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STATE OF SOUTH CAROLINA G;\[[NVILLE co. S:..C. f'i\UL B.WICKIENSIMtR

) IN THE COURT OF COMMON PLEAS COUNTY OF GREENVILLE ZUIJ JAN 1 Q) p ll: 5 L!

In re International Textile Group Merger ) C.A. No. 2009-CP-23-3346 Litigation )

ORDER (1) GRANTING PLAINTIFFS'

MOTION FOR CLASS CERTIFICATION AND

(2) DENYING DEFENDANTS' MOTIONS TO DISQUALIFY PLAINTIFFS AS DERIVATIVE REPRESENTATIVES

Plaintiffs Brian Menezes, FURSA Alternative Strategies LLC and FURSA Master Global

Event Driven Fund, LP (together "FURSA"), Ramius Securities, LLC, and Ramius Credit

Opportunities Master Fund Ltd. (together "Ramius"), Joseph and Marilyn Asiaf, and Juanita

Marett have moved the Court for class certification pursuant to Rule 23(a) of the South Carolina

Rules of Civil Procedure. All defendants oppose the motion. All defendants also moved to

disqualify plaintiffs as derivative representatives pursuant to Rule 23(b )(1) of the South Carolina

Rules of Civil Procedure.

The parties extensively briefed the issues, and the Court heard more than four hours of

argument on September 26, 2012. Upon consideration of the memoranda and arguments

presented at the hearing, plaintiffs' motion for class certification is HEREBY GRANTED and

defendants' motions to disqualify plaintiffs as derivative representatives are HEREBY DENIED.

The Court further ORDERS that the plaintiffs' counsel serve notice on the class pursuant to

plaintiffs' proposed class notice submitted with plaintiffs' memorandum in support of class

certification on June 15, 2012.

I. BACKGROUND

A

"'""

This lawsuit is (a) a derivative action on behalf of Safety Components International, Inc.

("SCI"), and (b) a direct class action on behalf of the minority shareholders of SCI as of October

20, 2006. 1 On that date, the former International Textile Group, Inc. ("FITG"), a private textile

manufacturer based in North Carolina, was merged into SCI, a Delaware public company then

based in Greenville, South Carolina, which manufactured automobile airbags. SCI was

technically the surviving company in the merger. Afterwards, however, its name was changed to

"International Textile Group, Inc." To distinguish this company from FITG, it will be referred to

as new International Textile Group, Inc., or "NITG."

Plaintiffs allege that SCI provided consideration worth approximately $150 million to the

shareholders of FITG in connection with the merger. (First Amended Consolidated Complaint

["FACC"], ~144.) They allege that FITG was not worth that amount and, in fact, probably had a

negative value at the time of the merger. (FACC ~522.) For example, plaintiffs allege, as of

August 17, 2006, FITG's projected net income for 2006 was negative $19.3 million, projected

EBITDA was negative $14.8 million, and projected cash flow from operations in the last quarter

of 2006 alone was negative $42.9 million. (FACC ~161.) In addition, plaintiffs allege, as of

August 30, 2006, FITG was forecasting sales for the fiscal year at $47 million below budget and

operating income at $13 million below budget. (FACC ~162.) Plaintiffs allege that to cover

FITG's negative cash flow, the WLR defendants were continually pumping funds in, issuing

shareholder loans to FITG of over $66 million between May and December 2006. (FACC ~163.)

FITG, plaintiffs contend, was not only worthless as a going concern, it was rapidly collapsing.

This lawsuit is a consolidation of three previously filed lawsuits. On April 8, 2008, Brian Menezes filed a putative class action on behalf of SCI minority shareholders as of the merger. (2008-CP-23-2701.) On April 17, 2009, Mr. Menezes filed a separate derivative action on behalf of SCI. (2009-CP-23-3346.) FURSA filed its own action on August 25, 2009. (2009-CP-23-7320.) It alleged both class and derivative claims together. These actions were assigned to the undersigned judge and consolidated on February 5, 2010. By leave of Court, an amended complaint was filed on October 10, 2011, which, among other things, added the additional plaintiffs.

The defendants are the financier Wilbur Ross and his company W.L. Ross & Co. LLC

("WLR"), which are alleged, through funds they controlled, to have been the majority owner and

controlling shareholder of both SCI (owning 75.6%) and FITG (owning 85.4%), and now to be

the majority owner and controlling shareholder of NITG. (FACC ,-r22 & ,-r47). Mr. Ross is also

alleged to have been the chairman of both the SCI and FITG boards at the time of the merger and

of the Nl'I'G board since, and to have controlled four of the five seats on the SCI board and five

of the six on the FITG board. (FACC ,-r,-r43 & 48.) Defendants also include David Wax, David

Storper, and Michael Gibbons (who are employees and officers/directors of WLR and were on

the board of SCI or deeply involved in the actions here); Joseph Gorga (who was the CEO of

FITG at the time of the merger and was a member of the boards of SCI and FITG at the time of

the merger and of the NITG board since); Gary Smith (who was the CPO of FITG who was also

a member of the board of FITG); Daniel Tessoni (who was the "independent" director of SCI at

the time of the merger and has been on the NITG board since the merger); Stephen Duerk (who

was the president of SCI at the time of the merger); and the WLR Funds that are the legal entities

that actually owned the stock in SCI and FITG, along with their general partners. (FACC ,-r,-r23,

24 & 117).2

RSM EquiCo Capital Markets LLC (now known as McGladrey Capital Markets LLC, but

referred to here as "RSM") is also a Defendant. Plaintiffs also contend that RSM was the

investment bank hired to protect the interest of the SCI minority shareholders. (FACC ,-rz4.)

Finally, SCI itself (now known as NITG), is a nominal defendant because of the derivative

claims. (FACC ,-rz5.)

