Even though Covid has produced clogged courts, cases are still moving forward, including a series of cases using similar, novel legal arguments to storm the barricades of incestuously and poorly managed major European companies. We’ve written the most about Bayer, which is in the dock for its disastrous, executive and banker serving acquisition of Monsanto. Credit Suisse, Deutsche Bank, UBS, Barclays and Volkswagen are also in the crosshairs in parallel cases detailing their corporate dereliction of duty.
Even though the misconduct and the destruction of value has been glaring, European shareholders have an uphill road in trying to gain restitution. However, as we’ll explain below, by virtue of having ADRs and significant US shareholdings and operation, the managements, boards, and advisers to these companies can be hauled into court in the US. And that’s where the fun begins.
We’ve posted the latest round of filings, all rejoinders to arguments made by the defendants in the Bayer case. But the Bayer case, like its siblings, are derivative lawsuits, which make for complicated lawyering. So we’ll review the foundations before continuing to the latest round of jousting.
We’ll start by quoting an August 2020 post:
Each suit targets an epic level of value destruction, but they are not shareholder suits. They are derivative lawsuits, in which a shareholder steps in to act on behalf of a company that has been done wrong, typically by key members of its management and board. Important advisers may also be targets.
The Novel Legal Angle: Using New York Courts for Derivative Cases Against Major European Companies
The novel feature in these cases is suing in New York state court but using the parent company’s governing law, which for Bayer is the German Stock Corporation Act as the basis for asserting causes of action.1 The abstract from a 2015 article by Gerhard Wagner, Officers’ and Directors’ Liability Under German Law: A Potemkin Village:
The liability regime for officers and directors of German companies combines strict and lenient elements. Officers and directors are liable for simple negligence, they bear the burden of proof for establishing diligent conduct, and they are liable for unlimited damages. These elements are worrisome for the reason that managers are confronted with the full downside risk of the enterprise even though they do not internalize the benefits of the corporate venture. This overly strict regime is balanced by other features of the regime, namely comprehensive insurance and systematic under-enforcement. Even though the authority to enforce claims against the management is divided between three different actors – the supervisory board, the shareholders assembly, and individual shareholders – enforcement has remained the exception. Furthermore, under the current system of Directors’ and Officers’ (D&O) liability insurance, board members do not feel the bite of liability as they are protected by an insurance cover that is contracted and paid for by the corporation. Thus, the current German system may combine the worst of two worlds, i.e., the threat of personal liability for excessively high amounts of damages in exceptional cases, and the practical irrelevance of the liability regime in run-of-the-mill cases.
Notice here the low bar for misconduct: simple negligence, plus the managers and board members bear the burden of proof that they behaved well! So the linchpin of these cases is getting a non-captured court to measure corporate conduct against these standards.
Also observe another key feature: extremely generous D&O policies. That is serving as one of the deep pockets for this litigation….
The other deep pockets are the investment banks, Bank of America and Credit Suisse. As the suit explains, they too have duties defined under German law, yet they failed abjectly in acting as independent advisers because they were hopelessly conflicted. In addition to acting as merger advisers, they were also providing financing, since Bayer, to avoid needing to get shareholder approval, did an “all cash” deal. That in turn led to Bayer engaging in over a dozen financings, including pricey bridge loans. That meant the banks had huge incentives to see the deal close, which resulted in them not looking at the Monsanto garbage barge very hard.
Back to the present post. The Bayer purchase of Monsanto has been described as the worst deal of all time, beating even the train wreck of Time Warner’s AOL acquisition. As we wrote in August:
Yes, nearly every penny of the $66 billion that Bayer paid for Monsanto has gone poof. Yes, Bayer is the first time in German corporate history that a public company got a majority vote of no confidence from its shareholders. Yes, Bayer is at risk of bleeding out over seemingly endless Monsanto-related liability claims (Roundup has so taken the center stage that what would ordinarily be a big-deal litigation drain, Dicamba, is treated as an afterthought). Unlike any other company ever facing similar litigation, Bayer has neither taken Roundup off the market, nor reformulated it, nor put a cancer warning on it. It looks like Bayer will eventually declare bankruptcy.
The original filing did a devastating job of describing why Bayer was so keen to do the horrific Monsanto deal, and on such terrible terms: the above-mentioned all cash offer, which it funded by borrowing boatloads of debt. Bayer was small enough in the world of ever-growing chemical and Pharma behemoths to make for a nice meal. Acquisitive Pfizer had just had a big deal scuppered for legal reasons, and Bayer’s management worried it might be the next target. It settled quickly on Monsanto despite or one might argue because of its terrible reputation; it served as a poisoned pill.
