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Parametric Sound Corp. v. The Eighth Judicial District Court of State

Supreme Court of Nevada

September 14, 2017

PARAMETRIC SOUND CORPORATION; VTB HOLDINGS, INC.; KENNETH POTASHNER; ELWOOD NORRIS; SETH PUTTERMAN; ROBERT KAPLAN; ANDREW WOLFE; AND JAMES HONORE, Petitioners,
v.
THE EIGHTH JUDICIAL DISTRICT COURT OF THE STATE OF NEVADA, IN AND FOR THE COUNTY OF CLARK; AND THE HONORABLE ELIZABETH GOFF GONZALEZ, DISTRICT JUDGE, Respondents, and VITIE RAKAUSKAS, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARILY SITUATED; AND INTERVENING PLAINTIFFS, RAYMOND BOYTIM AND GRANT OAKES, Real Parties in Interest.

         Original petition for a writ of mandamus or, alternatively, a writ of prohibition challenging a district court order denying a motion to dismiss in a corporate shareholder action.

          Snell & Wilmer, LLP, and Kelly H. Dove and Richard C. Gordon, Las Vegas; Dechert, LLP, and Joshua D. N. Hess, San Francisco, California; Dechert, LLP, and Neil A. Steiner, New York, New York, for Petitioners Parametric Sound Corporation and VTB Holdings, Inc.

          Holland & Hart, LLP, and Robert J. Cassity and J. Stephen Peek, Las Vegas; Sheppard, Mullin, Richter & Hamilton, LLP, and John P. Stigi, III, Los Angeles, California, for Petitioners Kenneth Potashner, Elwood Norris, Seth Putterman, Robert Kaplan, Andrew Wolfe, and James Honore.

          O'Mara Law Firm, P.C., and David C. O'Mara, Reno; Robbins Geller Rudman & Dowd, LLP, and Randall J. Baron, A. Rick Atwood, Jr., David T. Wissbroecker, and David A. Knotts, San Diego, California; Saxena White, PA, and Jonathan M. Stein and Joseph E. White, III, Boca Raton, Florida, for Real Parties in Interest.

          Brownstein Hyatt Farber Schreck, LLP, and Jeffrey S. Rugg and Maximilien D. Fetaz, Las Vegas, for Amicus Curiae State Bar of Nevada, Business Law Section.

         BEFORE THE COURT EN BANC.[1]

          OPINION

          HARDESTY, J.

         In this case, we consider whether shareholders lack standing to sue a corporation and its directors because the shareholders' claims are derivative, not ones asserting direct injury. In doing so, we examine Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 62 P.3d 720 (2003), which discussed the distinction between direct and derivative shareholder claims. In Cohen, we summarized the distinction as follows:

A claim brought by a dissenting shareholder that questions the validity of a merger as a result of wrongful conduct on the part of the majority shareholders or directors is properly classified as an individual or direct claim. The shareholder has lost unique personal property-his or her interest in a specific corporation. Therefore, if the complaint alleges damages resulting from an improper merger, it should not be dismissed as a derivative claim. On the other hand, if it seeks damages for wrongful conduct that caused harm to the corporation, it is derivative and should be dismissed.

Id. at 19, 62 P.3d at 732 (footnotes omitted).

         Although the parties agree Cohen is directly relevant to this case, they offer conflicting applications. Petitioners argue that the shareholders have not lost unique personal property and were not shareholders of a merging entity. Thus, under the petitioners' interpretation of Cohen, the shareholders' claims are derivative and their complaint should be dismissed. The shareholders argue that the petitioners' interpretation is too narrow and that Cohen only requires a claimant to assert wrongful conduct affecting the validity of a merger to establish a direct claim.

         We thus take this opportunity to clarify Cohen and distinguish between direct and derivative claims by adopting the direct harm test, as articulated in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004), which allows a direct claim when shareholder injury is independent from corporate injury. Applying Tooley's direct harm test to the facts of this case, we conclude that the shareholders' complaint alleges derivative dilution claims, not direct claims. Accordingly, we grant the petition for a writ of mandamus[2] and instruct the district court to dismiss the complaint without prejudice to the shareholders' ability to file an amended complaint.

         FACTS AND PROCEDURAL HISTORY

         Petitioner Parametric Sound Corporation (Parametric) was a small, publicly traded company that negotiated a merger with petitioner VTB Holdings, Inc. (Turtle Beach), a larger, privately owned company. Parametric and Turtle Beach ultimately agreed to a reverse triangular merger.[3] To accomplish the merger, Parametric created a subsidiary named Paris Acquisition Corporation (Paris), and Paris was merged into Turtle Beach. As a result, Paris ceased to exist and Turtle Beach became a subsidiary of Parametric.