2 Defendants Ross, Wax, Storper, Gibbons, Gorga, Smith, Duerk, WLR & Co., WLR Recovery Associates II and III, and WLR Funds II and III are referred to herein as the "WLR defendants."

X

a ... Plaintiff's central claim is that, because FITG had little or no value and may even have

had a negative value, defendants breached their fiduciary duties to SCI (or aided and abetted

others in breaching their fiduciary duties to SCI) when they caused or allowed the merger of

FITG into SCI, and that these actions destroyed the value of SCI and of plaintiffs' stock in SCI

and saddled the combined company with significant debt and other obligations. (FACC 1110.) As

to RSM, plainttffs also clatm that It atded and abetted the breaches of fiduciary duty to SCI and

was grossly negligent because, among other things, it failed to account for over $140 million in

negative cash flow, failed to account for $24.7 million of an unfunded pension liability in its

discounted cash flow valuation of FITG, failed to consider FITG's execution risk, failed to

consider planned dilution of FITG, largely ignored FITG's negative earnings, and used

projections that included unapproved or uncertain projects. (FACC ~~430-85 & %64.)

Plaintiffs contend that because certain defendants also owned or controlled FITG (they

were on both sides of the transaction), their actions are to be judged not by the "business

judgment" rule but by the "entire fairness" standard. Kahn v. Lynch Communication Systems,

Inc., 638 A.2d 1110, 1115-18 (Del. 1994). (FACC ~12.) They contend that this standard requires

that the merger have been entirely fair to SCI in terms of both fair dealing and fair price, and

further that the defendants bear the burden of proof on these issues. Weinberger v. UOP, Inc.,

457 A.2d 701, 710-11 (Del. 1983). (FACC ~13.) Plaintiffs contend that the merger does not meet

the "entire fairness" standard or even the conventional business judgment rule standard. (F ACC

1119.)

Typically, an "overpayment" claim like this one is a claim of the corporation and not of

an individual shareholder "because any dilution in value of the corporation's stock is merely the

unavoidable result (from an accounting standpoint) of the reduction in the value of the entire

•

corporate entity, of which each share of equity represents an equal fraction." See Gentile v.

Rosette, 906 A.2d 91, 99 (Del. 2006). If the corporation does not make the claim for any reason

such as a conflict of interest, however, a shareholder, if it meets various requirements, may make

the claim on its behalf "derivatively." The derivative suit "has been characterized as 'one of the

most interesting and ingenious of accountability mechanisms for large formal organizations.' It

enables a stockholder to bring suit on behalf of the corporation for harm done to the

corporation." Americas Mining Corp. v. Theriault, 51 A.3d 1213, 1264 (Del. 2012) (formerly In

re Southern Peru Copper Corp. Shareholder Derivation Litigation), quoting Kramer v. W Pac.

Indus., Inc., 546 A.2d 348, 351 (Del. 1998). Importantly, "[b]ecause a derivative suit is being

brought on behalf of the corporation, any recovery must go to the corporation." !d., citing Tooley

v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004). In certain instances,

however, the law does provide that "a stockholder who is directly injured retains the right to

bring an individual action for those injuries affecting his or her legal rights as a stockholder." Id.

Such an injury "is distinct from an injury to the corporation alone. 'In such individual suits, the

recovery or other relief flows directly to the stockholder, not to the corporation."' I d.

Plaintiffs contend that in this case, in addition to bringing the claims derivatively on

behalf of the company, they may bring the claims directly for their own damages. They refer to

Gentile v. Rosette, 906 A.2d 91 (Del. 2006), and its progeny. In any event, the parties agree that

this issue need not be resolved at this time.

The damages sought here include the overpayment for FITG, consequential damages for

the loss in value of SCI caused by the merger, and prejudgment interest. Plaintiffs alternatively

claim rescissory damages. In the class action, plaintiffs estimate damages to the minority

shareholders of SCI from the merger to exceed $20 million dollars. In the derivative action, they

6 \?Iiiii

estimate damages to SCI as a whole from the merger to be many times higher, running into the

hundreds of millions of dollars. (FACC ,-r20.)

On June 15, 2012, plaintiffs served their renewed3 motion for class certification. On July

27, 2012, the WLR defendants served their opposition to the motion and their renewed motion to

disqualify the plaintiffs as derivative representatives (and thus end the derivative case). RSM and

'I'essom JOined m the WLR opposition and motion. NITG served a separate motion to disqualify

the plaintiffs as derivative representatives. Plaintiffs served responsive papers on August 27,

2012. Defendants served reply memoranda regarding their derivative status disqualification

motions on September 17, 2012. As noted above, on September 26, 2012, the Court heard oral

argument.

At this point, the record in the case is nearly complete, with discovery having closed on

December 4, 2012. The discovery record is voluminous, with approximately 100 days of

deposition of parties, witnesses, and experts, and well over 1,000,000 pages of documentary

discovery. Under the current scheduling order (the seventh), trial is scheduled to occur after

March 1, 2013, after the class notice period expires.

II. Plaintiffs' Renewed Motion for Class Certification

Plaintiffs' motion requests that the Court, pursuant to Rule 23(a) of the South Carolina

Rules of Civil Procedure, certify this case as a class action on behalf of

all persons who were stockholders of Safety Components International, Inc. ("SCI") as of the Merger of the old International Textile Group, Inc. ("FITG") into SCI on October 20, 2006, excluding Defendants and persons or entities affiliated with Defendants, and excluding all persons who would otherwise be members but whose damages do not exceed one hundred dollars-i.e., all

3 On August 25, 2010, Mr. Menezes and FURSA moved for class certification. The WLR defendants opposed the motion and counter-moved to disqualify them as derivative representatives. RSM and Tessoni adopted and joined in the motion. NITG filed its own motion to disqualify Mr. Menezes and FURSA as derivative representatives. The motions were fully briefed but not heard in light of the amendment to the complaint and the addition of new plaintiffs.

minority stockholders of [pre-merger] SCI (non-WLR affiliated stockholders) with damages in excess of $100.

