Thursday, May 25, 2017

Dexter v. ZAIS Financial Corp. (Cir. Ct. Balto. City)

Filed: December 8, 2016

Opinion by: Judge Audrey J.S. Carrion


The Wittman standard of awarding attorneys’ fees is not met in a cash-stock merger suit alleging inadequate information in the registration statement because (1) directors do not owe shareholders a common law duty of candor in that type of transaction, and therefore the claim cannot be “meritorious” when filed, and (2) the corporate benefit was not casually related to the suit when the information in published disclosures was in accordance with previous public filings filed before the suit.


On April 7, 2016, a merger agreement was announced between ZAIS, the Defendant, and another party, the Second Defendant, in which shareholders could elect to receive all cash or all stock.  The Second Defendant would be merged into a subsidiary of Defendant, ZAIS would issue its shares to the Second Defendant’s shareholders, and ZAIS would make a pre-merger tender offer to its shareholders who would not like to own shares in the resulting company.

The registration statement was filed on May 10 and amended on June 20 and August 5, 19 and 26, 2016 (the “August Registration Statement”).   On August 24, 2016, Dexter, the Plaintiff, an individual shareholder of Defendant, filed a complaint alleging inadequate information about the shareholder vote.  Plaintiff argued that details about the final exchange ratio, the per share tender offer price and conflicts of interest were missing from the registration statement.

Dexter then filed a Motion for Preliminary Injunction.  On September 12, 2016, ZAIS filed supplemental disclosures with the SEC.  On September 19, 2016, Dexter withdrew the Injunction Motion as moot and it was granted.  On September 30, 2016, Dexter filed a request for attorneys’ fees.  Defendants argue that the supplemental disclosures were disclosed not due to Plaintiff’s demand letter, but rather in accordance with the registration statement.


The “corporate benefit” doctrine is an exception to the American Rule, which states that litigants bear the cost of their own attorneys’ fees and expenses.  In re First Interstate Bancorp, 756 A.2d 357, 756 A.2d 353, 357 (Del. Ch. 1999).  It should be noted that attorneys’ fees can be awarded even when a defendant moots a claim by satisfying a plaintiff’s demands.  Tandycrafts v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1966) citing Chrysler Corp. v. Dann, 223 A.2 384, 386 (Del. 1966).

The Court required the Plaintiff to satisfy the three conditions of the Wittman standard: the suit was meritorious when filed; the action producing the corporate benefit was taken by the Defendant prior to a judicial resolution; and the resulting corporate benefit was causally related to the lawsuit.  Wittman v. Crooke, 120 Md. app. 369, 379, 707 A.2d 422, 426 (1998).

1. The Suit was not meritorious when filed.

A suit is “meritorious” when it can “withstand a motion to dismiss on the pleadings.”  The Court held that Plaintiff’s claim that the Defendant’s directors breached the duty of candor and the Second Defendants aided and abetted that breach could not have been meritorious.

The Court disagreed with Plaintiff that Shenker applied to this case.  The transaction in Shenker v. Laureate Education, Inc., 411 Md. 317, 338, 983 A.2d 408, 420 (2009), involved a cash-out merger after the decision to sell the corporation had already been made and that Court “determined the common law duties are triggered when the decision is made to sell the corporation, the sale of the corporation is a foregone conclusion, or the sale involved an inevitable or highly likely change-of-control situation.”

In this case, the Court agreed with Defendant that Revlon duties do not apply in a cash-stock election merger, similar to this merger.  Therefore, individual shareholders like the Plaintiff may not bring direct claims against the directors for a breach of common law duties.  ZAIS also referred to Sutton v. FedFirst Financial Corp., 226 Md. App. 46, 85, 126 A.3d 765, 788 (2015), which involved a stock-for-stock transaction, and the Court of Special Appeals did not apply Revlon.

2. The corporate benefit was not causally related to the Suit.

The September 12 Supplemental Disclosures were made in accordance with the August Registration Statement, which included a prospectus with a calculation of the exchange ratio, that was to be publicly announced at least five days before the shareholder meetings.

The Court found that the benefit to the Defendant’s shareholders – the disclosure of the Exchange Ratio and Tender Offer price – was not caused by the Plaintiff’s lawsuit; it was “mere happenstance” (Wittman).

The full opinion is available in PDF.

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