         To facilitate the merger, over 90 percent of Parametric shareholders voted to authorize the issuance of new stock to the Turtle Beach shareholders as consideration.[4] Upon issuance, the Turtle Beach shareholders held an 80 percent interest in Parametric, and the original Parametric shareholders were left with a 20 percent stake in Parametric.[5]After the merger, Parametric was renamed Turtle Beach Corporation, [6] a new board of directors was elected, and a new management team was installed.

         Several non-controlling shareholder actions challenging the merger were consolidated in the district court. Real parties in interest Raymond Boytim and Grant Oakes filed a class action complaint in intervention on behalf of the original, public shareholders of Parametric against Parametric, Turtle Beach, and Parametric's board of directors, petitioners Kenneth Potashner, Elwood Norris, Andrew Wolfe, Robert Kaplan, Seth Putterman, and James Honore (we collectively refer to all petitioners as petitioners except when necessary to separately discuss the corporate entities). The shareholders eventually designated the complaint in intervention as the operative complaint in the action.

         The complaint asserted two causes of action: (1) breach of fiduciary duties as to Parametria's board of directors, and (2) aiding and abetting the directors' breaches of fiduciary duties by Parametric and Turtle Beach. Those two causes of action can be divided into four main factual allegations. First, the shareholders alleged that five of the six directors were conflicted when approving the merger.[7] Second, the shareholders alleged that deal protection agreements entered into between Parametric and Turtle Beach were coercive and preclusive-depriving the shareholders of a meaningful vote on the merger while simultaneously warding off potentially superior merger offers-and that the go-shop provision[8] in the merger agreement was a sham. Third, the shareholders alleged that Parametric board members intentionally delayed announcing positive and material information about Parametric in an attempt to manipulate the premium on the merger, and made several other disclosure omissions and misstatements associated with the proxy statement. Fourth, the shareholders claimed that because of the wrongful conduct alleged, Parametric's valuation was lower than it should have been and Turtle Beach's valuation was higher than it should have been, resulting in a 65 percent to 82 percent dilution of the pre-merger value of the shareholders' Parametric stock when considering their 20 percent interest in the post-merger company, Petitioners moved to dismiss the complaint, arguing that the shareholders lacked standing because their claims were derivative, not direct.[9] Without explanation, the district court denied the motion. This writ petition followed.

         DISCUSSION

         Writ relief is appropriate

         "A writ of mandamus is available to compel the performance of an act that the law requires as a duty resulting from an office, trust, or station or to control an arbitrary or capricious exercise of discretion." Humphries v. Eighth Judicial Dist. Court, 129 Nev, 788, 791, 312 P.3d 484, 486 (2013) (quoting Int'l Game Tech., Inc. v. Second Judicial Dist Court, 124 Nev. 193, 197, 179 P.3d 556, 558 (2008)). "Writ relief is not available, however, when an adequate and speedy legal remedy exists." Int'l Game Tech., 124 Nev. at 197, 179 P.3d at 558. "While an appeal generally constitutes an adequate and speedy remedy precluding writ relief, we have, nonetheless, exercised our discretion to intervene 'under circumstances of urgency or strong necessity, or when an important issue of law needs clarification and sound judicial economy and administration favor the granting of the petition.'" Cote H. v. Eighth Judicial Dist. Court, 124 Nev. 36, 39, 175 P.3d 906, 908 (2008) (footnote omitted) (quoting State v. Second Judicial Dist. Court, 118 Nev. 609, 614, 55 P.3d 420, 423 (2002)).

         This case involves an important issue of law recognizing the distinction between direct and derivative corporate shareholder claims. We take this opportunity to clarify Cohen and in doing so adopt a clearer standard for recognizing the distinction between direct and derivative corporate shareholder claims in this context. Furthermore, the interests of sound judicial economy and administration favor resolving this writ petition on the merits, as clarifying the law at this early stage of the underlying litigation will permit the shareholders to appropriately plead their case and prevent this matter from proceeding under an erroneous application of the law. We review questions of law de novo, even in the context of a writ petition. Int'l Game Tech., 124 Nev. at 198, 179 P.3d at 559.

         Nevada caselaw regarding direct and derivative ...


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