PARAMETRIC SOUND CORPORATION; VTB HOLDINGS, INC.; KENNETH POTASHNER; ELWOOD NORRIS; SETH PUTTERMAN; ROBERT KAPLAN; ANDREW WOLFE; AND JAMES HONORE, Petitioners,
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.
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.
& 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.
THE COURT EN BANC.
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
Id. at 19, 62 P.3d at 732 (footnotes omitted).
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
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 and instruct the district court to dismiss
the complaint without prejudice to the shareholders'
ability to file an amended complaint.
AND PROCEDURAL HISTORY
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. 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
facilitate the merger, over 90 percent of Parametric
shareholders voted to authorize the issuance of new stock to
the Turtle Beach shareholders as consideration. 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.After the merger,
Parametric was renamed Turtle Beach Corporation,
new board of directors was elected, and a new management team
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.
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. 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 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. Without explanation, the district
court denied the motion. This writ petition followed.
relief is appropriate
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
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.
caselaw regarding direct and derivative ...