(FACC ,-r593.)

Rule 23(a) of the South Carolina Rules of Civil Procedure sets forth the requirements for

a class action:

(a) Prerequisites to a Class Action. One or more members of a class rna sue or be sue as representative parties on behalf of all only if the court finds (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, ( 4) the representative parties will fairly and adequately protect the interests of the class, and (5) in cases in which the relief primarily sought is not injunctive or declaratory with respect to the class as a whole, the amount in controversy exceeds one hundred dollars for each member of the class.

For purposes of this motion, the Court is not to weigh the evidence. Thus, the allegations

of the complaint are taken as true.4 "A court may not look at the merits when determining

whether to certify a class." King v. American General Finance, Inc., 386 S.C. 82, 88, 687 S.E.2d

321, 324 (2009). Further, the standards for class certification under South Carolina law are more

expansive than the federal standards. Grazia v. South Carolina State Plastering, LLC, 390 S.C.

562, 576, 703 S.E.2d 197, 204 (201 0) ("Our state class action rule differs significantly from its

federal counterpart. The drafters of Rule 23, South Carolina Rules of Civil Procedure (SCRCP)

intentionally omitted from our state rule the additional requirements found in Federal Rule

23(B), Federal Rules of Civil Procedure (FRCP). By omitting the additional requirements, Rule

23, SCRCP, endorses a more expansive view of class action availability than its federal

counterpart."); Salmonsen v. CGD, Inc., 377 S.C. 442, 454-55, 661 S.E.2d 81, 88 (2008);

Littlefield v. South Carolina Forestry Commission, 337 S.C. 348, 355, 523 S.E.2d 781, 784

(1999).

4 The Court notes that defendants dispute the allegations of plaintiffs' complaint. Furthermore, under Rule 23(a), SCRCP, the Court is making no final determination on the merits, or of any factual issue.

The Court finds that this is not a doubtful case for class certification. Upon consideration

of the standards for class certification, the record presented, and the arguments of counsel at the

hearing on this motion, the Court finds that the plaintiffs have met their burden of proof

demonstrating that the proposed class satisfies the requirements of Rule 23(a) for class

certification and grants the plaintiffs' motion.

A. Numerosity

The first requirement of Rule 23(a) for class certification is that the proposed class be so

numerous that 'joinder of all members is impracticable." No particular minimum number is

required. In this case, there are several hundred minority shareholders of SCI who were holding

shares in their own names and many more holding shares in their brokers' names. At damages of

roughly $13 per share, shareholders with eight or more shares qualify prima facie for class

membership. Indeed, defendants did not contend that the numerosity requirement was not met in

this case. The Court finds that the numerosity requirement for class certification is met.

B. Common Questions of Law or Fact

The second requirement is that there are "questions of law or fact common to the class."

Plaintiffs meet the commonality requirement when their claims and the claims of absent class

members share a determinative issue. Gardner v. South Carolina Dept. of Revenue, 353 S.C. 1,

20-23, 577 S.E.2d 190, 200-01 (2003). The rule does not require a complete identity of

circumstances among class members; differences among class members are not fatal to a class

action as long as some common questions of fact or law exist. McGann v. Mungo, 287 S.C. 561,

566-569, 340 S.E.2d 154, 157-58 (S.C. App. 1986). Indeed, "a single common issue will suffice

if it is important enough." Id. at 158, quoting H. Lightsey & J. Flanagan, South Carolina Civil

Procedure at 171, 198 (2d ed. 1985).

Although defendants do not consent in their briefing that the commonality requirement is

met in this case, commonality is obvious here. Plaintiffs have raised a host of issues that are

common to the minority shareholders of SCI, including:

Whether the WLR defendants breached their fiduciary duties to the SCI minority shareholders by approving the merger with FITG.

Whether Delaware's entire fairness standard of review applies to this case because Wllbur Ross as the controlling shareholder of SCI and FITG stood on both sides of the merger under Kahn v. Lynch Communications Systems, Inc., 638 A.2d 1110, 1115-18 (Del. 1994).

Whether the merger ratio (price) was fair.

Whether the process followed in approving the merger was fair.

Whether RSM was grossly negligent and/or aided and abetted the WLR defendants in breaching their fiduciary duties.

The amount of the damages in this case on a per share basis.

The Court finds, at a minimum, that all of the class members were affected by precisely

the same conduct by the defendants, i.e., the merger. Resolution of the common question as to

the wrongfulness of the defendants' conduct with regard to the merger is central to the question

of the wrong suffered by each class member. The numerous issues raised by the plaintiffs are all

common issues that can most expeditiously be decided in one case. It makes sense to resolve this

question in the class context.

C. Typicality

The third requirement is that the "claims or defenses of the representative parties are

typical ofthe claims or defenses of the class." This requirement means merely that "the claims or

defenses do not need to be coextensive, but rather similar to, or shared by, most of the members

of the class." J. Flanagan, South Carolina Civil Procedure, at 180 (2d ed. 1996). Typicality is

satisfied where the interests of the putative class representatives arise from the same course of

A \li!J1

conduct that gave rise to the claims of the class they seek to represent and are based on the same

legal or remedial theory. 1 H. Newberg, Newberg on Class Actions § 3.13, at 167 (2d ed. 1985);

King v. Am. Gen. Fin., Inc., 386 S.C. 82, 687 S.E.2d 321 (2009); The S.C. Nat 'l Bank v. Stone,

139 F.R.D. 325, 329 (D.S.C. 1991); Kornberg v. Carnival Cruise Lines, Inc., 741 F.2d 1332,

1337 (11th Cir. 1984).

