In a very interesting development and one that will definitely be worth watching, a plaintiff shareholder has launched a shareholder derivative lawsuit in New York state court on behalf of Bayer AG against members of its supervisory board, certain managers, and other defendants, seeking damages from the defendants for alleged violations of their duties under the German Stock Corporations Act. The lawsuit basically alleges that the defendants violated their duties to the company for pursuing and completing Bayer’s disastrous acquisition of Monsanto. The lawsuit raises the question of whether shareholders of a company organized under the laws of and based in Germany can pursue German law claims in New York courts using New York court procedures. As discussed below, the plaintiff’s attempt to pursue her claims in New York rather than Germany could face significant threshold hurdles. However, if her claims are permitted to go forward, this case could have very significant implications for the potential exposures of other non-U.S. companies to litigation in the U.S. A copy of the plaintiff’s March 6, 2020 complaint can be found here.
Background
Bayer AG is a major pharmaceutical and chemical company organized under the laws of Germany, with headquarters and principal place of business in Leverkusen, Germany. In May 2016, less than two weeks after he took over as Bayer’s CEO, Werner Baumann met in St. Louis with executives of Monsanto and made an offer for Bayer to purchase the company. Monsanto is the manufacturer of an herbicide using the chemical glyphosphate and marketed under the name Round Up, which at that time and subsequently has been the subject of significant litigation in the U.S. and elsewhere. When word of the planned acquisition began circulating in the press, the criticism of the proposed deal was sharply negative.
Nevertheless, in September 2016, the parties formally signed a deal by which Bayer would acquire Monsanto for $66 billion in cash, subject to due diligence. Much of the acquisition price was to be financed by debt. Because Bayer and Monsanto were competitors, there were regulatory constraints on the level and kind of due diligence that Bayer was able to complete, and as a result of the regulatory constraints, the closing of the transaction was delayed until June 2018. When completed, it was the largest acquisition in German corporate history.
Well before the transaction was first announced, there were significant scientific concerns about glyphosphate. In March 2015, for example, as a result of an extensive study, several world health groups issued a report that concluded that glyphosphare was a “probably human carcinogen.” Even before the initial announcement of the Monsanto acquisition, there had been a significant number of lawsuits filed in the U.S. against Monsanto seeking damages related to Monsanto’s Round Up product. By the time the formal agreement was signed in September 2016, 120 suits had been filed. By June 2018 when regulators gave the OK for the deal to be completed, over 5,000 lawsuits had been filed. As the subsequently filed management liability complaint alleges, “despite these adverse developments and without having conducted the independent, objective, and thorough due diligence required to protect Bayer,” the defendants went ahead with the deal, “despite the unquantifiable financial risks” posed by the thousands of pending lawsuits.
The subsequently filed shareholder complaint alleges that all of these events unfolded against the backdrop of Bayer’s prior failed acquisition of Merck, another transaction in which regulatory constraints had hamstrung Bayer’s ability to conduct complete due diligence. The shareholder complaint alleges that during the course of 2018, as the Monsanto deal moved toward closing, the Merck deal was unraveling, and by the end of 2018 Bayer was forced to take massive write-downs and to lay off significant numbers of workers as a result of the disappointing impact of the Merck deal.
Within a very short time after the Monsanto deal closed, several of the bellwether Round Up cases went to trial and resulted in massive verdicts against Monsanto, including one with a $2 billion punitive damages verdict. Though the initial verdicts were later reduced, even the reduced amounts have significant implications when “extrapolated” across the over 45,000 Round-Up cases now pending.
As a result of these developments, the subsequent shareholder complaint alleges, “the Acquisition has been a disastrous failure.” The shareholder complaint quotes extensively from various news reports that have called the deal “one of the worst corporate deals in recent memory.” The shareholder complaint says that as a result of the deal, Bayer has been “engulfed by a tsunami” of Round Up-related litigation, in which the verdict to day “cause Bayer’s market capitalization to collapse by over $60 billion, wiping out the entire ‘value’ of the Monsanto Acquisition” and supposedly even threatening the company with bankruptcy.
The Lawsuit
On March 6, 2020, a plaintiff acting as trustee for a trust holding Bayer shares filed a shareholder derivative lawsuit in New York (New York County) Supreme Court. (In the New York court system, the trial court is called the Supreme Court.) The complaint names as defendants certain present and former members of the Bayer Supervisory Board; two of the company’s mangers; two investment banks that advised Bayer in connection with the Monsanto transaction; and two corporate law firms – Sullivan & Cromwell and Linklaters – who advised the company in connection with transaction.
The complaint seeks compensatory damages for the harm allegedly caused to the company by the transaction; disgorgement of compensation paid to Bayer Supervisory Board members and managers as well as fees paid to the investment banks and law firms; and punitive damages from the banks and three top Bayer insiders.
