IN RE THE TOPPS CO. SHAREHOLDERS, 924 A.2d 951 (Del.Ch. 2007)

C.A. No. 2786-VCS.Court of Chancery of Delaware.Submitted: May 8, 2007.
Decided: May 9, 2007.

Page 952

Seth D. Rigrodsky, and Brian D. Long, Rigrodsky Long, P.A., Wilmington, DE; Joseph A. Rosenthal, Rosenthal, Monhait Goddess, P.A., Wilmington, DE; Robert M. Kornreich, and Carl L. Stine, Wolf Popper, LLP, New York City, for Plaintiff.

Gregory P. Williams, and Blake K. Rohrbacher, Richards, Layton Finger, P.A., Wilmington, DE; Robert K. Payson, and Bradley W. Voss, Potter Anderson Corroon, LLP, Wilmington, DE; Brian E. O’Connor, Russell D. Morris, and Andrew L. Weiner, Willkie Farr Gallagher, LLP, New York City, for the various Defendants.

Page 953

OPINION
STRINE, Vice Chancellor.

This opinion resolves a motion to dismiss or stay a consolidated shareholder class action seeking to enjoin a merger transaction (the “Merger”) in which The Topps Company, Inc. (“Topps”), a publicly traded Delaware corporation headquartered in New York, will be sold to a group of private equity buyers. The motion is unusual in that the defendants do not contend that Delaware is, in any way, an improper or inconvenient forum. In fact, the defendants preferred to have the propriety of the Merger decided by the courts of Delaware, the state whose law is at issue. Thus, the defendants sought leave to file a motion to stay identical actions pending in the courts of New York. But the defendants were denied leave to present their motion on the ground that the initial New York action, which was filed by an Ohio resident a day before the first Delaware action, was first filed. By that time, the various Delaware actions had already been consolidated and expedited discovery had begun. Soon thereafter, a schedule for the consideration of a motion for a preliminary injunction against the Merger’s procession was set.

Presented with the inefficient prospect of litigating identical issues in two courts simultaneously, the defendants now seek to have this court refrain from hearing the injunction motion in order to avoid an unseemly and wasteful duplication of effort.

Although I am sympathetic for the defendants’ plight, I deny the motion. In a representative action such as this one, the desire of an individual plaintiff to litigate in a forum other than the state of incorporation has no legal or equitable force, particularly when the plaintiff is not even a resident of the state in which he seeks to litigate. The paramount interest is ensuring that the interests of the stockholders in the fair and consistent enforcement of their rights under the law governing the corporation are protected. In a situation like this one, when all the actions are filed essentially simultaneously on the heels of the announcement of a transaction, the mere fact that one plaintiff won the filing Olympics by beating his competitors to court by a day also has no logical bearing on where the case should proceed.

Instead, well — settled principles of public policy and comity — as recognized by the United States Supreme Court and the New York Court of Appeals — point toward the appropriate basis for resolving where cases like this should be decided. In Langfelder v. Universal Laboratories,[1]
the New York Court of Appeals stated that “it is well settled that jurisdiction in any case will be declined . . . where a determination of the rights of the litigants involves regulation and management of the internal affairs of [a] corporation dependent upon the laws of [a] foreign state.”[2] Moreover, “the fact that a foreign corporation may have its records and principal place of business in New York does not affect a decision to decline jurisdiction under the internal affairs doctrine.”[3] The New York Court of Appeals’ reasoning is grounded in the long-understood notion that when a corporation forms under the laws of a particular state, the rights of its stockholders are determined by that state’s law and that the chartering state has a powerful interest in ensuring the uniform interpretation and enforcement of its corporation law, so as to facilitate economic growth and efficiency.

Page 954

Langfelder was no novelty, it is based on long-standing teaching from the United States Supreme Court that it “has long been settled doctrine that a court — state or federal — will, as a general rule, decline to interfere with, or control by injunction or otherwise, [a] corporation organized under the laws of another state but will leave controversies as to such matters to the courts of the state of domicile. . . .”[4] More recently, our nation’s highest court has stated that

No principle of corporation law . . . is more firmly established than a state’s authority to regulate domestic corporations. . . . The beneficial free market system depends at its core upon the fact that a corporation — except in the rarest of situations — is organized under, and governed by, the law of a single jurisdiction, traditionally the State of its incorporation. . . . A state has an interest in promoting stable relationships among parties involved in the corporations it charters.[5]

