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Steel Partners II, L.P. v. Aronson

2006 WL 1044818 (U.S. Dist. Ct. N.J. 2006) (Unpublished)

BUSINESS COMBINATIONS — Pursuant to the New Jersey Shareholders Protection Act, an interested stockholder cannot enter into a business combination with a resident domestic corporation for a period of five years unless the transaction was pre-approved by the board of directors of the company to be acquired before the stockholder became an interested stockholder.

An investment fund, whose principal activity was the purchase of securities of publicly traded companies, was the largest shareholder of a publicly traded corporation involved with various lines of business. The investment fund filed complaints in state and federal courts against the Chief Executive Officer (CEO) and the other board officers and members of the company. In this federal action, the investment fund alleged claims for violations of section 13 of the Securities Exchange Act, for failure to report alleged group activity involving the company’s securities.

The investment fund alleged in its first claim for relief that the company violated the Act, and regulations promulgated thereunder by failing to report on a Schedule 13D their agreement to coordinate their purchases of the company stock for the purpose of placing absolute majority control of its shares in the CEO’s hands.

Pursuant to the Act, the owner of five percent or more of any class of a corporation’s registered securities is required to file certain information with the SEC within ten days after acquiring a five percent share. This information includes the purchaser’s identity, the number of shares purchased, the source and amount of funds used in acquiring the securities, agreements regarding further purchases, and any major changes in the issuer’s operation or structure intended by the purchaser if it obtains control of the issuer. While the board officers and members argued that the investment fund was time-barred from asserting a 13(d) violation because the underlying allegations were identical to the allegations in the investment fund’s state court action, the District Court found that the allegations in this action were distinct from the allegations in the state court action. Thus, because the investment fund’s allegations were made within the applicable statute of limitations period, the other board officers’ and members’ motion for summary judgment on count one was denied.

The investment fund alleged, in its second claim for relief against the CEO, the same violation as the first against the board officers and members. For the same reasoning that the board officers’ and members’ motion for summary judgment was denied in the first claim, the motion for summary judgment on the second claim was also denied.

The CEO and board officers and members asked the District Court to dismiss the investment fund’s third claim for relief pursuant to the abstention doctrine. Under certain limited circumstances, a federal court may abstain from exercising its grant of jurisdiction due to overriding principles of “federalism, comity and judicial economy.” One type of abstention applies in certain extremely limited circumstances in which a federal court may defer to pending state court proceedings based on considerations of wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation. A Court invoking this doctrine must first determine that the state and federal actions are parallel. Generally, cases are parallel when they involve the same parties and claims. There is a policy, however, that only truly duplicative proceedings be avoided. When the claims, parties or requested relief differ, deference may not be appropriate. Here, the District Court reasoned that the state court proceedings and this federal action involved the same parties. However, the District Court did not find that the claims alleged in each action supported an inference that the cases were parallel. Accordingly, the District Court found that this action and the state court proceedings were not parallel, and therefore, the threshold requirement of the invoked abstention doctrine was not met. Thus, the motion for summary judgment on abstention grounds was denied.

The CEO and board officers and members asked the District Court to dismiss the investment fund’s fourth claim for relief on ripeness grounds. Specifically, they contended that the investment fund failed to allege an actual or threatened business combination under the New Jersey Shareholder Protection Act. Pursuant to the New Jersey Shareholders Protection Act, an interested stockholder cannot enter into a business combination with a resident domestic corporation for a period of five years unless the transaction was pre-approved by the board of directors of the company to be acquired before the stockholder became an interested stockholder. The District Court found that the investment fund sufficiently alleged a business combination. The investment fund alleged that the board officers and members purchased shares of common stock for the purpose of obtaining, as a group, sufficient shares to give the CEO undisclosed voting control. The District Court found that this allegation, combined with certain paragraphs of the complaint, was sufficient to state a claim for relief under the New Jersey Shareholders Protection Act. Accordingly, the motion for summary judgment on the fourth claim for relief on ripeness grounds was denied.


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