Haynes and Boone Wins Texas Supreme Court Ruling on Demand Letter in Derivative Case
By Andrew Longstreth
May 27, 2009
Note to plaintiffs attorneys thinking of filing a derivative suit in Texas: Make sure your demand letter to the board has some meat to it. In a case of first impression, the Texas Supreme Court ruled last Friday that a one-page demand letter that Coughlin Stoia Geller Rudman & Robbins sent to the board of Lancer Corporation did not meet the standards the state's legislature set for launching a derivative suit.The case began in December 2005, when Coughlin Stoia sent a demand letter (available here) to the Lancer board, asking it to reject a $22-per-share buyout offer for the company in light of a "superior" $23-per-share bid. The firm's suit alleged that Lancer's directors breached their fiduciary duty by accepting the lower offer. The directors, represented by a team from Haynes and Boone, argued at both the trial and intermediate appellate level that the plaintiffs' demand letter was not up to snuff. Both courts denied their motions.
But in an 8-to-0 ruling, the Texas Supreme Court agreed with Haynes and Boone's arguments. The court found several problems with the Coughlin demand letter, beginning with its failure to identify a client. ("[A] demand from Warren Buffett may have different implications than one from Jimmy Buffett," the ruling notes.) The court also found that Coughlin's letter wasn't very specific. "In a merger like this, involving several hundred million dollars, one cannot say whether the $23 offer was superior to the $22 offer without knowing a lot more," the ruling says.
On Wednesday we spoke with Nick Even, who was on the winning Haynes and Boone team (along with George Bramblett, Jr., Lamont Jefferson, and Debbie McComas). He told us that the Texas legislature revised the standards for demand letters back in 1997 in an effort to make the state more friendly to businesses. With this decision, Even said, "the Texas Supreme Court has recognized that."
Randall Baron of Coughlin Stoia told us the ruling doesn’t amount to much more than additional technical requirements for derivative suits. "Not a big deal," said Baron.
