Raul v. Burke,
2015 NCBC 91.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF MECKLENBURG 15 CVS 16703
MALKA RAUL, Derivatively on )
Behalf of SWISHER HYGIENE, INC.; )
and Individually and on Behalf of All )
Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
JOSEPH BURKE; RICHARD )
HANDLEY; HARRIS W. HUDSON; )
WILLIAM M. PIERCE; WILLIAM M. ) ORDER ON PLAINTIFF’S MOTION FOR
PRUITT; DAVID PRUSSKY; ) EXPEDITED PROCEEDINGS
SWISHER HYGIENE INC.; and )
ECOLAB, INC., )
)
Defendants, )
)
and )
)
SWISHER HYGIENE, INC. )
)
Nominal Defendant. )
)
{1} THIS MATTER is before the Court on Plaintiff’s Motion for Expedited
Proceedings (“Motion”) filed September 21, 2015. For reasons stated below, the
Motion is DENIED.1
Rabon Law Firm, PLLC by Gary Jackson for Plaintiff.
Moore & Van Allen PLLC by James P. McLoughlin, Jr. and Jonathan M.
Watkins, and Dechert LLP by David H. Kistenbroker (pro hac vice) and Joni
S. Jacobsen (pro hac vice) for Defendants Joseph Burke, Richard Handley,
Harris W. Hudson, William M. Bierce, William M. Pruitt, David Prussky, and
Swisher Hygiene, Inc.
1 The Court has limited its consideration to the facts and claims of the verified Derivative and Class
Action Complaint (“Verified Complaint”). This ruling reflects the Court’s preliminary indication to
the parties of its ruling during a telephone conference on October 7, 2014.
Robinson, Bradshaw & Hinson P.A. by Robert W. Fuller and Adam K. Doerr,
and Skadden, Arps, Slate, Meagher & Flom LLP by Matthew R. Kipp (pro
hac vice), Donna L. McDevitt (pro hac vice) and Andrew J. Fuchs (pro hac
vice) for Defendant Ecolab, Inc.
Gale, Chief Judge.
{2} Plaintiff filed her verified Derivative and Class Action Complaint
(“Verified Complaint”) on September 11, 2015, along with a Notice of Designation,
seeking to have the matter assigned to this Court as a complex business case.
{3} North Carolina Supreme Court Chief Justice Mark Martin issued an
order designating the case as a complex business case on September 17, 2015. The
case was initially assigned to the Hon. Louis A. Bledsoe, III, but was reassigned to
the undersigned on September 25, 2015.
{4} Plaintiff filed her Motion and supporting brief on September 21, 2015.,
Defendants filed their opposition on September 25, 2015, and the Court held a
telephone hearing on the Motion on October 7, 2015.
{5} Plaintiff’s claims relate to a pending transaction during which, subject
to shareholder approval, Defendant Swisher Hygiene, Inc. (“Swisher”) expects to
sell all of its operating assets to Defendant Ecolab, Inc. (“Ecolab”) for $40,000,000.00
of cash consideration, following which Defendants’ directors intend to dissolve the
corporation.
{6} Swisher is a Delaware corporation. The lawsuit involves Swisher’s
internal governance, and therefore it is appropriately resolved pursuant to
Delaware law. See Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680–81,
657 S.E.2d
55, 63 (2008) (describing North Carolina courts’ adherence to the internal affairs
doctrine); see also
N.C. Gen. Stat. § 55-7-47 (2013). Further, Delaware’s procedures
attendant to derivative actions are applicable.
N.C. Gen. Stat. § 55-7-47 (providing
that derivative proceedings are generally governed by the laws of the corporation’s
jurisdiction of incorporation).