Courts have held ·that the typicality requirement is met "if the class representatives

occupy essentially the same position as the other members of the class." In re Chambers Dev.

Sec. Litig., 912 F. Supp. 822, 824 (W.D. Pa. 1995). "The proper inquiry is whether other

members of the class have the same or similar injury, whether the action is based on conduct not

special or unique to the [class representatives], and whether other class members have been

injured by the same course of conduct." Dura-Bitt Corp. v. Chase Manhattan Corp., 89 F.R.D.

87, 99 (S.D.N.Y. 1981).

Here, each of the plaintiffs has satisfied the typicality requirement. Each owned shares of

SCI when FITG was merged into SCI. Ramius and FURSA were the largest minority

shareholders, together holding over fifty percent (over 700,000 shares) of the non-WLR

controlled shares. Mr. Menezes owned over 100,000 shares. The Asiafs owned about 10,000

shares. Ms. Marrett owned approximately 57 shares. Each was injured in the same manner by the

conduct of the defendants in effectuating the merger.

D. Adequacy of Representation

The fourth prerequisite of Rule 23(a) requires that "the representative parties will fairly

and adequately protect the interests of the class." Because the purpose of this requirement is the

protection of legal rights of absent class members, it has two components: (1) that the class

representatives and their counsel will competently and vigorously prosecute the action; and

(2) that the interests of the class representatives are not adverse to those of the class members.

Waller v. Seabrook Island Prop. Owners Ass 'n, 300 S.C. 465, 467-68, 388 S.E.2d 799, 801

(1990); see also Griffin v. Carlin, 755 F.2d 1516, 1533 (11th Cir. 1985) (applying similar federal

rule).

The Court finds that class counsel, Mr. Herlong and Nexsen Pruet, have significant

experience with class actions and other litigation, are fully qualified to represent the class in this

action, have adequately represented the class to date, and are fully capable of continuing to do

so. Although the employment of competent counsel is generally held to assure vigorous

prosecution, Stone, 139 F.R.D. at 330, citing Berland v. Mack, 48 F.R.D. 121, 127

(S.D.N.Y.l969), the record is sufficient that the prosecution of this case has been, and continues

to be, "vigorous."

The Court further finds that the interests of the class representatives are not adverse to the

class members. The interests of each class representative in pursuing this case are aligned with

the interests of the class. The Court therefore finds that the class representatives, and their

counsel, are adequate under Rule 23(a), SCRCP.

The particular issues raised by the defendants challenging these findings are discussed

below.

E. Defenses to Class Certification Raised by Defendants

1. Conflict Between Class And Derivative Cases

The defendants contend that there is a conflict between the derivative and class cases

because of overlapping remedies sought in the cases. NITG made this argument in connection

with its initial motions to dismiss more than three years ago. The Court rejected it, finding no

per se conflict when the same plaintiff brings both a direct and derivative action. Order of Feb. 4,

2010 (filed Feb. 5, 2010), citing In Re Dayco Corporation Derivative Securities Litigation, 102

F.R.D. 624, 630 (S.D. Oh. 1984), Heilbrunn v. Hanover Equities Corp., 259 F. Supp. 936, 938-

939 (S.D.N.Y.1966); Keyser v. Commonwealth Nat. Financial Corp., 120 F.R.D. 489, 492 (M.D.

Pa. 1988). Since the asserted conflict was only "potential" and not "actual," the Court held that

the derivative and class cases could proceed together.

The defendants assert now that the conflict has become "actual" based on the reports of

plaintiffs' expert, Dr. Robert McCormick. They state that Dr. McCormick "winds up urging that

[the] same $20 million be awarded both to the putative shareholder class and the derivative

corporate plaintiff' and that "the same $20 million in damages sought by the putative class is

also necessarily included in the damages ostensibly sought by NITG." (!d. at 16 & 19, emphasis

added.) They argue, based on In re J.P. Morgan Chase & Co. Shareholder Litigation, 906 A.2d

766, 772 (Del. 2006), and other cases, that this is an "actual" conflict and means the class and

derivative cases cannot be brought together.

writes:

However, as Stephen A. Radin, a leading commentator on Delaware corporate law,

Some courts have held that "an individual shareholder has a conflict of interest" where the shareholder seeks to simultaneously bring a derivative action on behalf of a corporation and a direct action (on behalf of an individual or a class) against the same corporation. Other courts, "reject a per se rule prohibiting shareholders from simultaneously bringing both direct and derivative actions." These courts suggest that "[i]f and when plaintiffs prove their allegations and the remedy stage is reached, the court may take corrective measures to resolve any actual conflicts which may arise at that time."

Stephen A. Radin, The Business Judgment Rule, at 3755-56 (6th Ed. 2009) (emphasis added,

internal footnotes omitted).

This approach is exemplified by Bertozzi v. King Louie Intern., Inc., 420 F. Supp. 1166

(D.R.I. 1976), a widely cited case. The defendants there argued that the plaintiffs could not fairly

and adequately represent the defendant's public shareholders while maintaining a derivative

action on behalf of the defendant. The court noted that "[s]ince plaintiffs' success as to either

12

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action is equally contingent upon the proof of the same nucleus of facts, they and their counsel

can be expected to attack all fronts with equal vigor." Hence, at most, "defendants perceive a

potential conflict regarding the appropriate form of remedy to be fashioned in the event plaintiffs

prevail, if they can vis-a-vis King Louie, in both the primary and derivative actions." 420 F.

Supp. at 1180. The court held that any conflict in the remedy phase could be dealt with when and

1f that phase was reached. Id., citing Lamphere v. Brown University, 71 F.R.D. 641, 650

(D.R.I.1976), appeal dismissed, 553 F.2d 714 (1st Cir.1977). There are numerous other cases to

the same effect.5

The Court finds this approach appropriate. Defendants' focus on the specter of the

prohibited double recovery overlooks the fact that liability for both the class and derivative

actions will be decided by the same core facts. Therefore, as in the cases cited above, plaintiffs

"can be expected to attack all fronts with equal vigor." Defendants' arguments under J.P.