The complaint alleges that the defendants breached “their duty of prudence, duty of care, duty of candor and duty of loyalty to Bayer in connection with the Acquisition, as well as aiding and abetting one another while participating in a course of misconduct that induced, permitted, and facilitated the Supervisors’ and Mangers’ actions damaging Bayer in violation of German law.”
The filing in New York state court of the complaint on behalf of a German company and alleging German law violations begs the question: what is this lawsuit doing in New York?
The plaintiff is glad you asked that question because extensive parts of the complaint are giving over to explaining why this case supposedly needs to be in New York court rather than in a German court, and also to anticipating the defendants’ likely objections to the lawsuit proceeding in New York rather than Germany.
The complaint alleges that the New York trial court has subject matter jurisdiction of the dispute under Section 7(a) of the New York State Constitution. Section 7(a) provides in relevant part that “The supreme court shall have general original jurisdiction in law and equity and the appellate jurisdiction herein provided.” The complaint alleges further that “the substantive claims made are based on German law to be entered in New York Court via New York’s procedural rules.” The complaint also preemptively attempts to assert that the case cannot be removed to federal court because there is not complete diversity of citizenship among the parties; because there are no violations of federal law alleged; and because there are no class action allegations.
While the complaint asserts claims based on alleged violations of substantive German law under the German Stock Corporation Act, the complaint further asserts that the procedural provisions of the German Stock Corporation Act do not apply. The complaint alleges that the Act requires prospective derivative claimants to pursue a two-step process, under which the prospective claimant must first seek leave of court to proceed. The granting of leave can be appealed, and an unsuccessful claimant can be liable for attorneys’ fees and costs. The complaint states that “plaintiff is unaware of any derivative action involving a public German corporation being successfully prosecuted under these procedures.” The plaintiff argues that the procedures for derivative suits under New York law rather than the “convoluted” German procedures should apply to this action.
Having argued that New York rather than German procedures apply to this action for damages under German law, the complaint then contends that the New York requirement that a prospective derivative claimant must first made a demand on the board of the company to pursue the lawsuit should not bar this suit. The complaint alleges that “demand futility” excused the demand requirement, owing to the board’s demonstrated unwillingness to examine the circumstances surrounding the merger and determine whether there are potential claims.
The complaint then attempts to make the case that New York is a superior forum for this case rather than the courts in Leverkusen, Germany. The company’s American Depositary Receipts trade in New York. Bayer’s owners and business are heavily concentrated in the U.S. (more than 40% of Bayer’s shareholders are in the U.S., compared to 20% in Germany). The Monsanto acquisition was centered in the U.S. and most of the due diligence or lack thereof took place in the U.S. The debt that financed the acquisition was arranged in the U.S. Leverkusen, by contrast, the complaint alleges is “an inconvenient and inappropriate forum” and is a “company town” largely subject to the control of Bayer management and where the plaintiff could not expect a fair trial. Moreover, there are no jury trials in the German system; there are no punitive damages in the German system; little pre-trial discovery is permitted in Germany; and the plaintiff could not obtain counsel in Germany using a contingent fee arrangement.
In addition to arguing that this case should be allowed to go forward in New York in preference to Germany, the complaint also shows what the plaintiff’s true objective with this lawsuit is. Among other things, in arguing that a demand on the current board to pursue this action would be futile, the plaintiff argues that the company’s board has taken no actions to recover damages for the defendants’ wrongdoing under the company’s D&O insurance policy.
With respect to the company’s D&O insurance, the complaint states, referring to the company’s supervisory board that “The policy belongs to Bayer, not them. That policy is a corporate asset that can and ought to be realized upon, to help compensate Bayer for the damage they caused it due to their lack of due care and prudence. That was why the insurance was purchased.” (See Complaint, Paragraph 231). Yet, the complaint notes, despite the availability of this asset, the board has not hired counsel to determine whether there are viable claims.
The complaint returns again to the D&O insurance again in a later paragraph, noting that large D&O insurance policies are issued with an “Insured vs. Insured exclusion,” precluding claims brought by one insured person; thus, if the company were to pursue a claim against the insured directors and officers, the insurer would likely try to deny coverage for the claim. The exclusion would not apply to the plaintiff’s derivative claim, and therefore, the complaint argues, the derivative claim “is the legal vehicle best available to realize on this corporate asset for the benefit of the corporation, which after all paid 100% of the premiums.”
Discussion
This new lawsuit should be of keen interest to anyone who is responsible for worrying about the possible U.S. litigation exposure of companies based outside the U.S. Typically, someone whose job it is to worry about these things is most focused on the possible U.S. securities class action litigation exposure that these non-U.S. companies might face (about which refer here). However, this lawsuit is expressly and explicitly NOT a securities lawsuit and NOT a class action lawsuit.
This lawsuit is a test probe to see whether non-U.S. companies’ board can be subject to home law derivative lawsuit claims but using U.S. procedures (including discovery, jury trials, contingency fees, and even punitive damages).
This law suit purports to claim that U.S. courts can be used for claimants to sue foreign company boards and managers for foreign law violations, even though the claim procedurally might not be able to be brought in the foreign jurisdiction – or at least much more difficult.