{7} It is unclear whether North Carolina or Delaware law should control
the procedural issue of whether to grant Plaintiff expedited discovery. As the
standard to be applied by a trial court in North Carolina is unclear, this Court has,
in other factual circumstances, applied a Delaware standard to evaluate a request
for expedited proceedings. See, e.g., Corwin v. British Am. Tobacco PLC, 2015
NCBC LEXIS 2, at *10–13 (N.C. Super. Ct. Jan. 8, 2015) (looking to Delaware and
North Carolina law to evaluate a request for expedited discovery of a North
Carolina corporation); Ehrenhaus v. Baker,
2008 NCBC LEXIS 20, at *13 (N.C.
Super. Ct. Nov. 3, 2008) (applying the Delaware standard to evaluate a request for
expedited discovery in a merger transaction). Whether it follows North Carolina
law or Delaware law, the Court must undertake a balancing test in which it must
determine both whether Plaintiff has demonstrated a substantial, colorable claim
and the magnitude of the possible burden or harm to Defendants that may result
from imposing the expense and potential business delay attendant to expedition of
discovery, including in that determination the possibility of motion practice
following initial discovery. Cf. Corwin,
2015 NCBC LEXIS 2, at *10–13;
Ehrenhaus,
2008 NCBC LEXIS 20, at *13. Within the context of this case, this
Court resolves the Motion by balancing the potential need for supplemental
shareholder disclosures versus the potential shareholder loss if the underlying
transaction is adversely affected. Although not dispositive, the Court also considers
whether the timeliness and manner by which Plaintiff has pursued the litigation
are consistent with the exigencies offered in support of expedition. Those inquiries
are obviously case specific.
{8} Swisher issued a press release announcing the intended transaction on
August 13, 2015. The Court may take judicial notice of NASDAQ records indicating
that the trading price of Swisher’s stock has more than doubled since the press
release. Swisher Hygiene, Inc. (SWSH), NASDAQ (October 8, 2015),
http://www.nasdaq.com/symbol/swsh/stock-chart. Swisher filed its Schedule 14A
Definitive Proxy (“Proxy”) on September 3, 2015, which reflects that Swisher will
hold a shareholder vote to approve the transaction at its annual meeting on October
15, 2015. Plaintiff has not filed any motion for a preliminary injunction.
{9} During the October 7, 2015, telephone conference, defense counsel
advised the Court that Swisher expects to make imminent supplemental disclosures
but also intends to move forward with the October 15, 2015, shareholder vote. After
the conference, defense counsel advised the Court by e-mail of criminal proceedings
instituted on October 7, 2015, in the Western District of North Carolina that arose
out of accounting irregularities that have been a matter of public record.2
{10} The Verified Complaint includes allegations that are typical of those
made during challenges to mergers or acquisitions, but it also includes specific
allegations of failures to disclosure information that Plaintiff contends is both
material and omitted from the Proxy. Although the Court does not purport to
summarize these allegations in detail, it notes that Plaintiff’s counsel in the October
7, 2015, telephone conference summarized Plaintiff’s basic premise: that Swisher
shareholders are being asked to approve the transaction without knowing how
much of the transaction price might ultimately be paid to them. Plaintiff contends
that Defendants are aware of more specific information that has not been disclosed
to shareholders as to the expenses and liabilities that must be paid before it makes
any distribution to shareholders.
{11} Defendants counter that they cannot be required to disclose what they
do not and cannot know. They refer the Court to statements in the Proxy that
clarify that Defendants are not capable of quantifying those liabilities and expenses
or providing a reliable estimate of any distribution that might be made to
shareholders. In particular, Defendants emphasize the following statement from
page eight of the Proxy:
The balance of the proceeds will be retained to pay ongoing
corporate and administrative costs and expenses associated with
winding down the Company, liabilities and potential liabilities relating
to or arising out of our outstanding litigation matters, any fines or
penalties and other costs and expenses relating to or arising out of the
USAO/SEC Inquiries, and potential liabilities relating to our
indemnification obligations, if any, to Ecolab or to current and former
officers and directors.
2 Without expressing any opinion on the effect of those matters on the transaction and shareholder
vote that is the subject of this litigation, the Court concludes that those matters do not lead the
Court to decide that expedited proceedings are appropriate or necessary in regard to the Verified
Complaint currently filed in this action or the claims that it contains.
