1. Mergers & acquisitions Section 1c: SH litigation Prof. Amitai Aviram Aviram@illinois.edu University of Illinois College of Law Copyright © Amitai Aviram. All Rights Reserved S15

2. Shareholder litigation Overview of Section 1c 1. Litigation concepts – Process of litigation – Economics of settlement – Economics of class actions 2. Derivative actions 3. SH inspection rights © Amitai Aviram. All rights reserved. 2

3. Process of litigation In the next few slides I will highlight some aspects of the litigation process that are most relevant for this course Stages of litigation – Preliminaries – Pleadings – Pre-trial – Trial – Post-trial © Amitai Aviram. All rights reserved. 3

4. Process of litigation Preliminaries Choice of law – The “internal affairs doctrine” provides that the internal affairs of a firm (disputes between the firm, corporate actors & SHs) are governed by the law of the state of incorporation (McDermott Inc. v. Lewis [Del. 1987]) Jurisdiction – Del. Court of Chancery has jurisdiction “to hear and determine all matters and causes in equity” (10 Del. C. 341), and doesn’t have jurisdiction “to determine any matter wherein sufficient remedy may be had by common law, or statute [before another jurisdiction]” (10 Del. C. 342) Venue – Courts outside Delaware may have jurisdiction over SH litigation of Delaware corporations; in recent years, Delaware has been losing market share in SH litigation of Delaware corporations. In response, companies have started to adopt forum selection bylaws directing disputes to Delaware courts © Amitai Aviram. All rights reserved. 4

5. Process of litigation Pleadings Complaint – Plaintiff’s complaint commences the lawsuit; must allege: Jurisdiction Claim (facts showing that plaintiff is entitled to relief) Relief (a demand for an appropriate remedy) Provisional remedies – Plaintiff can ask judge for immediate (provisional) remedies when waiting for a post-trial remedy would cause irreparable harm – TRO (temporary restraining order): issued before opponent can respond – Preliminary injunction: issued after opponent responds (but before trial) – Standard (for both): (a) reasonable probability of success on the merits; (b) reasonable likelihood moving party will suffer irreparable harm absent the provisional remedy & that harm outweighs harm to non-moving party from granting the provisional remedy © Amitai Aviram. All rights reserved. 5

6. Process of litigation Pleadings Pre-answer motions (motion to dismiss) – Can be based on procedural flaw (lack of jurisdiction, improper venue, faulty process or service) or substantive flaw (failure to state a claim) – Standard for dismissal for failure to state a claim (Rule 12(b)(6)) Federal courts: “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face” (Twombly [US 2007], Iqbal [US 2009]) Delaware: complaint dismissed for failing to state a claim only if, accepting plaintiff’s factual allegations as true, “plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances” (Central Mortgage [Del. 2011]) Non-moving party’s well-pled allegations are accepted as true, and factual inferences are made in light most favorable to non-moving party Answer – Defendant responds to complaint, including asserting defenses, counter-claims (against plaintiff) & joinder (requesting that other necessary parties be included in the litigation) Post-pleading motions (motion for judgment on the pleadings) – Rule 12(c): granted if pleadings fail to reveal existence of any disputed material fact & movant is entitled to judgment as a matter of law – Same standard as a motion to dismiss for failure to state a claim Defendant more likely to use a Rule 12(b)(6) motion (than a 12(c) motion) – answering limits defendant’s future arguments © Amitai Aviram. All rights reserved. 6

7. Process of litigation Later stages of litigation Pre-trial: Discovery – Initial disclosures (info on witnesses, documents & objects that party may use to support its claims or defenses; computation of damages; insurance information) – Discretionary discovery (e.g., interrogatories, depositions, requests for producing evidence) Pre-trial: Motion for summary judgment – No genuine dispute as to any material fact, and the moving party is entitled to a judgment as a matter of law Genuine dispute: if a rational factfinder could rule in favor of non-moving party Material fact: if fact could affect the outcome of the lawsuit – Factual inferences are made in light most favorable to non-moving party Trial – No jury trials in Delaware Court of Chancery (it is an equity court) Post-trial – Post-trial motions, enforcement of judgment, appeal © Amitai Aviram. All rights reserved. 7

