dixon
wants damages, not another round of voting. A claim
for damages is not mooted by the underlying transac-
tion’s irreversibility. Defendants assert that the business
judgment rule, or Wis. Stat. §180.0828, moot Dixon’s
claim for damages. Yet a good defense to liability is a
reason why defendants prevail on the merits rather than
a reason why the litigation should be dismissed with-
out prejudice—which is the consequence of mootness.
Defendants don’t want a judgment that leaves Dixon
free to start over in state court. The demand for com-
pensatory damages is not moot.
Both the claims under federal law and the claim
under state law rest on omissions from the registration
and proxy statements, documents whose contents are
prescribed by the Securities Exchange Act of 1934. The
Securities Litigation Uniform Standards Act of 1998
(SLUSA), 15 U.S.C. §78bb(f), preempts most state-law
claims that rest on statements in, or omissions from,
documents covered by the federal securities laws. See
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547
U.S. 71 (2006). SLUSA applies to most securities suits
brought as class actions, unless they present derivative
claims—that is, unless the investor seeks to take over
the corporation’s own claim against corporate insiders
who may have injured the corporation as well as its
investors. Dixon sought to represent a class of all equity
investors, and this is not a derivative action. Yet defen-
dants have not invoked SLUSA.
Preemption under SLUSA is a defense rather than a
limit on subject-matter jurisdiction, see Brown v. Calamos,
No. 11-1976 5
664 F.3d 123 (7th Cir. 2011), so defendants have
forfeited any benefit the statute may have to offer.
Perhaps clause (3)(A) explains defendants’ omission.
This carves out of SLUSA any claim that concerns state-
ments by issuers to their investors about voting their
securities in response to an exchange offer, if the claim
rests on the law of the state in which the issuer was
incorporated. 15 U.S.C. §78bb(f)(3)(A)(i), (ii)(II). This
appears to preserve Dixon’s state-law claim. Given de-
fendants’ forfeiture, we need not decide whether her
claim is indeed within the scope of this clause.
The other thing we need not decide is whether the
business judgment rule applies to contentions that direc-
tors of Wisconsin corporations left useful information
out of proxy statements. Some of the information
that Dixon contends should have been disclosed—such
as the details of Ladish’s long-range plan—could be
valuable to Ladish’s business rivals. Most businesses
hold a great deal of information (think trade secrets or
products in development) that is simultaneously
material to the value of shares and more valuable if
secret than if disclosed. Directors must decide whether
investors will gain more from secrecy or from disclo-
sure. See Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir.
1990) (en banc). Making such decisions is part of the
directors’ duty of care; the district judge thought that
the business judgment rule accordingly applies, even
though making the same decision also may be described
as the exercise of a duty of candor.
Whether this is right or wrong, the business judgment
rule is a common-law doctrine, and there is no need to
6 No. 11-1976
decide how Wisconsin’s courts would apply the com-
mon law when there is a statute on the topic. Wis. Stat.
§180.0828 provides:
(1) Except as provided in sub. (2), a director is not
liable to the corporation, its shareholders, or any
person asserting rights on behalf of the corpora-
tion or its shareholders, for damages, settlements,
fees, fines, penalties or other monetary liabilities
arising from a breach of, or failure to perform,
any duty resulting solely from his or her
status as a director, unless the person asserting
liability proves that the breach or failure to per-
form constitutes any of the following:
(a) A willful failure to deal fairly with the
corporation or its shareholders in connection
with a matter in which the director has a mate-
rial conflict of interest.
(b) A violation of criminal law, unless
the director had reasonable cause to believe
that his or her conduct was lawful or no
reasonable cause to believe that his or her
conduct was unlawful.
(c) A transaction from which the director
derived an improper personal profit.
(d) Willful misconduct.
(2) A corporation may limit the immunity pro-
vided under this section by its articles of incorpora-
tion. A limitation under this subsection applies
if the cause of action against a director accrues
while the limitation is in effect.
No. 11-1976 7
This statute covers “any duty” that a director owes to
the corporation or its investors; it is as applicable to a
“duty of candor” as to the general duty of care. Ladish
had not opted out under subsection (2).
Defendants’ appellate brief relied on §180.0828, but
Dixon did not respond that paragraphs (a) through (d)
take the transaction outside the statute. Instead Dixon
contended that defendants had forfeited reliance on
§180.0828 by not mentioning it in the district court. Yet
a litigant does not forfeit a position just by neglecting to
cite its best authority; it suffices to make the substantive
argument. See Elder v. Holloway, 510 U.S. 510 (1994) (omit-
ted case citation); FDIC v. Wright, 942 F.2d 1089, 1094–95
(7th Cir. 1991) (omitted statutory citation). Defendants
did that by relying on the business judgment rule,
which was the subject of extensive briefing in the
district court.
Dixon contended that Wisconsin would follow deci-
sions such as Revlon, Inc. v. MacAndrews & Forbes
Holdings, Inc., 506 A.2d 173 (Del. 1986), and Unocal Corp. v.
Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), which she
asserts make the business judgment rule inapplicable
to directors’ choices concerning mergers. The district
judge thought that these decisions concern the price
that investors would receive in the transaction, not the
procedural details—and also concluded that Wisconsin
would not follow Revlon. The sort of debate the parties
had in the district court shows why §180.0828 is salient.
Revlon and Unocal extend Smith v. Van Gorkom, 488 A.2d
858 (Del. 1985) (Trans Union), in which Delaware’s
8 No. 11-1976
judiciary first held that the business judgment rule does
not necessarily protect directors and managers from a
claim that they negotiated a merger at an inadequate
price. See Daniel R. Fischel, The Business Judgment Rule
and the Trans Union Case, 40 Bus. Law. 1437 (1985). Statutes
codifying the business judgment rule existed before
Trans Union but were amended afterward to fortify its
protection. See James J. Hanks, Jr., Evaluating Recent
State Legislation on Director and Officer Liability Limitation
and Indemnification, 43 Bus. Law. 1207, 1209–22 (1988).
Section 180.0828 dates to 1989. It allows prospective
relief for errors that directors may make in connection
with a merger, but damages are out, unless the directors
violate the duty of loyalty or engage in willful
misconduct (the domain of §180.0828(1)(a) to (d)). A
debate in the district court about the scope of Revlon
and the business judgment rule leads straight to
§180.0828, and Wright shows that the parties’ failure to
cite that statute in the district court does not make
it unavailable as a ground of decision on appeal.
Dixon does not contend that Ladish’s directors violated
their duty of loyalty. They sold their own shares as part
of the merger, receiving the same price as outside inves-
tors. Their interests thus were aligned with those of
all other shareholders. Two of the seven directors had
golden-parachute arrangements, potentially entitling
them to compensation should they be fired by Allegheny
after the merger closed, but five did not—and the board
approved the merger unanimously, showing that this
potential conflict was unimportant. The potential
conflict of interest also was disclosed, which means that
No. 11-1976 9
the two directors did not engage in “[a] willful failure
to deal fairly with the corporation or its shareholders”
in connection with the conflict (§180.0828(1)(a)). None
of the other paragraphs in §180.0828(1) is even arguably
applicable. It follows that Wisconsin law does not allow
an award of damages to Ladish’s shareholders.
A FFIRMED
1-26-12