The remaining amounts, if any, would be distributed to our
stockholders upon completion of the proposed Dissolution. We can
provide no assurance as to if or when any such distribution will be
made, and we cannot provide an estimate as to the amount to be paid
to stockholders in any such distribution, if one is made. However, we
expect the amount of any such distribution, if one is made, to be
significantly and materially less, in the aggregate, than the
consideration received in the Sale Transaction.
Swisher Hygiene Inc., Definitive Proxy Statement Relating to Merger or
Acquisition (Form DEFM14A) 8 (Sept. 3, 2015).
{12} Other sections of the Proxy provide further detail as to the potential
liabilities and expected costs related to the acquisition, but reiterate the
management’s and directors’ inability to reliably estimate any shareholder
distribution.
{13} Defendants further contend that Swisher’s shareholders will suffer
significant potential harm if the shareholder vote is not allowed to proceed as
scheduled. The Proxy makes it clear that Swisher’s directors are recommending the
transaction because of its continuing recurrent losses. Swisher’s accountants have
issued a “going-concern” opinion. Although Plaintiff clearly contends that certain
additional underlying details should be disclosed, the Proxy contains financial
information demonstrating the continuing recurrent losses to which Defendants
refer. The shareholders are clearly advised by the Proxy that they are being asked
to approve a transaction that provides no assurance of a cash benefit to the
shareholders in return. They are also clearly advised that Swisher may not be able
to maintain any of its value as a going concern if the transaction is not completed.
With this awareness of the obvious uncertainty surrounding the results of the
transaction, the shareholders are, of course, free to vote for or against it. The Court
is unpersuaded that imposing the burden of expedited proceedings or forcing a delay
of the shareholder meeting to complete discovery and allow for a possible injunction
hearing would be appropriate under the particular circumstances of this case.
{14} There is clear risk in delay. The Proxy discloses that Ecolab can
terminate the transaction without penalty if it is not closed by December 31, 2015.
{15} Plaintiff also complains that Swisher’s directors agreed to improper
deal protection provisions, including a termination fee of less than four percent,3 a
prohibition on affirmatively soliciting additional offers, and a prohibition on
providing a potentially higher bidder any information without first advising Ecolab.
The Court believes that each of these provisions is of a nature that Delaware law
would indicate to be a reasonable protection of the transaction, and that the
provisions do not unfairly preclude the potential for Swisher to pursue a more
attractive bid. See, e.g., In re Morton’s Rest. Grp., Inc., 74 A.3d 656, 675 n.108 (Del.
Ch. July 23, 2013) (analyzing several deal protection measures and finding that
they were not preclusive or coercive); In re 3Com S’holders Litig., No. 5067-CC,
2009 Del. Ch. LEXIS 215, at *24–25, 25 n.37 (Dec. 18, 2009) (analyzing deal
protection measures and finding them reasonable, and listing cases where the
Delaware Court of Chancery has held various types of deal protection measures to
be reasonable).
{16} Plaintiff has offered no reasoned argument or evidence why Swisher
should expect any higher bid. While Plaintiff contends that Defendants should
make additional disclosures as to the history of the Ecolab agreement, and while
Plaintiff might make a more substantial showing in connection with a preliminary
injunction motion, based on the present record and solely for purposes of ruling on
the present Motion, the Court concludes that the Proxy makes adequate disclosures
to inform shareholders prior to their vote on the pending transaction, and that there
is not a sufficient suggestion of a higher bid to justify the risk of delay to allow
Plaintiff expedited discovery and resulting further motion practice.
{17} Accordingly, based on these considerations and this record and in the
exercise of its discretion, Plaintiff’s Motion for Expedited Proceedings is DENIED.
3 Ecolab is also obligated to pay a termination fee if it refuses to close for certain predefined reasons.
Ecolab’s termination fee is double Swisher’s termination fee. Swisher Hygiene Inc., Definitive Proxy
Statement Relating to Merger or Acquisition (Form DEFM14A) 58–59 (Sept. 3, 2015).
IT IS SO ORDERED, this 8th day of October, 2015.
/s/ James L. Gale
James L. Gale
Chief Special Superior Court Judge
for Complex Business Cases
