Section 1312(a) Held To Preclude Preliminary Injunction In Cost Plus Tender Offer

On May 9, 2012, Cost Plus, a California corporation, and Bed Bath & Beyond, a New York corporation, issued this press release announcing their agreement for BB&B's acquisition of Cost Plus.  The acquisition was to be effected by a cash tender offer followed by a merger in which the tendering shareholders would receive the same consideration.  Not surprisingly, litigation ensued in the California Superior Court and the U.S. District Court for the Northern District of California.  The state court litigation was stayed and the plaintiff in the federal suit moved for a preliminary injunction.  The federal plaintiff's complaint alleged four causes of action (two federal and two state). 

"California Corporations Code § 1312(a) is a unique statute."

The plaintiff's state law causes of action alleged breach of fiduciary duty by the individual defendants and aiding and abetting by the corporate entities.  In assessing the plaintiff's likelihood of succeeding on the merits with respect to the plaintiff's claim that the directors failed to obtain the best price reasonably available, Judge Lucy H. Koh considered California Corporations Code Section 1312(a) which provides in relevant part:

No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof . . . . [emphasis added]

Judge Koh characterized Section 1302(a) as a "unique statute" and found that California has established a statutory bar to merger challenges by minority shareholders outside of appraisal proceedings in an effort to avoid "strike suits" by minority shareholders.  While the plaintiff had sought to enjoin the tender offer, Judge Koh found that the plaintiff was not likely to succeed on the merits of her breach of fiduciary duty claim to the extent that the plaintiff's claim relies on the alleged unfairness of the merger price.

A director duty to disclose?

Judge Koh did not decide whether the plaintiff's disclosure claims were barred by Section 1312(a).  Rather, she decided that plaintiff had not shown that she is likely to succeed on the merits.  Although the defendants argued the absence of any California case holding that directors have a duty of candor, Judge Koh found that "Directors are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action."  Curiously, she cited Corporations Code Section 25401 which is part of the Corporate Securities Law, not the General Corporation Law.  Section 25401, moreover, applies to persons who offer or sell a security "in this state" not to directors per se.   The defendants nonetheless prevailed because Judge Koh found that all of the alleged material non-disclosures or misstatements were "either not, in fact material, or were subsequently disclosed and remedied . . .".