8. Economics of settlement Extortion by litigation Various legal mechanisms constrain SHs who sue the firm & its actors – Enhanced pleading standards E.g., persuasiveness of claim (plausible vs. conceivable) – “Safe harbors” in substantive law E.g., applying BJR (rather than entire fairness) if deal requires SC & MSH approval Why impose these constraints? Because SH litigation imposes costs asymmetrically, creating opportunities to extort the firm – Firm’s reputation can be harmed by litigation; plaintiff usually doesn’t have a reputation to risk – Usually firm/actors can’t counterclaim against SH (SH’s only cost is attorney’s fees) – Typically firm/actors can’t impose significant discovery costs on SH – Firm has time-sensitive events that can be thwarted if delayed by litigation (M&A deals, IPOs, SH meetings) Defendants would settle a case if costs less than their litigation costs – When litigation costs are asymmetrical, the amount firm would be willing to offer is greater than litigation costs to plaintiff – So plaintiff would initiate litigation even without a valid case – To prevent this, law offers tools to terminate litigation at an early stage © Amitai Aviram. All rights reserved. 8

9. Economics of class actions Why do we have class actions? When a party inflicts a small amount of harm on a large number of parties, individual lawsuits aren’t a strong deterrent – E.g., a store illegally overcharges each of its 1M customers $1/month over two years (total benefit for store: $24M) Total cost for each customer: $24 (not enough to hire a lawyer to sue) – This is a common problem in SH litigation Each SH has a small stake in the firm, so directors can steal $24M from the firm & it won’t make sense for each of firm’s 1M SHs to sue Is it a problem? – Would harm to reputation suffice to deter the store/directors? – Would government enforcement suffice to deter the store/directors? Solution: class actions – Class actions allow an individual plaintiff to sue on behalf of all persons with the same cause of action, and in return plaintiff is reimbursed the legal expenses incurred in the class action (sort of an “involuntary agency”) – When a SH sues to vindicate a cause of action belonging to the firm, it is called a derivative action, and is in essence a class action for all SHs © Amitai Aviram. All rights reserved. 9

10. Economics of class actions Who is behind class actions? Tooley [Del. 2004] : Credit Suisse acquires DLJ (investment bank) 1.Credit Suisse buys from AXA (owner of 71% of DLJ) its DLJ shares 2.Credit Suisse launches a tender offer for the remaining 29% 3.DLJ merges with Credit Suisse subsidiary (freezeout merger) The tender offer (step 2) – Tender offer to expire after 20 days, but extension is allowed by agreement between DLJ & Credit Suisse – DLJ & Credit Suisse agree on additional 22-day extension – Eventually, tender offer closes successfully & freezeout merger takes place The lawsuit – Tooley (a former DLJ SH) challenges the 22-day extension of the tender offer – Demands the interest he would have received had the tender offer closed 22 days earlier © Amitai Aviram. All rights reserved. 10

11. Economics of class actions Who is behind class actions? Why does Tooley bother suing? – Interest rate Tooley could have received on his money in Oct.-Nov. 2000: 6.55% [Avg. interest rate on a 1-month CD in October 2000] For 22 days, this equals ~0.39% – If Tooley owned $10,000 of DLJ stock, he’s suing for $39.48 Would you sue for that much? – With $39.48 you can hire an experienced attorney (20+ yrs.) for 6 minutes, 14 seconds; or hire an inexperienced attorney (fresh out of law school) for 13’, 10” [03-04 Laffey Matrix, U.S. Attorney’s Office, District of Columbia] The key feature of class actions is that plaintiff’s lawyer (not plaintiff) is in the driver’s seat – Class actions enlist lawyers as law enforcers, when SHs & government can’t do the job adequately – In SH litigation, this reduces SHs vs. management agency costs but creates SHs vs. lawyer agency costs © Amitai Aviram. All rights reserved. 11