The plaintiff in this case is attempting to walk a very fine line by trying to say that she should be able to pursue her foreign law claim in a domestic U.S. court but without the burden or inconvenience of the foreign jurisdiction’s pesky and annoying procedural requirements — but at the same time with the benefit of all of the U.S. procedures, none of which would be available in the foreign country.
There are a lot of things that might be said about this, but I think one fair concern a U.S court should have about this lawsuit is the question of why U.S. courts should make themselves available as a forum for these foreign law claims, and not only to provide a forum, but to disregard the foreign jurisdiction’s procedural requirements that clearly were designed to provide safeguards and protections to make these kinds of claims difficult to pursue. Without any separate and independent basis for a U.S. court to entertain this kind of case, simple principles of comity would seem to argue in favor of the U.S. court declining this case in favor of a German forum.
Along those same lines, it is going to be a very steep uphill battle for this plaintiff to convince a court that a court in the jurisdiction where Bayer was founded and where it is based and has its headquarters is an inconvenient forum. Though this plaintiff doesn’t like her prospects for pursuing this same claim in a German court, the reality is that there an alternative available forum; the plaintiff’s position that the alternative forum is not an adequate forum amounts to an argument that when the German legislature set up its liability regime, it choice a procedural approach that is more onerous than U.S. procedures. That is not an argument that the German courts are not an adequate alternative forum for German law claims.
There is an interrelated policy concern here, which is that the New York court will have to be conscious of the need not to beget global forum shopping. New York’s courts have little interest in becoming the preferred forum for aggrieved parties to pursue foreign law claims involving foreign companies, in preference to the courts of the foreign jurisdiction. Again, principles of comity would seem to militate in favor of a different outcome here, as would general judicial principles against encouraging forum shopping.
The complaint’s multiple references to the company’s D&O insurance policy is a pretty bald declaration of what this lawsuit’s objective is (although the claims against the investment banks and the law firms clearly make this more than just an attempt to recover under the company’s D&O insurance policy.) I will say as someone who has spent my entire career thinking about D&O insurance, I find the complaint’s attitude toward the D&O insurance odd. The complaint’s authors seems to think that the D&O insurance is an asset of the company that the company purchased for its own benefit. This stands the basic D&O insurance proposition on its head. Companies don’t buy D&O insurance for the benefit of future claimants. Companies buy D&O insurance for the protection of their individual directors and officers because the individuals face direct personal liability for their actions undertaken as directors and officers. There is a lot that might be said about this complaint and this lawsuit, but I want everybody reading this who is thinking about the role of the D&O insurance here to understand that the complaint’s understanding of D&O insurance is wrong-headed; the insurance exists to protect the people that this plaintiff has sued. THAT is what the D&O insurance is there for.
The plaintiff will have other problems in pursuing these claims. First, there is a provision in Bayer’s Article of Incorporation that provides that “The place of jurisdiction for all disputes between the company and stockholders shall be the location of the company’s registered office. Foreign courts shall have no jurisdiction with respect to such disputes.” The complaint goes to great lengths to argue that this provision does not apply to her claim, because as a derivative suit it is not a dispute between the company and a stockholder it is in fact a claim on behalf of the company.
The plaintiff may also have some difficulty as a result of what the complaint describes as an incident of “corporate espionage.” In early February 2020, the plaintiffs’ advisors met with another Bayer shareholder in connection with the plans to bring this claim. The other Bayer shareholder had led a prior failed attempt to launch an “audit” of the Monsanto merger; this prior audit effort did not get off the ground. However, in February 2020, this same Bayer shareholder took the information he obtained about this lawsuit as a result of the early February meeting, and met with Bayer company representatives in order to apprise them of the prospective lawsuit and to relaunch his audit effort. The company subsequently announced its agreement to the audit procedure, as well as other preemptive steps to try to cut off or undercut this lawsuit. These allegations are troublesome, but the existence of the audit and the other preemptive steps the company took when it got wind of this lawsuit could provide the defendants with further ammunition to try to fight this lawsuit. Among other things, they can try to argue that because of the audit this lawsuit is premature.
I will say that though this lawsuit involves a German company and claims under German law, there are some very U.S.-centric circumstances here, and not just because Monsanto was a U.S. company and so on. The gist of the underlying claims is that the defendants’ either ignored or disregarded the dramatic threat that thousands of U.S.-based Round Up lawsuits represented. At the core, the outcome of the failed merger is a tale of the U.S.-litigation system run absolutely amok. The excesses of the U.S. system (including the jury trial procedures and allowances for punitive damages) represent the essence of the very risk that the plaintiff here says the defendants ignored. Isn’t there something ironic about the plaintiff trying to take advantage of those very U.S.-specific procedures to try to assert foreign law claims against the defendants?
In any event, this will be a very interesting case to watch.
Special thanks to a loyal reader for providing me with a copy of the complaint.