Morgan and otherwise regarding double recovery and remedy conflicts should be made at the

remedy phase.

2. Unique Defenses

The defendants claim that various unique defenses render each of the putative class

representatives inadequate. In particular, the defendants claim the following:

• Menezes' release bars him individually;

• Menezes, FURSA and Ramius are subject to unique defenses of acquiescence, waiver, estoppel, and unclean hands; and

• Ramius delayed too long in joining this suit.

See, e.g., Keyser v. Commonwealth National Financial Corporation, 120 F.R.D. 489 (M.D. Pa. 1988); Singer v. Magnavox Co., 1978 WL 4651 (Del. Ch. Dec. 14, 1978); In re TransOcean Tender Offer Securities Litigation, 455 F. Supp. 999 (D. Ill. 1978); Natomas Gardens Investment Group, LLC v. Sinadinos, 2010 WL 1659195 (E.D. Cal. April 22, 2010); Srebnik v. Dean, 2006 WL 2457386 (D. Colo. Aug. 22, 2006); In Re Rasterops Corporation Securities Litigation, 1993 WL 476651 (N.D. Cal. (1993).

& WJ/1

None of these potential defenses are sufficient to defeat any of the named plaintiffs from serving

as class representatives.

There are no cases in South Carolina that hold that a putative class representative does

not satisfy the typicality or adequacy requirements due to potential unique defenses. Cf SC Bar

Publication, Lewis and Sullivan on Class Actions, by Camden Lewis, Martha Sullivan, and Ariail

King, at 44 (2005) ("I he presence of mdiv1dual defenses does not render a case unsuitable for

class certification."). Other courts have held that it is only where such defenses threaten to

dominate the case would class certification be inappropriate: "While it is settled that the mere

existence of individualized factual questions with respect to the class representative's claim will

not bar class certification, class certification is inappropriate where a putative class

representative is subject to unique defenses which threaten to become the focus of the litigation."

Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 180

(2d Cir. 1990) (citations omitted; emphasis added); Newberg on Class Actions, §3:45, pp. 296-

304 (5th ed.). Based on a review of the record and the argument of counsel, the Court finds that

none of the unique defenses raised by the defendants threaten to become the focus of this

litigation, and therefore class certification is appropriate.

a. Mr. Menezes' Release

Defendants argue that Mr. Menezes cannot be a class representative because the release

he signed in a prior employment case he settled with SCI applies to his claims in this case. He

counters that the release does not apply to this case and has no bearing on him being a class

representative. Whether the release applies to his claims in this case is currently on appeal. In

any event, based on a review of the record, the Court finds that the factual dispute concerning the

release can be tried separately without unnecessary waste or confusion of the issues, and

therefore the release does not disqualify Mr. Menezes from being a class representative. See

14

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e ·.

Newberg on Class Actions 3.45 at 301-302 (5th ed.) ("typicality will generally not be defeated

by allegations that the proposed class representative has released the defendants from the claims

asserted .... "); In Re: Systems Software Associates, Inc. Securities Litigation, 2000 WL

1810085 (N.D. Ill. Dec. 8, 2000) (release question "should not require a significant amount of

time to resolve or detract attention from absent class members' claims"); Zeffiro v. First

Pennsylvania Banking & Trust Co., 96 F.R.D. 567, 570 (D.C. Pa. 1983) ("Where, as here, an

alleged defense may affect the individual's ultimate right to recover, but it does not affect the

presentation of the case on the liability issues for the plaintiff class, that defense should not make

a plaintiff's claim atypical.").

b. Various Equitable Defenses As To Mr. Menezes, FURSA, and Rami us

Defendants have raised various equitable defenses as to Mr. Menezes, FURSA, and

Ramius, including acquiescence, waiver and estoppel, ratification, and unclean hands. Based on

a review of the record and the law concerning these equitable defenses, the Court finds that these

defenses do not pose a threat to become the focus of this litigation, and therefore class

certification is appropriate.

As a general matter, the Court notes that defendants have a high hurdle to clear to

establish these defenses under Delaware law, which applies here, or in establishing that they

would interfere with class certification. For example, in In re Cetera Corp. S 'holder Litigation,

2012 WL 1020471 (Del. Ch. March 23, 2012), the court was confronted with the issue of

whether the unique defense of acquiescence would defeat the typicality prong necessary to

establish a class certification in a breach of fiduciary duty case. The court held that not only did

acquiescence not apply under the facts of the case, but also that, even if it did, it would not bar

the plaintiff from serving as class representative. The court recited the law concerning the

acquiescence defense as follows:

The equitable defense of acquiescence "may produce a quasi estoppel," similar to the doctrine of laches in certain respects. In general, to be susceptible to an acquiescence defense, the plaintiff must: (1) have "full knowledge of his [or her] rights and all material facts"; (2) possess a "meaningful choice" in determining how to act; and (3) act voluntarily in a manner "show[ing] unequivocal approval" of the challenged conduct. Thus, the doctrine of acquiescence protects defendants from being misled into believing that their conduct has been approved .

.. . the mere act of tendering one's shares while simultaneously pursuing an equitable claim is not sufficient to show acquiescence. Rather, the defendant still must show all three elements of the general defense. For example, a finding that the shareholder was unaware of all of the material facts precludes a showing of acquiescence, even though the shareholder knew enough to plead upon information and belief in the complaint. Similarly, where "the approval process takes on an aura of inevitability," shareholders may lack a meaningful choice. Finally, evidence that a shareholder voted against a deal, or simply abstained from voting, does not show the requisite unequivocal approval of the challenged conduct.

