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From Securities Regulation Daily, July 25, 2014

Aborted merger triggers new claims by Ebix shareholders

By Anne Sherry, J.D.

Abandoning an unpopular proposed merger with a Goldman Sachs affiliate did not completely quiet the tide of lawsuits against Ebix, Inc. and its six-member board. Instead, class-action plaintiffs challenged the conduct surrounding Ebix chairman and CEO Robin Raina’s bonus agreement, several of which claims survived the defendants’ motion to dismiss (In re Ebix, Inc. Stockholder Litigation, July 24, 2014, Noble, J.).

Unpopular merger. In the going-private merger proposed in May 2013, Ebix’s public stockholders were to receive $20 per share in cash, while several of its largest stockholders were to receive equity in the post-merger entity. Raina was in the latter group, agreeing to accept $32 million in cash and 29 percent of the post-merger entity in exchange for his 9.3 percent diluted stake in Ebix and a waiver of any bonus payment due under his 2009 Acquisition Bonus Agreement (ABA). By the end of May, Ebix stockholders had filed 12 class actions challenging the merger terms, including the consideration to be paid to Raina. Ebix and Goldman called off the deal in June.

New focus. With no merger to challenge, lead plaintiffs Desert States Employers & UFCW Union Pension Plan and Gilbert C. Spagnola amended their complaint to focus on the conduct surrounding the ABA, which entitled Raina a bonus payment upon a defined acquisition event. The plaintiffs allege that the ABA violates Ebix’s 1996 stock incentive plan, particularly in fixing the base price for Raina’s rights at $23.84. Ebix disclosed the ABA in its July 2009 Form 8-K, but omitted to mention it in several subsequent filings. In the proxy statement for Ebix’s 2010 shareholder meeting, at the 2010 stock incentive plan was approved, the board explained the ABA and identified the base price as $7.95. According to the plaintiffs, this was a material misstatement because the base price was not so reduced.

Among the remedies the plaintiffs sought were a declaration regarding the current ABA base price, an injunction preventing the defendants from claiming that Raina is entitled to any bonus under the ABA, a declaration that the 2010 plan was not validly approved by Ebix stockholders, rescission of the compensation that the board has received under the 2010 Plan, and compensatory damages.

Unripe claims. The court dismissed the declaratory judgment claim as not ripe because, absent a pending transaction, there is no actual controversy: The plaintiffs do not allege that Raina’s right to a payment infringes on their stock ownership rights or on the board’s ability to manage Ebix. Likewise, the fiduciary duty and unjust enrichment claims against Raina were dismissed as unripe because there is no pending transaction.

Anti-takeover device. The court dismissed as barred by laches the plaintiffs’ claim that the ABA was improperly adopted (as opposed to maintained) as an unreasonable anti-takeover device. However, when reviewing the plaintiffs’ allegations about the board’s disclosures, the court could draw a reasonable inference that the board considered the ABA to have anti-takeover effects. Thus, the claim challenging the continuing anti-takeover effects of the ABA stated a reasonably conceivable claim under the heightened-scrutiny standard of Unocal Corporation v. Mesa Petroleum and would not be dismissed regardless of whether it was direct or derivative.

Demand futility. Two claims otherwise turned on whether demand was excused as to the plaintiffs’ derivative claims. Demand was not excused under either prong of Aronson with respect to the breach of fiduciary duty claims in connection with the ABA’s alleged violation of the 1996 plan, the court held, because there were no particularized allegations that at least half the board was interested or that the outside directors were not adequately informed or acting in good faith. However, as to the claim that the directors breached their fiduciary duties by receiving compensation under the 2010 plan, the board was inherently interested and demand was excused.

Material misstatements. Finally, the court denied the defendants’ motion to dismiss the direct claim against the board to the extent the plaintiffs seek non-monetary relief for material misstatements related to the ABA base price in the 2010 proxy statement. As the plaintiffs failed to allege or present a theory of damages arising from nondisclosure in the 2009, 2011, and 2012 proxies, there is no monetary relief that the court could grant for those claims. It was also not reasonably conceivable that information about the ABA would have been material to a decision to vote for a proposed charter amendment. However, the court concluded that it was reasonably conceivable that the ABA base price was material in deciding whether to approve the 2010 plan and would not dismiss the claims for non-monetary relief relating to those omissions.

The case is No. 8526-VCN.

Attorneys: Michael Hanrahan, Esq. (Prickett Jones & Elliott PA), Stuart M. Grant, Esq. (Grant & Eisenhofer PA), Seth D. Rigrodsky, Esq. (Rigrodsky & Long PA), Christine S. Azar, Esq. (Labaton Sucharow LLP) and Mark Lebovitch, Esq. (Bernstein Litowitz Berger & Grossmann LLP) for Desert States Employers and UFCW Union Pension Plan. Samuel A. Nolen, Esq. (Layton & Finger PA) and Charles W. Cox, Esq. (Alston & Bird LLP) for EBIX, Inc.

Companies: Desert States Employers; UFCW Union Pension Plan; EBIX, Inc.

MainStory: TopStory MergersAcquisitions FraudManipulation ExecutiveCompensation Proxies DelawareNews

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