Shareholder Representative Servs. LLC v The NASDAQ OMX Group, Inc.

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Shareholder Representative Servs. LLC v The NASDAQ OMX Group, Inc. 2018 NY Slip Op 33019(U) November 29, 2018 Supreme Court, New York County Docket Number: 651145/2014 Judge: Marcy Friedman Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [*FILED: 1] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 SUPREiVIE COURT OF THE STATE OF NEW YORK COUNTY OF NE\V YORK: COMMERCIAL DIVISION PART 60 ---------------------------------------------------------------------){ SHAREHOLDER REPRESENTATIVE SERVICES LLC, !N JTS CAPACITY AS THE REPRESENTATIVE OF THE INDEX NO. SELLING SHAREHOLDERS OF FTEN, INC., MOTION 651145/2014 DATE Plain ti ft~ MOTION SEQ. -v- THE NASDAQ Ol'vlX GROUP, INC. AND FTEN, INC., Defendants. NO. 006 DECISION AND ORDER ---------------------------------------------------------------------)( HON. MARCY S. FRIEDMAN: The follovdng e-filed documents, listed by NYSCEF document number (Motion Seq. No. 006) 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181, 183, 184, 185, 186, 188 LEA VE TO AivlEND were read on this motion for Plaintiff Shareholder Representative Services LLC (SRS) brings this action in Its capacity as representative of the former shareholders (Selling Shareholders) of defendant FTEN, Inc. (FTEN). The Selling Shareholders sold their equity interests in FTEN to defendant The NASDAQ OMX Group, Inc. (NASDAQ) in a 2010 Merger (the Merger). The terms of the Merger were memorialized in an Agreement and Plan ofIVforger, dated as of December 15, 2010 (the Merger Agr~ement). By Escrow Agreement, dated as of December 23, 2010, SRS and NASDAQ provided for the deposit of $11 million into an Escrow Account for payment of any indemnification claims arising from the Merger Agreement. Both sides claim entitlement to the balance of the Escrow Account The underlying facts of this case \Vere discussed at length in this court's prior decision and order, dated July 5, 2016, which determined SRS's motion for summary judgment (2016 NY Slip Op 31266 [U], 2016 WL 3618647 [Sup Ct, NY County 1 of 9 [*FILED: 2] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 2016] [Prior Decision].) Defendants now move, pursuant to CPLR 3025 (b), for an order granting defendants leave to file a second amended answer (proposed answer) adding a second counterclaim for breaches of representations and 'vvarranties and a third counterclaim for fraud. It is well settled that the decision \vhether to permit amendment of pleadings is committed to the discretion of the court YQtJ(, 60 NY2d CE:d~Jl\Y@1~LC.m1tr,__ CQ_,___y__Cil}: __QfN\';W __ 95 7, 959 [ J 983 J.) In general, leave to amend a pleading should be freely granted absent prejudice or surprise resulting from the delay, (CPLR 3025 [b]; Inr:,__y__()tL.rLfJ~:~.w..YmJ~" 74 NY2d 166, 170 [1989].) Jh_g_m_~'t~ __Cxjgu_nin~_{;QDJLJ;g_", It is flirther settled that the amendment should be denied if the arnendrnent "plainly lacks rnerit" (IhPHH'J..