2012 WL 1020471 at *9-10 (footnotes omitted, emphasis added); see also In re PNB Hldg. Co.,

2006 WL 2403999, at 10 n. 47 and *21 (Del. Ch. August 18, 2006); In· re Best Lock Corp.

S'holder Litig., 845 A.2d 1057, 1076 (Del.Ch.2001). Further, as decided in a recent Delaware

case, these equitable defenses may not even be applicable under the entire fairness standard of

review:

Summarized succinctly, [Clements v. Rogers and In re Best Lock Corp.] hold that a stockholder who casts a vote in favor of, or later accepts the consideration from, a merger effected by a controlling stockholder is not barred by the doctrine of acquiescence, or any other related equitable doctrine such as waiver, from challenging the fairness of the merger in an equitable action.

A fundamental premise of the Lynch doctrine is that controlling stockholders are reasonably perceived as having such potent retributive powers as to subject minority stockholders to inherent coercion in casting a vote on a squeeze-out merger ... As Chancellor Chandler pointed out in Best Lock, even if all of the minority stockholders approve a merger subject to the Lynch doctrine after

receiving exemplary disclosure, the unanimous vote would not have the traditional ratification effect of extinguishing equitable challenges to the merger's fairness.

In re JCC Holding Co., 843 A.2d 713, 722-23 (Del.Ch. 2003) (footnotes omitted, emphasis

added). See also Gesoff v. IIC Industries, Inc., 902 A.2d 1130, 1143 n.89 (Del. Ch. 2006) ("it

seems extremely unlikely to the court that Delaware law denies a remedy to minority

stockholders battered mto accepting unfair merger consideration.").

Here, the minority shareholders were not afforded the right to vote on the merger, and

plaintiffs contend that the proxy statement contained multiple and material misrepresentations

and omissions. Given the allegations of the case, the Court finds it unlikely that the various

equitable defenses, even if valid, would become a focus of the litigation. Therefore, the

defendants have not demonstrated sufficient legal and factual bases that unique equitable

defenses should defeat class certification.

c. Ramius' Delay In Joining This Suit

Defendants also claim that the unique defense of laches as to Ramius make it an

unsuitable class representative. The record reveals that, shortly after the merger was announced,

Ramius consulted counsel to look into the prospect of suing over the merger, but decided not to

sue to do so. Suit was later brought in 2008 by Mr. Menezes. In 2011, after defendants had

challenged the representative status of Mr. Menezes and FURSA, Ramius moved to join the

litigation as a putative class representative.

The general law is a laches or statute of limitations defense against a class representative

does not render him or her inadequate. See Newberg on Class Actions § 22:28 ("An assertion that

the plaintiffs claim is barred by laches or the expiration of the statute of limitations should not

make her or his claim atypical. The consideration of such affirmative defenses at the class

certification stage is an impermissible intrusion into the merits of a case.") (citations omitted).

..

,a • Further, the statute of limitations was automatically tolled when Mr. Menezes filed suit in 2008,

and thus Ramius is not subject to a statute of limitations defense. See Crown, Cork & Seal Co.,

Inc. v. Parker, 462 U.S. 345, 103 S. Ct. 2392 (1983) (employment discrimination) (the filing of a

class action tolls the statute of limitations for all members of the class, including intervenors,

until the trial court denies the class). Finally, defendants have presented no evidence that they

were preJudiced by Ramius not joining the case earlier. Historic Charleston Holdings, LLC v.

Mallon, 381 S.C. 417, 432, 673 S.E.2d 448, 456 (2009); King v. James, 388 S.C. 16, 28, 694

S.E.2d 35, 42 (App. 2010); Envo, Inc. v. Walters, 2012 WL 2926522 (Del. Ch. July 18, 2012)

(laches generally requires knowledge by the claimant, unreasonable delay in bringing the claim,

and resulting prejudice to the defendant). Based on the law, it is not necessary to review

plaintiffs' factual explanation for Ramius' decision to join the suit after it had been filed, or its

lack of knowledge of important facts. The Court finds that the delay does not amount to a

prohibited unique defense.

3. Standing of FURSA Entities

The defendants argue that FURS A Alternative Strategies ("F AS") never owned stock in

SCI and therefore lacks standing. The record reveals, however, that FAS was the 100% owner of

FURSA Company, Ltd. ("FCL"), and that FCL owned stock in SCI at the time of the merger and

continues to own NITG stock. Accordingly, FAS was the beneficial owner of SCI stock and has

standing to pursue the class (and derivative) claims. E.g., In re Cetera Corp. Shareholder

Litigation, 2012 WL 1020471 at *9 & *20 (Del. Ch. Mar. 23, 2012) (approving class of "[a]ny

and all record holders and beneficial owners of any share(s)).

Defendants also argued that plaintiff FURSA Master Global Event Driven Fund ("GED")

cannot be a class representative because GED has been dissolved under Cayman Island law. The

Court finds, based on the unchallenged affidavit of Cayman Islands legal expert Mr. Thomas

. '

Lowe pursuant to Rule 44( d) of the South Carolina Rules of Civil Procedure, that GED has not

been dissolved because it continues to have assets, namely the shares of SCI (now NITG) at

issue. The Court further finds, also based on Mr. Lowe's affidavit and pursuant to Rule 44(d),

that GED is not in fact a legal entity but is an association whose assets are held by FCL.

Accordingly, FCL is the real party in interest and as a shareholder of SCI and NITG has

standmg. The Court directs that FCL be substituted for GED as the real party in interest pursuant

to Rule 17(a) of the South Carolina Rules of Civil Procedure. Whether GED was in fact

dissolved is therefore unimportant.

