Friday, January 02, 2015

Director-Shareholder Suit Trips on Limitations Period

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

A former director and shareholder who sold his shares back to the company in the context of an ongoing private equity deal cannot bring an Exchange Act fraud claim based on his supposed lack of knowledge of other secret bids to buy the company that could have boosted his sale price because he filed suit after the two relevant limitations periods ended. Judge Jane A. Restani, siting by designation from the U.S. Court of International Trade, wrote for a unanimous Eleventh Circuit panel (100079 Canada, Inc. v. Stiefel Laboratories, Inc., December 31, 2014, Restani, J.).

If only he knew. Richard MacKay, a former Stiefel Laboratories, Inc. (Stiefel) director and shareholder, sued Stiefel for allegedly causing him to sell his shares in the company back to it prematurely. MacKay claimed that while serving on Stiefel’s board he learned in 2006 of a private equity deal between Stiefel and Blackstone Healthcare Partners LLC (Blackstone) that was worth between $1.8 and $2.9 billion.

By mid-2008, nearly two years after the Blackstone deal became known to him, MacKay arranged to sell his 750 Stiefel shares back to the company at $14,517 per share, based on a 2007 valuation by an accountant hired by Stiefel. Charles Stiefel’s 2007 correspondence with the Stiefel board implied a preferred stock per share value of over $60,000. MacKay did seek a valuation of his own.

But MacKay began to regret the share sale by February 2009, when he learned that Stiefel got two competing bids: one in November 2008 from Sanofi-Aventis ($2.8 billion), and another in March 2009 from GlaxoSmithKline (GSK) ($2.9 billion in cash after an initial bid of $3.1 billion). MacKay and Stiefel’s board later approved the GSK deal. MacKay, through the Canadian company he owns and controls (100079 Canada, Inc.), then sued Stiefel alleging fraud under Exchange Act Sec. 10(b) and breach of fiduciary duty under Delaware law.

Time runs out. Exchange Act Sec. 10(b)’s limitations period runs from the earlier of two years after a violation is discovered, or five years after the violation. MacKay argued that he learned of key facts giving rise to his claims from another law suit that alleged that Stiefel had a history of forcing its employees to sell their shares back to the company. The plaintiffs in that case filed suit on July 7, 2009; MacKay filed his suit on July 1, 2011. By contrast, Stiefel argued that the touchstone for purposes of the limitations period should be April 19, 2009, the date the Stiefel board approved the GSK deal.

The court noted Supreme Court precedent that tells a prospective plaintiff to file suit once he discovers the violation or, through reasonable diligence, he would have discovered the needed facts to show a violation. Here, MacKay could have pleaded each element of a Sec. 10(b) violation by the time the Stiefel board accepted GSK’s bid on April 19, 2009.

Moreover, the court said MacKay should have conducted some investigation of his own into the murky facts surrounding Stiefel’s dealings. MacKay, said the court, could have found evidence of even earlier secret negotiations by Stiefel with potential suitors. The court observed in a footnote that MacKay had even based his limitations argument on discovery revelations in the related employee suit, in which it appeared that Stiefel may have engaged in secret negotiations to sell the company in 2006.

Likewise, Mackay could not invoke equitable tolling to shoehorn his Delaware fiduciary duty claim into his federal case. Delaware has a three-year limitations period, subject to a few tolling options, that began to run on the date MacKay sold his shares back to Stiefel, June 18, 2008. MacKay was ineligible for tolling because, as a Stiefel director, he had greater access to deal information than non-director shareholders did. The court said that extending equitable tolling to director-shareholders would undermine the doctrine’s goals and could result in a fiduciary being rewarded for his own bad conduct.

The case is No. 13-13328.

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