The litany of horrors goes on. Bayer was unable to do proper due diligence by being too close a competitor. Monsanto had to sell a trophy asset for anti-trust reasons….yet Bayer didn’t demand a price adjustment. The acquisition process dragged on long enough that the WHO had named glysophate a probable carcinogen, yet Bayer didn’t beat a retreat. Bayer believed the scientists who insisted that glysophate hadn’t been proven to cause cancer, when the WHO designation was more than enough to set off a tsunami of product liability lawsuits, many of which garnered eye-popping awards (among the ugly facts that came out was that Monsanto employees wore hazmat-type gear when working with glysophate yet made no warnings about the need to wear protective coverings to consumers). Mind you, this is only a partial recap; you can find more gory details here.
Jousting Over Standing
We’ve embedded three filings made earlier this week by the plaintiffs to rebut the defendants’ various argument as to why the case should be made to go away. The most interesting one is the first, which makes what may be a novel argument about the “internal affairs” doctrine, which we’ll attempt to unpack shortly.
Mind you, the other filings make for worthwhile reading too. For instance, the second document below rebuts Bayer’s “personal jurisdiction” argument, that it’s unfair and a hardship to make those poor Bayer executives answer to a New York court. It gives a devastatingly comprehensive account of the many ways Bayer is active in the US and New York specifically, from having more US than German shareholders, to having more US than German employees, to having major offices in New York and regularly giving shareholders presentations there, to having done all its recent deals and all its Bayer financings out of New York, to having repeatedly been sued in New York.
But it’s important to note that the plaintiffs’ and defendants’ arguments often hinge on the distinction between procedural arguments and substantive arguments. The plaintiffs as New Yorkers can haul Bayer as a foreign corporation into New York court because, in simple terms, it has agreed to the jurisdiction of New York courts by doing business in New York. Note that from the perspective of a New York court, a Delaware company would also be a foreign corporation.
We’ll put aside for the moment arguments about jurisdiction and venue, that someone sued there can contend the case belongs somewhere else (which can include Federal court). In a suit in a particular courtroom, the procedural rules of that jurisdiction typically govern on procedural matters. The substantive arguments are regularly a completely different kettle of fish. For instance, New York courts regularly hear cases where the parties have agreed that their relationship is governed by Delaware law.
But the most interesting discussion comes in the first filing below. The defendants are attempting to have the case dismissed via arguing the plaintiffs lack standing. They first try using German company law to assert that derivative suits (where shareholders step in to act to defend the rights and interests of the company when the parties normally tasked to act in that capacity, as in executives and the board, have failed to do so) must be filed in Germany.
But any argument over standing is procedural, and hence can be argues only using New York statute and precedents.
There is a second, related basis for argument, the internal affairs doctrine. Internal affairs is a common law concept. The rules that govern how a company operates are “internal affairs” and they are set in the jurisdiction in which it is incorporated. New York statute and case law both confirm that New York law supersedes internal affairs provisions. The filing cites precedents from previous derivative suits, such as Norlin Corp. v. Rooney, Pace, Inc., a 1984 case that went to US Second Circuit Court of Appeals. From the ruling:
[T]he [NY] legislature has expressly decided to apply certain provisions of the state’s business law to any corporation doing business in the state, regardless of its domicile. Thus, under … §1319, a foreign corporation operating within [NY] is subject … to the provisions of the state’s own substantive law that control shareholder actions to vindicate the rights of the corporation. NYBCL §626 made applicable to foreign corporations by §1319, permits a shareholder to bring an action to redress harm to the corporation, including injury wrought by the directors[.]
Once you accept the notion that New York, by statute, overrides the internal affairs doctrines of other jurisdictions, the other standing questions are governed by New York law. A key one is demand futility. In New York, a wronged shareholder does not need to file a suit against management or directors to try to compel them to act on behalf of the company; they can show the “demand futility” by meeting any one of three tests, as this article from Freiberger Harber explains:
“Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit.” Bansbach, 1 N.Y.3d at 9. In New York, the demand requirement is excused where a plaintiff pleads “with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.” Marx, 88 N.Y.2d at 198. If any of these circumstances are met, the failure to file a pre-suit demand will be excused.