As a corollary to those principles, the U.S. Supreme Court has also firmly held that no state has a legitimate interest “in regulating the internal affairs of foreign corporations.”[6]

In a situation like this one, when this court is clearly an efficient and convenient forum prepared to issue a timely ruling, public policy and comity indicate that this state’s courts should answer the question of whether the pending Merger involving Topps should be enjoined. In this regard, the reality is that the Topps Merger is part of a newly emerging wave of going private transactions involving private equity buyers who intend to retain current management. This wave raises new and subtle issues of director responsibility that have only begun to be considered by our state courts. This factor bears importantly on the question of where this case should be heard. When new issues arise, the state of incorporation has a particularly strong interest in addressing them, and providing guidance.[7]
Noteworthy, too, is that the procession of cases like this in Delaware provide litigants the timely opportunity to seek review from this state’s highest court, the Delaware Supreme Court, by way of requesting an expedited and direct interlocutory appeal. That opportunity for prompt definitive guidance is obviously unavailable in the courts of another state.

I. Factual Background
Topps is a Delaware corporation with its principal executive offices in Manhattan. It is best known for marketing baseball cards and other memorabilia featuring professional athletes and popular television and movie characters. It also operates a confectionary business whose brands include quintessentially-American standards such as Ring Pops, Push Pops, and Bazooka Joe bubble gum. Topps was founded in 1938 and went public as a Delaware Corporation shortly after World War II.

On March 6, 2007, Topps announced that it had entered into a definitive agreement to be acquired by The Tornante Company, LLC and Madison Dearborn Partners, LLC (collectively, the “Private Equity Buyers”) in the $9.75 per share all cash Merger. The next day, March 7, the first of a number of putative shareholder class

Page 955

actions seeking to enjoin the Merger was filed in the Commercial Division of the New York State Supreme Court. The named plaintiff in that case is a resident of the state of Ohio and appears to have no substantial ties to New York.[8] The first Delaware action challenging the Merger was filed at 12:43 pm the next day, March 8 (i.e., only a few business hours later). By the end of the next week, a total of nine (five Delaware and four New York) complaints had been filed.

The consolidated complaints in the New York and Delaware actions contain virtually identical allegations. In sum, those complaints contend that the Topps board of directors failed to fulfill their fiduciary duties in a myriad of ways during the process leading to the signing of the Merger Agreement with the Private Equity Buyers, a Merger Agreement they contend allows the Private Equity Buyers to get Topps at a bargain price. In that connection, the plaintiffs raise concerns about conflicts of interest, the adequacy of the Topps board’s pursuit of other bidders, the preclusiveness of the deal protections of the Merger Agreement on other interested parties, and the utility of a so-called “go shop” provision in ensuring value maximization. That is, the complaints raise a number of the emerging issues facing corporate directors, managers, and stockholders during this new wave of mergers and acquisitions activity, in which private equity buyers buy companies and retain current management.

On March 26, 2007, this court consolidated the various actions pending before it.[9] The plaintiffs promptly filed a motion to expedite. The defendants obviated the hearing on that motion by acceding to the expedited production of documents. As of that time, the New York actions had not been consolidated and no substantial activity was undertaken. Once it became clearer when a meeting on the Merger would be held, a hearing for a preliminary injunction was scheduled in this court for May 23. Due to a slippage in the finalization of the Merger meeting schedule, the date for the hearing has been moved to early June.

In the first week of April, a conference was held in the New York cases. At that conference, the defendants sought leave to present a motion to dismiss or stay the New York actions in light of the pending actions in Delaware, the expedited production that was about to begin, and the applicability of Delaware law to important issues facing a Delaware corporation and its stockholders. The court declined to permit the defendants to file their motion, in view of the fact that the first New York case had been filed a day before the first Delaware case. Thus, the defendants did not submit to the court the precedent, including that of the New York Court of Appeals, cited in this decision.

The defendants then sought a conference with this court and expressed concern about being whipsawed. At that conference, I expressed my initial view that Delaware was the appropriate forum to decide whether to enjoin a merger involving a Delaware corporation and that my prior experience had been that other courts recognized and deferred to our state’s legitimate interests in these matters. I expressed my hope and anticipation that an agreement to that effect would be achieved. To that end, I encouraged the Delaware plaintiffs’ counsel to reach out to their colleagues in the New York actions and offer jointly to prosecute the case

Page 956

here, and for the defendants to provide the New York plaintiffs with discovery simultaneously with the Delaware plaintiffs.[10] Within that same week, I encouraged the Delaware counsel to make clear that they were offering their colleagues in New York an equal seat at the table. Regrettably, none of these efforts has to date broken the logjam and the defendants felt compelled to file this motion, lest they face two injunction proceedings against the same transaction.