4. Competency of the Asiafs and Mrs. Marett

A class representative must be sufficiently competent to render adequate representation

of the class. See Hospitality Management Associates, Inc. v. Shell Oil Co., 356 S.C. 644, 664,

591 S.E.2d 611, 621 (2004), citing Amchem Products, Inc. v. Windsor, 521 U.S. 591, 626 n. 20

(1997). The defendants contend that the Asiafs and Ms. Marett lack sufficient knowledge

concerning the underlying claim to serve as adequate class representatives. The Court disagrees.

The threshold for a proposed class representative's knowledge of the underlying claim

and the supporting legal basis is quite low. One of the leading cases in Delaware on this issue

noted that "the Court of Chancery will not bar a representative plaintiff from the courthouse for

lack of proficiency in matters of law and finance and poor health so long as he or she has

competent support from advisors and attorneys and is free from disabling conflicts. This

conclusion is both just and sensible." In re Fuqua Industries, Inc. Shareholder Litigation, 752

A.2d 126, 131 (Del. Ch. 1999). Based on the Court's review ofthe record and the argument of

counsel, the Court finds that the Asiafs and Ms. Marett have sufficient knowledge of the case and

are adequate class (and derivative) representatives.

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f-ur

tta ... S,~ Defenses Raised As To Conflicts Among Class Members And As To

Plaintiffs' Counsel

The defendants argue that plaintiffs' counsel are conflicted with respect to Mr. Menezes

and FURSA because other class members would receive more in damages if Mr. Menezes and

FURSA were not part of this class. Defendants have cited no case following their logic. Indeed,

under defendants' argument, courts could never approve common fund settlements in

shareholder cases because in every single such case, every single shareholder would be harmed

by the participation of every other shareholder. In other words, every shareholder would be better

off if other shareholders did not participate in the settlement. The Court finds that this argument

has no merit.

The defendants argue that, because of his release, Mr. Menezes cannot claim damages

from prior to the merger date (October 20, 2006), while other class members can claim damages

back to the date when the merger was approved (August 29, 2006). They argue that plaintiffs'

counsel have changed their position to accommodate Mr. Menezes. The Court sees no merit in

this argument.

Defendants also argue that because Mr. Herlong represented Mr. Menezes in connection

with the employment release, he will necessarily be a witness on the release issue and be

conflicted out if Mr. Menezes is a class representative. Because the Court finds that the release

issue can be tried separately and thus, even if Mr. Herlong becomes a witness on this issue, his

testimony will have no impact on the trial of the class or derivative cases. See Howes v.

Hitchcock, 66 F. Supp. 2d 203, 208 (D. Mass. 1999) (bifurcating liability and damages because

plaintiffs' counsel would have to be a witness with regard to damages); Hinton v. Outboard

Marine Corp., 2012 WL 195026, *4 (D. Me. Jan. 23, 2012) (holding that if the defendants

sought to call the plaintiff's counsel as a witness, the court would bifurcate the case, allowing the

20

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& \fill

praintiff's attorney to proceed with the products liability aspect of the lawsuit); CSX Transp., Inc.

v. Gilkison, 2012 WL 3283411 (N.D. W. Va. Aug. 10, 2012) (denying plaintiffs motion to

bifurcate because it was not clear that the defendants' attorneys would need to testify); Landmark

Graphics Corp., a subsidiary of Halliburton Co. v. Seismic Micro , 2007 WL 735007 (S.D. Tex.

Jan. 31, 2007) (denying motion to disqualify attorney because the trial could be bifurcated and

his testimony was only necessary in the non-jury portion).

Finally, defendants argue that counsel's conduct m representing Mr. Menezes and

FURSA demonstrates "actual" conflicts between the class members and make various charges

regarding the conduct of plaintiffs' counsel regarding Mr. Menezes, FURSA, and the Asiafs.

Based on a review of the record, the Court finds no merit to these contentions.

The Court finds that Mr. Herlong and Nexsen Pruet, LLC are adequate class counsel.

III. Defendants' Renewed Motions To Disqualify Plaintiffs As Deriyatiye Representatives

In addition to opposing class certification, defendants and nominal defendant NITG

moved to disqualify plaintiffs as derivative representatives.

Rule 23(b)(1) of the South Carolina Rules of Civil Procedure states that a "derivative

action may not be maintained if it appears that the plaintiff does not fairly and adequately

represent the interests of the shareholders or members similarly situated in enforcing the right of

the corporation or association." The basic framework for the analysis has been set forth in

Youngman v. Tahmoush, 457 A.2d 376, 379-82 (Del. Ch. 1982), which the Court applied in its

February 5, 2010, order denying NITG's original motion to dismiss the derivative claims. In its

recent Southern Peru decision, the Delaware court of chancery wrote that to disqualify a

derivative representative the "[t]he defendant ... bears the burden to show 'a substantial

likelihood that the derivative action is not being maintained for the benefit of the shareholders.'"

\ ~ ) . In Re Southern Peru Copper Corporation Shareholder Derivative Litigation, 2011 WL 6440761

at *3 n. 5 (Del. Ch. Dec. 20, 2011) (quoting Emerald Partners v. Berlin, 564 A.2d 670, 674 (Del.

Ch. 1989)), affd 51 A.3d 1213, 1264 (Del. 2012).

Further, "[a]lthough a number of factors may be relevant to the adequacy determination,"

the Delaware Supreme Court "has made clear that this is a very difficult burden unless the

plaintiff has an actual economic conflict of interest or has counsel who is incompetent and

suffers from such a conflict." /d. (emphasis added) (citing In re Infinity Broad. Corp. S'holders

Litig., 802 A.2d 285, 291 (Del. 2002), In re Fuqua Indus. Shareholder Litig., 752A.2d 126 (Del.

Ch. 1999), (expressing principle), Kahn v. Household Acquisition Corp., 1982 WL 8778 (Del.

Ch. Jan. 19, 1982), and generally Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and

Commercial Practice in the Delaware Court of Chancery, § 9.02(b )(1), at 9-32 (2009).)