This filing draws out the reasoning later in the text (emphasis original):
BCL §1319(a) provides: “[T]he following provisions … shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders: (2) Section 626 (Shareholders’ derivative action brought in the right of the corporation to procure a judgment in its favor).” Under §626(a), “[a]n action may be brought in the right of a … foreign corporation to procure a judgment in its favor, by a holder of shares … or of a beneficial interest in such shares.” Taken together, these provisions represent legislative decisions that (1) NY law specifies who can bring a derivative action on behalf of a foreign corporation regardless of—not subject to—the law of the place of incorporation, and (2) a holder of either shares or a beneficial interest therein, who meets §626(b)’s continuous-ownership rule, can bring such a case…
BCL §1319 is part of Article 13. BCL Article 13 is all about choice of law for foreign corporations; indeed, §1319 has no other purpose. The Legislature made policy choices in the process of enacting Article 13, including which provisions would apply to all foreign corporations doing business in NY, and which provisions would apply only to corporations not exempted under BCL §1320. See Robert S. Stevens, New York Business Corporation Law of 1961, 47 CORNELL LAW REV. 141, 172 (1962). In enacting Article 13, the Legislature chose to override the internal-affairs doctrine in certain regards (including derivative standing). “Most states follow the traditional internal[-]affairs doctrine, either through case law or statutory provisions. … Two states, [NY] and California, have statutes that are explicitly outreaching. These statutes expressly mandate the application of local law to specified internal[-]affairs questions in certain foreign corporations.”Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 LAW & CONTEMPORARY PROBLEMS 161, 164
The original filing in this case documented in gory detail how Bayer management pursued Monsanto after other terrible foreign acquisitions by the same key executives (which Bayer misrepresented to the press as successes until it was impossible to pretend otherwise) solely to make Bayer impossible to buy. It was all about preserving executive and board member pay and status.
The plaintiffs also point out that the defendants don’t dispute the New York court’s subject matter jurisdiction, arguing that it is “inviolable”. The filing cites case law where New York courts rejected Texas and statutes that required that certain cases be filed only in their states.
Given the length of this post, I apologize for giving short shrift to the third embedded document below, contesting Bank of America’s and Credit Suisse’s attempts to swat back the filings. These defendants tried to argue that plaintiffs were suing the wrong legal entities, and that the only ones on the hook should be the ones that executed agreements with Bayer (presumably those entities aren’t deep pockets). The plaintiffs pointed out that SEC filings, press releases and financing documents described the parent as responsible. And as anyone old enough to remember the failed “living will” exercise, US regulators gave up because the banks were unable to map their activities and P&Ls onto their legal vehicles.
I don’t see this filing mentioning the banks’ invoking the broad indemnification language that is standard in all M&A advisory agreements (their only outs are typically bad faith and gross negligence). However, it appears German law would trump that:
The Financially Conflicted Banks Violated GSCA §117 by Influencing and Inducing Bayer, Bayer’s Supervisors and Managers to Act to the Detriment of Bayer and Its Shareholders, While Pocketing Hundreds of Millions of Dollars for Themselves
Under §117 the Banks were forbidden to “exert influence on the company”— “inducing a member of the management board on the Supervisory Board to act to the disadvantage of the company or its shareholders,” and are “liable to the company for any resulting damage if they did so.” GSCA §117 does not require any contractual relationship with the company. It is a tough liability statute, different from U.S. corporation codes and securities laws which do not have such explicit aiding/abetting/conspiracy/joint and several liability provisions—with express liability to the company. This Court is familiar with this legal terrain. In re Renren Inc. Derivative Litig., 2020 N.Y. Misc. LEXIS 2132, at **100–02 (Sup. Ct. N.Y. Cnty. May 20, 2020) (investment banker advisors can be liable under English law for acting as knowing accessories to corporate insiders’ breaches of duty).
The SAC’s allegations that the Banks influenced and induced the Company and its Supervisors to act are detailed. See, e.g., ¶¶197–209. Financially conflicted and having abandoned any pretense of independence, the Banks (and Bayer’s NY lawyers) ran the Monsanto Acquisition—out of their NY offices where they put the final details together in September 2016 and closed it in June 2018 at S&C’s Broad Street NY office. They helped structure the deal to act as a “poison pill” to make Bayer “unacquirable” and entrench Bayer’s insiders. They never sounded the alarm on Monsanto despite its
horrible past and current problem—the latter of which was getting worse by the day as the closing approached. The Banks—which had received no fees for some three years of work and would get none at all, if the deal did not close—okayed the Supervisors’ horrible bet to close. They then immediately hit the NY financial markets with billions in securities issuances to raise the cash to pay off their risky but hugely profitable “bridge loan,” and pay the fees that they would pocket. ¶¶27, 50–52, 197–209. Although nothing in GSCA §117 requires the showing of a financial conflict, lack of independence, motive, intent or knowledge (“scienter”), those incriminating facts are alleged as to the Banks, from whom punitive damages are sought.
I hope you’ll take the time to have a look at these documents. They are more lively that most court filings, in part because the underlying facts are familiar, and in part because the plaintiffs’ attorneys set out to make the history and even the legal arguments vivid (for instance, departing from typical white shoe dry lawyering, they regularly quote the business press to drive the factual account home).
And Corporate Europe is overdue for a wake-up call.00 (2021-04-13) Bayer Internal-Affairs Brief
00 (2021-04-13) Bayer Personal-Jurisdiction Brief
00 (2021-04-13) Bayer Banks Brief