Fed. Sec. L. Rep. P 98,659 Guy P. Wyser-Pratte v. Van Dorn Company, B.T.Z. Inc., as Representative of the Class of Shareholders in Van Dorn Co., and Crown Cork & Seal Co., Inc.
Docket: 93-4262
Court: Court of Appeals for the Sixth Circuit; March 7, 1995; Federal Appellate Court
Guy P. Wyser-Pratte, a risk arbitrageur, solicited proxies from Van Dorn Company shareholders to promote a sale of the company, claiming he would cover solicitation costs but did not disclose his intention to seek reimbursement if the company was sold favorably. After Van Dorn agreed to be acquired by Crown Cork, Seal Co., Wyser-Pratte sued Van Dorn and a representative of its shareholders for recovery of proxy solicitation costs, including legal fees, under Ohio law in the U.S. District Court for the Northern District of Ohio, which had diversity jurisdiction.
Crown Cork was added as a defendant prior to a merger certificate being filed. The district court denied a preliminary injunction that would have required Crown Cork to escrow part of the purchase price, allowing full distribution to Van Dorn shareholders. Wyser-Pratte sought recovery based on three theories: quantum meruit, shareholder ratification, and an expanded common fund doctrine, but the court rejected all and granted summary judgment to the defendants.
On appeal, Wyser-Pratte focused on the common fund theory, acknowledging its traditional application to litigation expenses, arguing for its extension to proxy contest costs. However, the appellate court found it unnecessary to determine the viability of an expanded common fund theory under Ohio law, concluding that an Ohio court would likely deny recovery of Wyser-Pratte's solicitation costs. The judgment of the district court was affirmed.
Van Dorn, an Ohio corporation, had over 8.3 million shares outstanding and more than 3,300 shareholders. Crown Cork publicly offered to buy Van Dorn for $18 per share, which was rejected, and an increased offer of $20 per share was also turned down, leading to a decline in Van Dorn’s stock price.
Mr. Wyser-Pratte, a New York resident, owned 5,000 shares of Van Dorn stock and sought to convene a special shareholders' meeting to discuss unspecified corporate governance measures aimed at promoting a sale of the company after a second offer was rejected. Despite four lawsuits filed by other shareholders to compel a sale, he did not join those actions. He partnered with Spear, Leeds, Kellogg, which owned 285,000 shares, to share costs related to the special meeting initiatives.
On April 23, 1992, Wyser-Pratte sent a solicitation to Van Dorn's shareholders, urging them to oppose the company's nominated directors at the upcoming annual meeting, estimating the solicitation costs at $15,000, which he claimed would be solely funded by him and his company. Following a formal demand from Wyser-Pratte, supported by holders of approximately 45% of outstanding shares, Van Dorn called the special meeting for August 7, 1992.
On August 10, an investment group named Starpack agreed to reimburse Wyser-Pratte up to $100,000 for his solicitation costs. By September 10, Wyser-Pratte circulated proxy statements, expressing opposition to the rejection of the Crown Cork offer and advocating for annual director elections, the formation of an independent committee for acquisition reviews, and opting out of the Ohio Control Share Acquisition Act. His proxy statement disclosed increased shareholdings, with Wyser-Pratte owning 6,600 shares and associated clients holding 262,000 shares, while Spear Leeds increased its holdings to 400,000 shares. The total expected expenses for the solicitation were projected at approximately $200,000, with previously incurred costs amounting to $62,000.
In response, Van Dorn sent out a competing proxy statement on the same day, summarizing Wyser-Pratte's materials and highlighting his financial arrangements with Spear Leeds and Starpack.
Mr. Wyser-Pratte obtained proxies from over 50% of Van Dorn's shareholders and agreed to postpone a special meeting after Van Dorn announced it was soliciting proposals for the company's purchase. On December 17, 1992, Van Dorn agreed to be acquired by Crown Cork for $21 per share, totaling approximately $175 million, including $35 million in cash. In a supplemental affidavit dated August 6, 1993, Mr. Wyser-Pratte stated he intended to seek reimbursement for his proxy solicitation costs only if he conferred a benefit to shareholders, which he deemed likely when a $55 million benefit was apparent. However, he did not disclose this intention in his proxy materials. He claimed to have incurred costs of $499,282.30, which Van Dorn declined to reimburse.