With that said, it appears that the New York Supreme Court is awaiting this court’s ruling on this motion before deciding how to proceed. Although it has not permitted the defendants to file a motion to dismiss or stay, the New York Supreme Court has also indicated sensitivity to the need for the dispute to proceed in one forum.[11] I read that as saying that the New York Supreme Court is awaiting this court’s ruling on this motion before making a determination whether to proceed. Indeed, another teleconference in the New York action is scheduled for May 10, at which the Court suggested it will consider the outcome of this Delaware motion to stay. For that reason, I have endeavored to issue this decision in an expedited fashion, in the hopes of ensuring an outcome consistent with the interests of efficiency, public policy, and comity.

II. Discussion
The defendants have moved to dismiss or stay the Delaware proceedings primarily under the principles outlined i McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co.,[12] and, alternatively, under the related forum non conveniens doctrine.

As noted, however, this is an odd McWane motion. The defendants did not prefer to litigate this matter in New York, they preferred to litigate it here. But having been denied the chance to seek a stay of the New York matter, and facing dueling injunction hearings, the defendants are now taking the position that “New York is not an inconvenient forum,”[13] and, in light of the New York court’s failure as yet to stay the New York litigation, that it would be burdensome for the defendants to litigate here also.

This is a strained McWane motion for another reason McWane most clearly applies when an individual plaintiff sues a defendant in a convenient forum and is then met with a responsive suit by the defendant in another forum.[14]
In that circumstance, the first-filing plaintiff is rightly given primacy, assuming that her chosen forum is a convenient one that can do substantial justice between the parties.

In the representative action context, McWane has far less bite and for good reason.[15] A first-filing plaintiff has no legitimacy to “call forum” for all the other stockholders of a corporation, as if their rights turned on a schoolboy playground convention. What is most important is not that the filing plaintiff get her way, but that the stockholders she seeks to represent have their legitimate expectations

Page 957

upheld. As Chancellor Chandler recently explained in the analogous context of a derivative suit:

A shareholder plaintiff does not sue for his direct benefit. Instead, he alleges injury to and seeks redress on behalf of the corporation. Further, . . . any shareholder with standing may represent the injured party. Thus, this Court places less emphasis on the celerity of such plaintiffs and grants less deference to the speedy plaintiffs choice of forum. [Thus], this Court proceeds cautiously when faced with the question of whether to defer to a first filed [representative] suit, examining more closely the relevant factors bearing on where the case should best proceed, using something akin to a forum non conveniens analysis.[16]

The situation here is a perfect example of why this must also be so in the logically identical context of a putative class action. The reality is that every merger involving Delaware public companies draws shareholder litigation within days of its announcement. An unseemly filing Olympiad typically ensues, with the view that speedy filing establishes a better seat at the table for the plaintiffs’ firms involved. Therefore, as explained in Biondi the application of McWane
to class and representative actions is “troublesome,” because “the potential divergence in the best interests of the plaintiffs’ attorneys and the plaintiffs they are purporting to represent . . . are not addressed, and indeed may be exacerbated by a legal rule that places determinative weight on which complaint was filed first.”[17]

Just as it has no substantial weight in determining who should be lead counsel in a representative action, the fact that a particular plaintiff filed the first complaint in a wave of hastily-crafted class action complaints attacking a just-announced transaction has no rational force in determining where a motion to enjoin that transaction should be heard.[18]
In fact, in our prior cases, we have treated complaints as simultaneously filed when there are trivial time differences.[19] That is the case here. The first New York Action was filed a day before the first Delaware Action. It is no more rational to give that factor great weight than it would be to declare that because there are five Delaware complaints, and only four New York complaints, the dispute should proceed in Delaware because there are more plaintiffs who want to litigate here, or because the five Delaware complaints were (as a group) filed more speedily than the four New York complaints (as a group). Trivialities like these should not drive important determinations.