12. Economics of class actions Dysfunctional outcomes In re Oracle Corp. Derivative Litigation [Cal. Super. 2005] – Larry Ellison, CEO of software giant Oracle Corp., allegedly engaged in insider trading, selling some Oracle shares while he knew non-public, disappointing information about Oracle (which ultimately resulted in a 22% drop in share price) – Joseph Tobacco Jr., a lawyer, brings a class action in California on behalf of Oracle SHs. The settlement: Ellison promises to donate in Oracle’s name $100M over 5 years to a charity of Ellison’s choice (Ellison had already been donating over $30M a year) Oracle will pay Tobacco’s legal fees of $22.5M – Benefit to Oracle SHs from this settlement? – Settling derivative actions is subject to a judge’s approval Why would a judge approve a settlement like this one? Outcome: In Nov. 2005, a San Mateo Superior Court judge approved the settlement, but only after it was modified so that Ellison, rather than Oracle, paid Tobacco’s legal fees © Amitai Aviram. All rights reserved. 12

13. Economics of class actions Dysfunctional outcomes Why do we see these dysfunctional outcomes? – Guilty defendants may “bribe” plaintiff’s lawyer to extinguish a meritorious suit – Innocent defendants may be extorted by plaintiff’s lawyer to extinguish a frivolous suit – Good faith plaintiff’s lawyer may have preferences that do not represent most SHs’ preferences E.g., plaintiff’s lawyer may sincerely want Oracle to give more to charity, but this may not be what most SHs want © Amitai Aviram. All rights reserved. 13

14. Intervention (sue the lawyers if they do not represent faithfully) – SHs won’t sue; decision to sue lawyers suffers from same collective action problem that justified having class actions in the first place Exit (allow dissenting SHs not to participate in the suit) – This is allowed in many class actions, but is not practical in derivative actions, where the issue is legal rights of the firm (any action the firm takes affects all SHs; can’t limit the impact to only some SHs) Voice (allow SHs to dismiss the suit) – SH review (SH meetings to decide whether to pursue each suit)? Not feasible: very costly, so extortion problem may become worse Compromise solution: Board review (as a representative of SHs) – If an informed and independent board makes a business judgment that a derivative suit is not in the firm’s interest, court will not second guess that – Because a SH, not the board, initiates the suit, a process (called a demand on the board) is needed to facilitate board review: Alert the board to plaintiff’s allegations Allow the board to make a business judgment whether firm should sue Economics of class actions Agency solutions in SH litigation © Amitai Aviram. All rights reserved. 14

15. Economics of class actions Agency solutions in SH litigation Rules that apply to derivative suits (Del.Ch. Rule 23.1) – Plaintiff must have been a SH at time of the alleged wrong & maintained that status throughout the litigation (“contemporaneous ownership requirement”) Weeds out some opportunistic plaintiffs (who bought shares in order to litigate) How can an opportunistic lawyer get around this requirement? – SH must ask board to sue before suing derivatively (“demand requirement”) Facilitates board review (to keep plaintiff’s lawyer accountable) In some jurisdictions (e.g., MBCA), demand is universal (must always be made); in other jurisdictions (e.g., Delaware), demand is excused when it is futile – the differences will be explored in the next sub-section © Amitai Aviram. All rights reserved. 15

16. Shareholder litigation Overview of Section 1c 1. Litigation concepts 2. Derivative actions – Legal personality & litigation – Is the action derivative? – Demand – Special litigation committees 3. SH inspection rights © Amitai Aviram. All rights reserved. 16

17. Since a corporation is an independent legal person, it can sue and be sued When a corporation suffers harm, SH are indirectly harmed by the decrease in their shares’ value – To repair the harm, the corporation must sue – The board decides whether the corporation will sue, but there is an agency problem: directors are unlikely to sue when the lawsuit implicates them Derivative actions Legal personality & litigation © Amitai Aviram. All rights reserved. 17

