Delaware Business Litigation Report

Federal Court Dismisses Fraud And All Securities Claims Against Defendants In DaimlerChrysler AG Merger

Tracinda Corp. v. DaimlerChrysler AG, 364 F.Supp.2d 362 (D.Del. 2005). Tracinda Corporation ("Tracinda"), a Nevada entity with its principal place of business in California and engaged in investing in companies and then Chrysler's largest shareholder, brought this action against defendants comprising DaimlerChrysler AG, Daimler-Benz AG ("Daimler"), Jurgen Schrempp and Manfred Gentz (collectively "Defendants") and citizens of Germany alleging: (1) violations of securities laws; (2) common law fraud; and (3) conspiracy in connection with the 1998 merger between Chrysler Corporation ("Chrysler") and Daimler-Benz AG ("Daimler-Benz"). After a thirteen day bench trial, the Court held that: (1) personal jurisdiction did not exist over the German corporation; (2) the German company and its CEO were subject to the proxy solicitation statute although the American manufacturer solicited proxies; (3) pre-merger oral statements of the CEO did not attract liability; and (4) the documents memorializing the merger did not misrepresent that it was a merger between equals. The plaintiff filed the Complaint in 2000 alleging securities violations under Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 of the underlying rules ("Exchange Act"), Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 ("Securities Act"). The plaintiff additionally sued Hilmar Kopper, the Chairman of the Supervisory Board of Daimler-Benz. Several motions were filed by the Defendants resulting in the dismissal of the conspiracy count and Defendant Koppler for lack of personal jurisdiction, but denied summary judgment motions related to the applicable statute of limitations as a defense and other claims. The plaintiff then dismissed its Section 11, 12 and 15 claims before trial. At trial, only the common law fraud and the Exchange Act claims survived. The background to this case involved substantial pre-merger discord between Tracinda, Tracinda's CEO and sole shareholder, Kirk Kerkorian, on the one side and Chrysler on the other. This included Kerkorian's demands that Chrysler's board increase dividends for Chrysler's stockholders and a stock split. Chrysler resisted and Kerkorian threatened legal action if Chrysler did not: (1) redeem a poison pill then in place; (2) initiate a stock buyback; (3) a stock split; and (4) a dividend increase. Chrysler took action on the demands and announced a $1 billion buyback and a common stock dividend increase of 60%. Kerkorian then launched his campaign to acquire all the outstanding shares of Chrysler in cash. Those efforts were unsuccessful. Kerkorian's subsequent attempt to initiate a tender offer was unsuccessful. Tracinda continued in its efforts to acquire Chrysler shares and made efforts to replace the board of Chrysler, including Eaton, its Chairman. Subsequently the parties entered into agreements to resolve their differences, including a standstill agreement which required Tracinda to cap its stockholding in Chrysler below 13.5% in return for a position for Tracinda on the Chrysler board. Chrysler then considered and entered into a merger with Daimler-Benz. The merger was unanimously approved by Chrysler's board and by an overwhelming vote of its shareholders. The plaintiff then contended that Defendants had made material oral misrepresentations through Eaton that the merger would be a "merger of equals." It was further alleged that the management board of the new entity would be evenly represented and that Chrysler would have a significant role in the new company as an equal partner. The Court observed that to be held liable for common law fraud and under Section 10(b) and Rule 10b-5 of the Exchange Act, plaintiff had to show reasonabe reliance on the representations. It therefore examined the claims under both common law fraud and Third Circuit case law enumerating factors for 10b-5 claims and also factored in integration/non-reliance provisions in the written agreements to examine whether any alleged reliance was reasonable. Applying a totality-of-circumstances approach, the Court held that plaintiff's reliance on any alleged oral material misrepresentations to enter a Stockholder Agreement was not reasonable and therefore could not support a finding of common law fraud. Similarly, the Court concluded that plaintiff had failed to prove violations of the Exchange Act. Accordingly, the Court entered judgment in favor of all the Defendants on: (1) the claims of common law fraud; (2) on the claims of violations of Sections 10(b), 14(a) and 20(a) of the Exchange Act; and (3) Rules 10b-5 and 14a-9 of the Exchange Act. Authored by: Raj Srivatsan 302.888.6831 rsrivatsan@morrisjames.com Share