This is not to say that the consideration of which action is first filed cannot play a useful tie-breaking role when all other considerations are equal. This is especially true when the first-filed action is farther along than the Delaware action and no other public policy considerations weigh heavily in favor of proceeding with the case here. But, in this current situation, the Delaware actions actually proceeded

Page 958

more briskly than the New York actions and the first-filed New York complaint was simply the winner in a filing derby completed within a week of the Merger’s announcement. In this circumstance, other more compelling considerations become paramount.[20]

As the United States Supreme Court, the Delaware Supreme Court, and the New York Court of Appeals all recognize, a state has a compelling interest in ensuring the consistent interpretation and enforcement of its corporation law. Corporations are chartered by states, and the managers and investors who form them are free to choose from among a variety of laws to govern their relationships. Their contractual expectations deserve respect. The authority of a state to regulate the internal affairs of the corporations it charters is one of the oldest and most firmly established doctrines in American corporation law.[21] As the Supreme Court of the United States explained in Edgar v. MITE Corp.,[22] “[t]he internal affairs doctrine is a . . . principle which recognizes that only one State should have authority to regulate a corporation’s internal affairs, [i.e.,] matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”[23]

Venerable authority recognizes that a chartering state’s interest in promoting an efficient and predictable corporation law can be undercut if other states do not show comity by deferring to the courts of the chartering state when a case is presented that involves the application of the chartering state’s corporation law. That recognition is easily understandable as it applies to Delaware’s corporate law, which has a broadly enabling statute that gives directors wide leeway to manage the corporation, but subject to fiduciary duty review by a court of equity comprised of five judges dedicated in large measure to that specific purpose and further by an appellate court only a direct appeal away.[24] By contrast to the much larger federal judiciary,

Page 959

ten judges are involved in these decisions, avoiding phenomena such as “circuit splits,” which more than a decade ago were considered obstructive enough of commercial efficiency to impel the federal government to create the specialized Federal Circuit to handle all patent appeals.[25] The important coherence-generating benefits created by our judiciary’s handling of corporate disputes are endangered if our state’s compelling public policy interest in deciding these disputes is not recognized and decisions are instead routinely made by a variety of state and federal judges who only deal episodically with our law.[26]

Both the United States Supreme Court and the New York Court of Appeals understand these concerns and have instructed courts under their purview to accord comity to the courts of a corporation’s chartering state. In Rogers v. Guaranty Trust Co. of New York,[27] the United States Supreme Court stated that “[i]t has long been settled that a court — state or federal — sitting in one state will as a general rule, decline to interfere with, or control by injunction or otherwise, [a] corporation organized under the laws of another state but will leave controversies as to such matters to the courts of the state of the domicile.”[28] The courts of New York have long respected this teaching. Thus, for example, i Langfelder, the New York Court of Appeals upheld dismissal of a complaint that sought to determine the rights of preferred stockholders in a Delaware corporation following a stock-for-stock merger.[29] Likewise, Judge Learned Hand, one of New York’s most distinguished jurists, observed that “when a trial involve[s] the internal affairs of a corporation, the rule is that the courts of a foreign forum will not assume jurisdiction over it.”[30] Applying this precedent, the

Page 960

United States District Court for the Southern District of New York, applying New York law, declined under the internal affairs rule to hear a case seeking a declaration of whether certain corporate directors were properly elected.[31] That decision noted that dismissal was particularly appropriate where a “determination of plaintiffs’ contentions requires ascertainment of undeveloped Delaware law.”[32]

The teaching of Rogers and Langfelder are implicated here. There can be no doubt of the importance to Delaware of its corporation law. Although our courts have deferred to clearly first-filed actions in corporation cases involving settled questions of law, such as derivative actions raising claims of self-dealing,[33] our courts have long been chary about doing so when a case involves important questions of our law in an emerging area.[34] Anyone interested in the mergers and acquisitions market knows that the current wave of going private transactions involving private equity buyers is presenting transactional planners with interesting new questions about how to address potential conflicts of interest and how to balance deal certainty against obtaining price competition in a very different market dynamic.[35] As with the phenomenon of stock options backdating, Delaware has an important policy interest in having its courts speak to these emerging issues in the first instance,[36] creating a body of decisional authority that directors and stockholders may confidently rely upon. Indeed, in Delaware’s system of corporate law, the adjudication of cases involving the fiduciary duties of directors in new business dynamics is one of the most important methods of regulating the internal affairs of corporations, as these cases articulate the equitable boundaries that cabin directors’ exercise of their capacious statutory authority. In the context of mergers and acquisitions — the context pertinent to this matter — most of the law governing directors’ responsibility is set forth in our common law of corporations, not in our statute.[37]

Page 961

This policy interest far outweighs any other consideration in this case. The defendants do not even attempt to argue that this court is inconvenient for them. As with most corporate cases, the defendants are the ones who will produce most of the discovery and have their depositions taken. As they and all experienced corporate practitioners know, the discovery will take place in a location convenient to the party producing the documents and being deposed. Indeed, as indicated, the defendants preferred to have the dispute adjudicated here, so that the courts whose law is at stake will decide whether they complied with their duties.