18. Derivative actions Legal personality & litigation Hypo (derivative cause of action) – Danny, David and Dana, C Corp.’s three directors, embezzle $1 million from C Corp.’s treasury Steve, a SH, wants to sue the directors Does he have a cause of action against the directors? – Steve writes an angry letter to the corporation, demanding that it sue its directors Board convenes to decide on Steve’s request & votes 3-0 not to sue Can’t SHs just vote the directors out? Can Steve do something against the directors? © Amitai Aviram. All rights reserved. 18

19. Derivative actions Legal personality & litigation Modified hypo (direct cause of action) – C Corp. has two classes of shares: A shares are entitled to one vote & one share of the profits B shares are entitled to one vote & ten shares of the profits – The three directors do not embezzle money from the corporation. Instead, they reconfigure the rights of B shares so that each provides only two shares of the profits. Steve, a B SH, wants to sue the directors Did this change harm the corporation? Did it harm class B SHs? Does Steve have a cause of action against the directors? © Amitai Aviram. All rights reserved. 19

20. Is the action derivative? Tooley v. DLJ [Del. 2004] Tooley (a former DLJ SH) challenges a 22-day extension of the tender offer, demanding (as damages for an allegedly unlawful extension) the interest he would have received had the tender offer closed 22 days earlier Tooley’s problem – Why is Tooley a former SH? – Contemporaneous ownership requirement: Tooley must hold shares both at time of challenged transaction & throughout lawsuit – Result: If the suit is derivative, it must be dismissed since Tooley no longer owns the DLJ shares © Amitai Aviram. All rights reserved. 20

21. Is the action derivative? Tooley v. DLJ Del. Ch. Court Rule 23.1: “In a derivative action brought up by 1 or more shareholders… to enforce a right of a corporation…” – A suit is derivative when the cause of action belongs to the firm; but how do we know if a cause of action belongs to the firm or the SHs? Tooley court rejects two old tests: – Whether there was a “special injury” suffered only by some SHs (Lipton) – Presumption that claim is derivative if it affects all SH equally (Bokat) Tooley test – whether suit is derivative or direct is based on: – Who suffered the alleged harm – corporation or plaintiff SH individually? – Who would receive the benefit of recovery or other remedy? Agostino v. Hicks is endorsed by the Tooley court – “Looking at the body of the complaint and considering the nature of the wrong alleged and the relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation?” © Amitai Aviram. All rights reserved. 21

22. Is the action derivative? Tooley v. DLJ Applying the Tooley test to the DLJ situation – Court: The complaint does not state a derivative action, because it does not show how DLJ suffered an injury – However, claim is not direct either, because Tooley had no contractual right to be paid on Oct. 5 rather than Nov. 2 – Result: Complaint states no claim at all – neither direct nor derivative. Dismissal was proper, but on different grounds than the Chancery Court stated. © Amitai Aviram. All rights reserved. 22

23. Is the action derivative? Who can sue derivatively? (In Del.) Common SHs - Yes Preferred SHs – Yes, unless this right was specifically limited in charter or another “appropriate document” [Maginn (Del. Ch. 2010)] Creditors [Gheewalla (Del. 2007)] – Yes, when firm is insolvent – Unclear, when firm is in the “zone of insolvency” – No, in all other situations Directors – No (though courts may allow in future if needed to prevent “complete failure of justice”) [Schoon (Del. 2008)] © Amitai Aviram. All rights reserved. 23

24. Demand Delaware © Amitai Aviram. All rights reserved. 24

25. Demand MBCA (universal demand) MBCA §7.42 – A demand is required in all derivative actions – SH must not bring suit for 90 days after demand is made, unless irreparable injury would result, or board rejected demand MBCA §7.44 - Alternatives for review of the demand: – If independent directors constitute a quorum, the demand may be reviewed by the board (but only the independent directors vote) – In all cases, the independent directors may appoint by majority vote a committee of two or more independent directors to review the demand – Upon motion by corporation, court may appoint an independent panel MBCA §7.44 (continued) – If the reviewing institution determines in good faith, after conducting a reasonable investigation, that the maintenance of the derivative action is not in the best interest of the corporation, the court will dismiss the complaint (without examining the reasonableness of the determination) – Burden of proof as to good faith and reasonable investigation lies on: SH, if majority of board is independent, or review was by court appointed panel Corporation, if majority of board is not independent © Amitai Aviram. All rights reserved. 25