On March 30, 1993, Wyser-Pratte filed a lawsuit against Van Dorn and B.T.Z. Inc., a shareholder representative. Crown Cork was added as a defendant shortly before the merger was completed. He sought a temporary restraining order to place $2 million in escrow, arguing that the imminent distribution of funds to shareholders would cause irreparable harm and eliminate his remedy under the common fund doctrine. The district court denied his motion, concluding he had not demonstrated a substantial likelihood of success on the merits. Wyser-Pratte did not appeal the injunction denial, and it is assumed Bankers Trust distributed the purchase price to the shareholders. Both Van Dorn and Crown Cork moved to dismiss Wyser-Pratte's complaint, which the court treated as a motion for summary judgment, ultimately granting it and discharging B.T.Z. from the case. An appeal followed.
Under the American rule, as established by the Supreme Court, the prevailing party typically cannot recover attorney fees from the losing party. This principle applies in Ohio, which adheres to the American rule and recognizes that courts may grant attorney fees in class actions when a party has maintained a successful suit for the benefit of a common fund. The Ohio Supreme Court's decision in Smith v. Kroeger allows for reasonable attorney fees to be paid from a fund controlled by the court in class actions. However, the courts have not applied the common fund doctrine in non-litigation contexts.
Wyser-Pratte argues for an extension of the common fund theory to claim fees as a non-litigant, asserting that shareholders benefited from his actions as if he had litigated. Opponents argue that extending the doctrine could complicate determinations of the claimant's role in creating the fund and may encourage more litigation, contrary to the goal of reducing it.
The court expresses skepticism about the Ohio Supreme Court's willingness to extend the common fund doctrine but refrains from making a definitive ruling on the matter. The circumstances of Wyser-Pratte's case are unfavorable, and the district court did not abuse its discretion in denying his claim. Notably, Wyser-Pratte had previously informed shareholders he would cover his own costs, and there is disagreement about whether SEC rules required him to disclose his intent to seek reimbursement if a sale occurred. Regardless, the court believes that equity would require Wyser-Pratte to disclose such intent, as the principle "Equity will not aid a volunteer" applies here. Consequently, the district court's decision to deny his claim for costs stands.
Under Ohio law, attorney's fees must be sourced from the fund itself and cannot be imposed on a party unless exceptional misconduct is demonstrated. In this case, Crown Cork was not found to have engaged in any such misconduct, making it inappropriate to require them to cover Wyser-Pratte's legal fees following the distribution of the fund. Although Wyser-Pratte argued that Crown Cork should have created an escrow fund from the distributed shares, there was no provision in the merger agreement permitting this. He attempted to have the district court hold back funds pending reimbursement claims, but the court declined, and he did not appeal this decision. Consequently, it is deemed inequitable to allow Wyser-Pratte to challenge the outcome after failing to appeal when the fund was still available.
Wyser-Pratte referenced the case O'Neill v. Church's Fried Chicken, Inc. to argue for a fee award despite the fund's disbursement, claiming it supported his position under the common fund doctrine. However, the O'Neill case, governed by Texas law, allowed for attorney's fees because the shareholders conferred a substantial benefit to the corporation, a situation not applicable here, as Wyser-Pratte did not pursue a successful derivative suit. The Ohio Supreme Court's ruling necessitates that attorney's fees be taken from the fund itself, reinforcing that if there is any inconsistency with Texas law, the Ohio ruling prevails.
The district court's judgment was affirmed, with additional notes indicating Wyser-Pratte's shareholder status and claims regarding a holdback amount that exceeded the fees sought. The court also referenced Trustees v. Greenough, which limits payment from a common fund to avoid compensation for time spent by claimants, further supporting the judgment against Wyser-Pratte's additional claims.