~..O:iXDX!JiJJJL(;gJ1n:,J;~Q,JI1f~, 74 Division of this Department has repeatedly held, on a motion for leave to amend a pleading, the movant "need not establish the merit ofits proposed new allegations, but [must] simply show that the proffered amendment is not palpably insufficient or clearly devoid of merit." CMBJ.!.~. omitted]; g~~cord e.g. M.W.~.LY..C2h£U, 93 AD3d 424, 425 [1st Dept 2012]; J),:ggpv_rnk, 85 AD3d at 505.) NASDAQ's prior ansv.,,'er pleaded a sole counterclaim for a declaratory judgment This counterclaim sought a declaration that SRS \Vas obligated to indemnify NASDAQ for FTEN's unpaid taxes for taxable periods ending on or prior to the Closing Date of the merger (pre-merger taxes). (Am. Answer, ii 74.) This claim was based on the existence of pre-merger tax liabilities and not on breaches of representations and warranties regarding such liabilities. The counterclaim also sought a declaration that SRS was obligated to indemnity NASDAQ for FTEN's unpaid taxes for taxable periods ending after the Closing Date (post-merger taxes). (frL, 65114512014 SHAREHOLDER REPRESENTATIVE vs. NASDAQ OMX GROUP Motion Seq. No. 006 2 of 9 Page 2 of 9 [*FILED: 3] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 ii 75.) INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 This branch of the counterclaim was based on FTEN's alleged misrepresentations in the Merger Agreement about its tax liabilities, mt) The Prior Decision granted summary judgment to SRS dismissing NASDAQ's counterclaim to the extent that it sought a declaration that NASDAQ \Vas entitled to indeinnification for post-merger taxes based on FTEN's breaches of representations and warranties. (Prior Decision, at * 7-8.) The Prior Decision also rejected SRS 's claim that NASDAQ was not entitled to indemnification for pre-merger taxes because it did not actually incur damages until after the Claim Expiration Date. (Id., at* 5-7.) In upholding NASDAQ's indemnificalion claim for pre-mt:rgt:r taxes, the court reasoned that Article IX of the Merger Agreernent, which governs indemnification, does not require damages to have been incurred prior to the Claim Expiration Date provided that the Clairn Notice is timely and contains "a reasonable estimate" of the Damages "expected to be incurred." (Id,, at* 5.) The Prior Decision did not involve a claim for indemnification for pre~merger taxes based on breaches of representations and warranties. In its proposed answer, NASDAQ now seeks to plead a second counterdaim for this relief. (Proposed Ans\ver, ii~! 77-80.) The court holds that the representations and warranties on which this counterclaim is based expired and \Vere not preserved by defendants' Claim Notice. The counterclaim is therefore not maintainable. Section 4<13 ofthe Merger Agreement (Aff. of Edvv'ard \\lipper [PL's Atty.] In Opp. [Wipper AffJ, Ex. A) sets forth certain representations and warranties concerning the tax returns and tax liabilities of FTEN and its subsidiaries (the Target Companies). The representations and warranties in section 4.13 regarding taxes include "(a) The Target Companies have timely filed when due, .. all federal incorne Tax Returns, and aH other material Ta..'