26. Demand Delaware (excusable demand) Delaware has a narrower demand requirement: Where the directors cannot be expected to make a fair decision, demand would be futile and is excused If a demand was made, the directors may reach a decision whether the company should pursue the cause of action – BJR applies to the board decision, unless rebutted © Amitai Aviram. All rights reserved. 26

27. Demand Delaware: litigation strategy Under Del. law, demand must be made unless it is futile – Making a demand is deemed a concession that a demand was required If demand is made, board’s decision regarding the demand benefits from the BJR, unless it is rebutted – At this point, plaintiff isn’t entitled to discovery, so info on firm must come from public sources & SH inspection rights – Why is this important? Result: Plaintiff usually loses if demand was made & board rejected it Harm to plaintiff from foregoing demand? – If demand is required & plaintiff didn’t make the demand, litigation will be stayed while plaintiff makes the demand Conclusion: Typically, a plaintiff will not make a demand, and instead argue that demand was excused – So most litigation is about whether demand was futile (rather than whether demand was wrongfully rejected) © Amitai Aviram. All rights reserved. 27

28. Demand Delaware: demand excusal Primary test: Aronson v. Lewis [Del. 1984]: Demand requirement is excused if plaintiff shows reasonable doubt that either: – Majority of the board is independent for purpose of responding to the demand (@ time complaint is filed) – Challenged action is protected by the BJR Alternative test: Rales v. Blasband [Del. 1993]: test includes only 1 st prong (board independence in responding to demand); applies when: – P’s claim arises out of board inaction – P’s claims arise out of transaction not involving a board decision – A majority of directors that decided on underlying transaction was replaced by independent directors © Amitai Aviram. All rights reserved. 28

29. Demand Delaware: demand excusal Beam v. Stewart (Del. 2004): “To create a reasonable doubt as to an outside director’s independence, a plaintiff must plead facts that would support the inference that… the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.” A director is not independent if she: – has a material interest in the challenged transaction; or – is dominated/controlled by the alleged wrongdoer or an interested party A director may be independent even if she: – approved the challenged transaction; – was named as a defendant in the derivative action; or – was nominated by the alleged wrongdoer In Beam, Martha Stewart controlled 94% of MSO, but in itself this did not create a reasonable doubt regarding the directors’ independence © Amitai Aviram. All rights reserved. 29

30. Demand Zucker v. Andreessen [Del. Ch. 2012] Actress Jodie Fisher accused Hewlett-Packard CEO Mark Hurd of sexual harassment, falsifying expense reports & disclosing sensitive information Board investigated, found evidence of falsifying reports (but not harassment); decided to fire Hurd © Amitai Aviram. All rights reserved. 30

31. Demand Zucker v. Andreessen Severance agreement gave Hurd $40M in benefits (more than HP was obligated to give if he resigned or was fired for cause) Severance agreement required Hurd: – to extend provisions in Hurd’s earlier confidentiality agreements – to release any claims he had against HP – not to disparage HP – to cooperate with HP on future investigations & CEO succession Board appoints CFO as interim CEO; begins CEO search Zucker, a SH, sues derivatively, alleging that the board: – committed waste in awarding Hurd $40M while HP received no benefit – breached duty of care in failing to implement CEO succession plan No demand was made, so Zucker needs to show demand was excused or the suit will be dismissed Does Aronson or Rales apply to each of these claims: – committing waste by awarding Hurd $40M without a benefit to HP? – breaching duty of care by failing to implement CEO succession plan? © Amitai Aviram. All rights reserved. 31