Defendants' principal argument is that the remedies in the derivative and class cases

conflict and may lead to a double recovery. However, as noted above, the Court agrees with Mr.

Radin and the cases discussed above that any such conflict should be resolved at the remedy

phase. Defendants have not demonstrated that plaintiffs suffer from a "serious economic

conflict" or other deficiency to the extent Youngman compels their disqualification.

Defendants also argue that Mr. Menezes' release should disqualify him as a derivative

representative. The Court finds that the release, even if it did apply to Mr. Menezes' direct

claims, would not disqualify him from being a derivative representative. See Derouen v. Murray,

604 So.2d 1086 (Miss. 1992) ("the release Derouen gave Murray on December 28, 1985, has no

effect on the derivative claim"); In re JDS Uniphase Corporation ERISA Litigation, 2006 WL

2597995 *2 (N.D. Cal. 2006, Sept. 11, 2006) ("[t]he plaintiffs allege plan-wide fiduciary

wrongdoing and seek plan-wide relief. Employees' individual releases, therefore, do not bar the

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... '( ) --

~ ~~~~

present claims."); Bowles v. Reade, 198 F.3d 752, 761 (9th Cir. 1999) (plaintiff "remained as a

plaintiff in her representative capacity on behalf of the Plans and the participants notwithstanding

their release of her individual claims against Ms. Reade."); In re Schering Plough Corp. ERISA

Litigation, 589 F.3d 585 (3d Cir. 2009) (noting "vast majority of courts have concluded that an

individual release has no effect on an individual's ability to bring a claim on behalf of an ERISA

plan under§ 502(a)(2)).

Defendants also argue that Mr. Menezes, Ramius, and FURSA cannot be derivative

representatives because of the same "arguable" defenses defendants raised with respect to class

certification. The Court finds no merit to these arguments, for the same reasons discussed above.

Further, in the derivative context, for such, defenses to bar a plaintiff from serving as a

representative, the "plaintiffs conduct must be so at variance with principles of equity that a

court of equity will not permit the action." Forkin v. Cole, 548 N.E.2d 795, 805-06 (Ill. App.

1989). The Court does not find that to be the case here.

Defendants argue that plaintiff FURS A Alternative Strategies ("F AS") does not own SCI

stock and therefore cannot be a derivative representative. As indicated above, plaintiff has

demonstrated that F AS is the 100% owner of FURSA Company, Ltd. ("FCL"), and that FCL

owned stock in SCI at the time of the merger and has continued to own shares. Accordingly,

F AS has at all relevant times been a beneficial owner of SCI stock and has standing. Defendants

also argued that plaintiff FURSA Master Global Event Driven Fund ("GED") cannot be a

derivative representative because it has been dissolved under Cayman Island law. The Court has

already found, based on the unchallenged affidavit of Mr. Lowe, that GED has not been

dissolved. In any event, the Court has ordered that FCL, which has at all times owned SCI stock

and has standing to be a derivative representative, be substituted for GED as plaintiff.

Defendants argue the Ramius plaintiffs do not have standing, contending that they have

not continually owned stock in SCI (now NITG), pointing to a several month period in 2008

when Ramius claims ownership by virtue of 32,926 shares of SCI being held for its "benefit" by

the SCI Escrow Agent, to the fact that the shares that it held thereafter were "re-hypothecated,"

and to the fact that the SCI shares it now holds are tied up in the Lehman Brothers bankruptcy.

The Court finds that Ramius had beneficial ownership of those shares while they were held by

the SCI Escrow Agent, that the re-hypothecated shares are beneficially owned for purposes of a

derivative action (Gamble-Skogmo, Inc. v. Saks, 122 A.2d 120, 121-22 (Del. 1956)), and that the

fact that Ramius' SCI shares are now tied up in the Lehman Brothers does not affect Ramius'

beneficial ownership. Accordingly, Ramius satisfies the continual ownership requirement for

derivative status.

Defendants further argue, as they did in opposition to class certification, that Ramius

cannot be a derivative representative because it did not move to join the suit until 2011.

Defendants assert that this amounts to a prohibited "unique defense." The Court disagrees. The

relevant time in a derivative case is when the original suit was started, in this case April 2009.

See 13 Fletcher Cyc. Corp. § 6001, Intervention (Feb. 2012 Update) ("if the plaintiff [in a

derivative action] drops out, the intervenors may continue to prosecute the action, even though

the statute of limitations may have run at the time of intervention, provided the original plaintiff

had filed the action within the statutory period. If the plaintiff, on dismissal of the complaint,

does not appeal, another interested shareholder may be permitted to intervene and appeal the

adverse decision." (footnotes omitted).)

24

ht~

,..., .It I t.t

As to Mrs. Marett, defendants argue, as they did in opposition to her as a class

representative, that she has insufficient knowledge to serve as a derivative representative. The

Court disagrees for the reasons stated above with regard to her service as a class representative.

IV. CONCLUSION

For the foregoing reasons, the Court finds that plaintiffs have met their burden of proof to

demonstrate the requirements of Rule 23(a) for class certification. Accordingly, the motion for

class certification is granted. The Court approves the class notice forms submitted by plaintiffs in

connection with the renewed motion for class certification. (Defendants did not contend that the

notice forms or proposed procedure were inappropriate or insufficient.) NITG shall, within seven

days of this order, supply a list of its shareholders as of October 20, 2006, in electronic, mail-

mergeable format to counsel for plaintiffs. Plaintiffs shall serve the class notice forms upon class

members as soon as reasonably practicable thereafter.

Likewise, for the foregoing reasons, the Court denies defendants motions to disqualify

plaintiffs as derivative representatives.

IT IS SO ORDERED.

D. Garrison Hill, Circuit Court Judge

Date: J~ l 0 12 013

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