Likewise, there is no countervailing interest any party has in litigating this case elsewhere. Representative plaintiffs seeking to wield the cudgel for all stockholders of a Delaware corporation have no legitimate interest in obtaining a ruling from a non-Delaware court. For investors in Delaware corporations, it is important that the responsibilities of directors be articulated in a consistent and predictable way. Random results may be good for plaintiffs’ lawyers who can use the uncertainty factor that comes with disparate forums to negotiate settlements of cases that might otherwise be dismissed as unmeritorious. But random litigation results are not good for investors. What investors want is to have cases fairly determined, to hold directors accountable either through injunctions against their improper actions when that is necessary to prevent threatened harm or through damages awards when the harm has already been incurred. But just as important, stockholders want to have unmeritorious cases dismissed without rewarding plaintiffs’ lawyers for the simple fact that they filed a lawsuit.[38]

Here, the first filed action was brought by an Ohio resident in New York. His personal convenience is therefore of no relevance at all. Indeed, none of the New York plaintiffs are New York residents. Even if they were, a representative plaintiff has no cognizable interest in having a court of another state adjudicate a claim involving Delaware law.[39] Of equal importance is the fact that New York has no countervailing interest at stake that is

Page 962

compromised by the procession of this case in Delaware. As the Supreme Court of the United States has long recognized, states have no legitimate interest in regulating the internal affairs of foreign corporations.[40] New York courts themselves have long acknowledged this.

Moreover, the fact that Topps is headquartered in New York has no bearing on where this particular suit should be heard. Topps has been incorporated in Delaware for generations. It has stockholders all over the nation. Those stockholders invested on the understanding that Delaware law would govern their relations with the firm. Now, it is unquestionably true that the location of Topps’ headquarters could have great importance in a choice of law or forum analysis if different types of claims were at issue. One can imagine a myriad of contract, employment, worker safety, environmental, and tort claims against Topps that would be much more properly heard in a New York court than in this court, irrespective of Topps’ status as a Delaware corporation. In such cases, this court would not hesitate to defer in a “New York minute,” as it were. Indeed, on several occasions, this court has displayed deference to the primacy of other states’ interest in the evolution and enforcement of their laws.[41]

Page 963

But here, the location of Topps’ headquarters has no rational relation to where this case should proceed. This case is about the responsibilities of directors of a Delaware corporation to the corporation and its stockholders under Delaware law. As the New York Court of Appeals stated in Langfelder, “the fact that a foreign corporation may have its records and principal place of business in New York does not affect a decision to decline jurisdiction under the internal affairs doctrine.”[42]

Few contexts are more important to stockholders than the pendency of a transaction in which they exchange their shares for cash and the company is taken private. With a new M A market dynamic have come important new issues of appropriate director responsibility that should be addressed in the first instance by Delaware courts. That is particularly the case when the question is whether to enjoin a merger transaction. It is a very delicate corporate law exercise to determine whether to enjoin a premium-paying merger affecting thousands of stockholders at the instance of stockholders holding a small fraction of the company’s shares. In that respect, it is no insult to the courts of other states, and certainly not the courts of New York,[43]

Page 964

to say that the Delaware courts are better positioned to provide a reliable answer about Delaware corporate law in emerging areas like the ones presented by this dispute. That is especially so because appeals from this court go directly to the Delaware Supreme Court,[44] the definitive authority on our common law of corporations, which regulates much of the internal affairs of Delaware corporations.[45]

In the end, the only factor that really cuts in favor of New York as a forum is the fact that the New York court has, to date, not stayed its hand in deference to this court, and that the possibility for an unseemly and inefficient duplication of effort and for the production of inconsistent results therefore looms. But, as indicated, it appears to me from the transcripts of the New York proceedings that my learned colleague in New York was waiting to make that final determination until this court could consider this motion, based on the full briefing that he knew would be presented to me. In view of the comity traditionally shown by New York in these situations to the courts of the chartering state and mandated b Langfelder, I

Page 965

therefore have confidence that the result the defendants fear will not come to pass.[46]

III. Conclusion
For all these reasons, the defendants’ motion to dismiss or stay is DENIED. IT IS SO ORDERED. The parties shall present the briefing schedule on the motion for preliminary injunction discussed at the prior conference.