32. Demand Zucker v. Andreessen The waste allegation (Aronson) – Reasonable doubt that the board is independent in responding to a demand? – Reasonable doubt that challenged act (decision to sign severance agreement) is protected by the BJR? Failure to implement CEO succession plan (Rales) – Reasonable doubt that the board is independent in responding to a demand? Zucker claims board conceded demand futility by forming a committee to investigate – Relies on Sutherland, where petition from a Special Litigation Committee (SLC) to dismiss suit was seen to preclude firm from later requesting dismissal for demand futility – Court distinguishes from Sutherland – here committee is not SLC & did not petition for dismissal © Amitai Aviram. All rights reserved. 32

33. Special litigation committees Vulnerability of biased boards Firms get one more chance to dismiss a derivative suit when demand is futile, by forming a Special Litigation Committee – This is because fair decisions that happen to have been made by a conflicted board create attractive targets for strike suits Firm asks court to apply BJR (i.e., defer) to a decision of an SLC (composed of disinterested directors) that the derivative action lacks merit – Unlike demand futility litigation, in SLC litigation plaintiff is entitled to limited discovery (as to the independence of the SLC members) Most states simply apply BJR analysis to SLC’s decision Delaware applies two steps (Zapata Corp. v. Maldonado [Del. 1981]) – Quasi-BJR analysis to SLC’s decision SLC independence SLC good faith Reasonable bases for the SLC’s recommendations – Court may apply its own “independent business judgment” as to whether to dismiss the suit © Amitai Aviram. All rights reserved. 33

34. Special litigation committees In re Oracle Deriv. Litig. [Del. Ch. 2003] Plaintiffs allege that four directors of Oracle – Ellison, Henley, Lucas and Boskin - engaged in insider trading Upon being sued, Oracle appoints an SLC of two new directors (weren’t on the board when alleged events took place) – Garcia-Molina: chairman of Stanford’s computer science department – Grundfest: professor at Stanford law school Directs Stanford’s director college & the program in law, business and corporate governance. Is this a coincidence? © Amitai Aviram. All rights reserved. 34

35. Special litigation committees Oracle Compensation: $250/hour (below their market price) – To preserve their objectivity, SLC members agreed to give up compensation if court determined that it impaired their impartiality Advisors’ objectivity – The SLC hires legal counsel (Simpson Thacher) & economists (NERA). Court examines the advisors’ objectivity and finds no problem. – What evidence would taint the advisors’ objectivity? SLC’s report – SLC interviewed 70 witnesses. Its report was 1,110 pages long. Court finds no problems with the SLC’s investigation procedure – SLC recommends to dismiss the claims © Amitai Aviram. All rights reserved. 35

36. Special litigation committees Oracle Legal analysis (Zapata) Step 1: Quasi-BJR analysis – SLC members’ independence – SLC members’ good faith – Reasonable bases for the SLC’s recommendations Step 2: “Independent business judgment” © Amitai Aviram. All rights reserved. 36

37. Special litigation committees Oracle Ellison Boskin Lucas Garcia-Molina Grundfest SLC members’ independence What the SLC report disclosed: Boskin is a Stanford Professor Lucas made certain donations to Stanford, and donated $50,000 to after Grundfest delivered a speech to a Venture Capital Fund in which Lucas’ son is a partner (half the money went to Grundfest’s research account) © Amitai Aviram. All rights reserved. 37

38. Special litigation committees Oracle Boskin Taught Grundfest when G was a Ph.D. student Both Boskin & Grundfest are steering committee members at the Stanford Institute for Economic Policy Research Lucas A major donor to Stanford Law School & Stanford Institute for Economic Policy Research Ellison Ellison & Oracle make significant contributions to Stanford But: Ellison’s child applied to Stanford and was rejected – Ellison apparently continued to consider donations to Stanford after this © Amitai Aviram. All rights reserved. 38

39. Special litigation committees Comparing Beam & Oracle Why is the analysis and outcome different? Beam: “…for presuit demand purposes, friendship must be accompanied by substantially more…” Oracle: “Homo sapiens is not merely homo economicus… an array of other motivations exist to influence human behavior… envy… love, friendship, and collegiality.” © Amitai Aviram. All rights reserved. 39

