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R.I. Superior Court Allows Expedited Discovery On Shareholders' Claims Respecting Proposed Merger

The Rhode Island Superior Court has held it will allow a putative class of shareholders to conduct "limited and targeted" expedited discovery in advance of a shareholders' meeting to vote on the proposed acquisition of the defendant corporation's stock by another company. The Court relied on Delaware law in rendering its decision.

The defendant corporation had sold off a portion of its business in mid-2013 after which its stock rose substantially. It also began looking for companies to acquire the rest of the business through a merger. It formed a Special Committee of "three outside, non-management, disinterested and independent directors" to supervise negotiations with potential buyers. The Special Committee authorized management to retain a financial advisor.

The Buyer made an offer of $21.50 per share. The advisor opined that this was a fair price. In November 2013, the Board of Directors approved a merger agreement including that price. The price represents a premium on the share price over the prior six months ranging from 7.6 to 19 percent or more. Defendant scheduled a special meeting of shareholders for January 30, 2014 to vote on the proposed merger.

Plaintiffs filed suit in November 2013. They filed a motion for expedited discovery in December 2013. The court heard the motion on January 10, 2014.

The court rendered its decision three days later. It acknowledged a shortage of applicable Rhode Island case law and that our courts have previously looked to Delaware law in such circumstances. The court said plaintiffs seeking expedited discovery must show they have a "colorable" claim, "good cause" why expedited discovery is necessary, and a threatened irreparable injury.

The court said that the merger itself once accomplished would "represent an irremediable change in position which if wrongful will likely generate injury difficult to compensate in damages."

The court then considered whether plaintiffs had colorable claims. Plaintiffs articulated three claims, all of which concern alleged failures to disclose information to the shareholders via the proxy statement. Plaintiffs argued the information would be significant to a shareholder in deciding how to vote on the proposed merger. The court rejected plaintiffs' argument that disclosure of a purported "standstill" agreement with another prospective buyer was significant as there was no evidence that other prospective buyers were dissuaded from making a higher offer.

Similarly, the court rejected plaintiffs' argument about the failure to disclose statistical information and analyses respecting foreign companies the advisor used in its "comparable company analysis." The court said the foreign companies were not subject to the same reporting rules as U.S. companies. Instead, the proxy statement contained information that would allow shareholders to find sufficient information as to what the advisor did.

However, the court agreed that information as to the compensation paid to members of the Special Committee (or the advisor) that might be contingent on the merger going forward would be significant to a shareholder in deciding how to vote.

Accordingly, the court decided that plaintiffs could conduct "limited and targeted discovery." It instructed the parties to meet and confer on the scope of that discovery.

Cross Ledge Investments LLC v. Costa, Inc., C.A. PB 13-5770, slip opinion (R.I. Super. Jan. 13, 2014)

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