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A view of the judge's chair in court room 422 of the New York Supreme Court at 60 Centre Street February 3, 2012. REUTERS/Chip East
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(Reuters) – In 2020, a consortium of law firms including Bottini & Bottini, Brafman & Associates and Robert & Robert filed a series of shareholder derivative lawsuits in New York State Supreme Court that accused directors of huge foreign companies such as Bayer AG, Novartis AG, Deutsche Bank AG and UBS Group AG of breaching their duties.
The theory behind the cases was bold, even revolutionary: Shareholders blocked by the U.S. Supreme Court’s 2010 precedent in Morrison v. National Australia Bank Ltd from alleging securities fraud in U.S. courts could nevertheless avail themselves of New York state court by framing their accusations as derivative breach-of-duty claims against corporate directors. If the theory held up, New York courts would become a hub of fiduciary litigation against international corporations, as long as some of their board members' alleged wrongdoing took place in New York.
But last week, two Manhattan state-court judges called off the revolution.
On Dec. 27, Justice Andrew Borrok dismissed the derivative case against Bayer’s board members and bankers, which alleged that defendants cost shareholders billions of dollars in Bayer’s ill-fated 2018 acquisition of Monsanto Co. Borrok concluded that plaintiffs had not established New York's jurisdiction over claims against German board members whose deliberations on the Monsanto deal took place exclusively in Germany. The judge also found that New York is not the appropriate forum for the case, since Germany has a powerful interest in regulating a major German corporation governed by German law.
Then on Dec. 30, Justice Jennifer Schecter tossed a complaint alleging that UBS directors’ long-running oversight failures had caused “a seemingly endless train of scandals, lawsuits, prosecutions and regulatory proceedings” against the bank. Schecter ruled that the New York derivative claims were precluded by a provision in UBS’s corporate charter that requires shareholder disputes to be litigated in Switzerland.
Plaintiffs lawyers, of course, can appeal last week’s dismissals. And they’re still litigating at least four similar derivative cases against other foreign megafirms. (I emailed consortium members Francis Bottini and James Baskin of the Bottini firm; Benjamin Brafman; and Clifford Robert of Robert & Robert but didn’t hear back.) But in a Jan. 3 client alert, Bayer's lawyers from Wachtell, Lipton, Rosen & Katz predicted that the rulings from Borrok and Schecter portend doom for the rest of the shareholder groups’ New York derivative cases.
The Bayer decision “struck an important blow for judicial efficiency and international comity,” the Wachtell memo said. “It may sound the death knell for the plaintiffs’ bar’s campaign to transform New York into the forum of choice for international derivative claims.”
I’m going to focus on the Bayer case instead of UBS because Borrok held oral arguments and wrote a more extensive decision than Schecter. Broadly speaking, plaintiffs contended that New York should adjudicate derivative claims arising from Bayer's Monsanto deal because the acquisition had significant ties to New York. It was first proposed in Manhattan, shareholders alleged. Bayer also hired New York lawyers to conduct due diligence on Monsanto, shareholders said, and employed New York bankers and lawyers to help negotiate deal terms. At oral arguments on Dec. 13, shareholder lawyer Baskin of Bottini & Bottini described the deal, including Bayer’s issuance of debt to finance the acquisition, as “Manhattan-centric.”
“The injury took place in New York because that's where the due diligence was done,” Baskin told Borrok. The witnesses who conducted that due diligence and the documents that described the effort were all in the U.S., he said. In fact, Baskin asserted, it would be far more convenient to litigate a case centered on disastrous American due diligence in New York than in Germany.
Baskin also said that German law makes it very difficult for shareholders to pursue derivative claims. Wachtell had argued in Bayer’s dismissal motion that shareholders are already suing Bayer over the Monsanto deal in German courts. At oral argument, Wachtell’s William Savitt told Borrok that the German shareholder litigation, in fact, was brought by a New York investor who is represented by well-known U.S. securities litigators. But Baskin said the German securities litigation does not assert breach of duty claims against Bayer directors – and that no Bayer shareholder has proved willing to bear the risk of German fee-shifting rules to bring such a case. “The incentive structure is set up so that it is virtually unheard of,” he asserted.
Baskin’s consortium has brought New York derivative suits against other German companies, so his point about the difficulty of asserting such claims in German courts resounds beyond the Bayer case. Unfortunately for his side, the judge didn’t buy it.
“You're asking me to hold that, as a matter of law, Germany does not provide an adequate forum for derivative actions involving German companies because the cost of maintaining those actions in Germany is an effective [bar to] litigation?” Borrok said at oral argument. “I can tell you right now there are no chances of that happening today here at 60 Centre Street, period.”
Baskin’s other arguments for New York jurisdiction and for New York as the more convenient forum fared no better in Borrok’s Dec. 29 opinion. Bayer’s board members, none of whom reside in New York or even met with anyone in New York on the Monsanto deal, deliberated in Germany. Bayer’s books and records are in Germany, the judge said, and German law governs shareholders’ claims. The company’s hiring of New York bankers and lawyers, Borrok said, is simply too tenuous a connection to justify New York courts grabbing control of the case.
Interestingly, Borrok is not implacably opposed to exercising jurisdiction over derivative claims against board members of foreign companies. I told you last fall about a $300 million settlement for minority shareholders in a derivative suit against insiders from China’s Renren Inc. Borrok presided over that case. But as Bayer counsel Savitt said during oral arguments, New York was more essential to the Renren board's alleged wrongdoing.
It looks like that’s what it’s going to take for shareholders’ suits to survive.
Read more:
‘Facebook of China’ shareholders score $300 million in cross-border derivative deal
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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.
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