40. Shareholder litigation Overview of Section 1c 1. Litigation concepts 2. Derivative actions 3. SH inspection rights © Amitai Aviram. All rights reserved. 40

41. SH inspection rights Purposes SH inspection rights can: – Facilitate SH voting: getting non-public information that will persuade SHs to support an insurgent in proxy contest (e.g., uncovering info that shows the board did a poor job managing the firm & shouldn’t be re-elected) – Facilitate SH litigation: getting non-public information that sufficiently substantiates allegations that the complaint survives a motion to dismiss Why not give SH an automatic right to access all of the corporation’s info? © Amitai Aviram. All rights reserved. 41

42. SH inspection rights DGCL Proper purpose (DGCL §220(b)) – SH must make a written demand, presenting a “proper purpose” (i.e., a purpose “reasonably related to such person’s interest as a stockholder”) Who has BoP whether purpose is proper? (DGCL §220(c)) – If SH seeks access to the SH list, BoP on the firm to show that SH does not have a “proper purpose” – If SH seeks access to other corporate records, BoP on the SH to prove “proper purpose” © Amitai Aviram. All rights reserved. 42

43. SH inspection rights Pershing Square v. Ceridian [Del. Ch. 2007] Pershing Square, a hedge fund, is Ceridian’s largest SH (11.3%) – Ackman is its portfolio manager Comdata is Ceridian’s largest operating subsidiary – Krow is Comdata’s president Ackman learns that Krow sold Ceridian stock; calls Krow to learn why – How does Ackman know about Krow’s sale of stock? © Amitai Aviram. All rights reserved. 43

44. SH inspection rights Pershing Square v. Ceridian Krow tells Ackman he’s about to quit because he disagrees with the business strategy pursued by Marinello, Ceridian’s new CEO – Krow wants Comdata spun off – Marinello prefers to keep Comdata & make new acquisitions – What motivates Marinello, Krow and Ackman in choosing between the strategies? – Ackman & Krow discuss Pershing Square running a slate of directors at the upcoming elections Gary Krow Kathryn Marinello © Amitai Aviram. All rights reserved. 44

45. SH inspection rights Pershing Square v. Ceridian Krow meets with Ackman at an airport – Tells Ackman which Ceridian SHs supported a Comdata spin-off and would support Ackman’s director slate – Also tells Ackman that he wrote two letters to Ceridian’s board, detailing mismanagement by the previous Ceridian CEO & hinting that the board failed to oversee the CEO – How is the info useful for Pershing’s bid to elect directors? Previous CEO was terminated & replaced by Marinello, but Krow thinks that the letters damaged his relationship with the board & Marinello was hired with the intention of firing Krow © Amitai Aviram. All rights reserved. 45

46. SH inspection rights Pershing Square v. Ceridian Pershing makes a DGCL §220 demand to receive: – A copy of Ceridian’s current bylaws – SH list – Copies of the two letters Krow mentioned Ceridian provides bylaws & SH list; refuses to provide the letters – Claims confidentiality & lack of proper purpose Court examines stated purposes Purpose is proper if it is reasonably related to one’s interest as a SH – Investigating suitability of directors – Communicating with fellow shareholders about board elections Ceridian: This makes every board-level document available for inspection – Court: stating a proper purpose does not automatically grant inspection rights © Amitai Aviram. All rights reserved. 46

47. SH inspection rights Pershing Square v. Ceridian Conditions for SH inspection right: 1.Written demand from a shareholder (record owner or beneficial owner) 2.Proper purpose – Purpose is proper if it is reasonably related to one’s interest as a SH – That purpose must be SH’s true/primary purpose – SH must have evidence establishing a credible basis for that purpose 3.Proper records – Requested records are necessary & essential for the purpose – Safeguards may be imposed to protect confidentiality of the records In this case: – Pershing’s stated purposes are proper – But Pershing’s true purpose is improper: finding a legal vehicle to publicly broadcast improperly obtained confidential information © Amitai Aviram. All rights reserved. 47