( Returns that they were 65114512014 SHAREHOLDER REPRESENTATIVE vs, NASDAQ OMX GROUP Motion Seq, No, 006 3 of 9 Page 3 of 9 [*FILED: 4] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 and regulations. '''rlO its Sec.r.101~~ 9 0l r~ro-vicles~: Ln tht~ ' ',,, . su~)S1(~1ar1es. IJ2lr1.: :~'Sul~Ject to the En1ita.tior1s set fortl1 lr1 this /~::rt~~~l~~~IX; ~u~HJ ir1 this ..:\.gree111ent ... rNi\SI)/\{)j ancl its i\ffiliates (incltuiir1g the Survi\~ink1 (~:orr~oration) l'C~ollec.ti·vt.:[y N'l\Sf)/\(~] ar10' i\cccn.urt agalr1st a.11)' l)arna.ges tt1at f.N l\S.!)./\(/] 1r1c1Jrs ar1~nr1g out of or resulUr1.g frorn: .else·\vhc.r(~ (a) ax1y breac.h of a~n:/ rerJrcsentat.ion or \l·/(:trr(:u·1tJ.t co.ntalr1ed in l> rli cl ~~~L:l Purst12u1t to section (a).) t.he renrtsentations ar1d ' ~~r~xc,ei)t a~~ ;3t:! 1~Jrth in ~s~~~L}~~-~JJ_~\J!.~~.-Ciil, all of th~; represer~taUons an::.1 '\\l(;s of the J)~~t.rties set forth lr1 fthe \<1erger i\gJ"een·1er1tJ tt:rr.nin_ate an(l ext).ire~ a.11cl sha~ t cease to t::e of any tl)rc:e or etllx.~t) at 5:00 fJ.rxL (E~astern .~ri.n1e) l1J)Ot1 the d~:1t.e that is the 18 rnor1th aH l]al>illt:y of the parues hereto \Vit:h resr~ect to st1c:h l't.:J)Tf.:;Sentatio.ns (including for ind.e.n1nification lor breach of ~~U(~.~-1 represern.atio:ns and \Var:rar1ties tu1ch~r u·u s ./\K~ti~:~~s~~~LX}~ sha] t thert;t1r)on ~)e;u.ish.ed, It is thz~ express lntent crf the parties that, \~xc,~pl as s~~t i~Jrth in ~L~~s~l1~~:!11._;2~:.~2~~fl~~L i1otV· any ar~~pLicablf-.~ st.ah.rte of [i.n1itatior1s~ tlIJon the (~]a.i.n1 E~xr1ira.t.Ion [)ate f§t}i·~45llG14 ~~ot!on S~~q. S.H.t\~~EHt)LDER. REPRt:~~~~:NT;:.\ThlE \··~~L N.:.\SDAC~ {)~~X No_. t)(~t1 4 of 9 GRf)UP arr1or1g [*FILED: 5] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 c.]ai.n1s f(.)r ir1df.:-:1T1r1ificatio1} c.2.u1 be ~:l assertt~d by [0-~f /\ SI)i\(~] l1r1der [the .rv~!erger i\grt~ernent] . .,~ r10 fttrth.t=..~r 2012. Sect.ion~1 9.03 (b) .ar1G' 9.06 of the I\.::!erger ~~r~JotYvithstanding at\ytl~d.n.g ·prior to the in thj~1 .S~~~~JiQH __~~~-\t} to (~lain·1 :E~X}Jira.tlor1 f)~:tte,, [N/\SI)/\..(~J th.e corn.ra.ry, or [SH._S]., as i-f~ (:Ia.itr1 T~-otice to [N-/\SI)_/\.(~] or [S:I~_S]~: as ar1JJlic.a.ble or bus du.1) rleEi/ered a notic.e of ·~rax (~ontroi/ersy to [S.~~-S] ... , t.her1 the sr>eci±lc intierY1r1iflca.tior1 clairn set fortl1 in such c:~ain·1 T\J.otice (to the extent of the rnatter speci·fie~.i .h1 the (~lai.n1 N·odce) or any iIH.ie1-r1r1if1cat1or1 ch:tirn resulting fro:rn the ·rH.x C.\)ntrrf\l~:_~r~~y- shaH stu~·vi\/f.~ tht: (~1airn E:.}zph""'~:ttion I)ate and. shall :not be extir1guished the1\~l))l ur1til resohJtion of the rr1atter srH.~ci.f-l~~d 1n the (~lain-i or the 'T'ax (~o.nlTO\tersy· in (1Cc.ordanc'~ \·'lit11 this In no evern~ s:haJl /\grcernent at1cl the ir1de111r1ificat1{)11 c.lain·1 by· ['"Ni\SfJi\(~J, reg~::.rcl]ess of'\.\rhether 1ts exI>iration 1s cleiay{:d. rn1rstJant to this Sect~.g~Q. . ~~.J};i(Q):: create ar1y· LiabiLity· for f)arn.a.ges exc(~1:1t to th.e extent ~Jf the a.rnotn-1t tht:n. a'-/ai~al"::le in the I~'..scr::.YV·/ .i\.c.(:cn.n1t. ''.~ [N·l~SI)./\(~j 1 • ~§~~~.~~1is~trt~~~~~~L1 or ~~L~~s~t!~~~n.. ~?~J!;f:; as arJIJncable; Oi) tal·dr1g into ac.c.ou~nt tl1e irtfiJr.n1atio.n ~:~~/f:~i iable to ['N./\.SI)i~(~] at such·H.:, a renso.r1al}ly detailed clesc.rir~t.ion of the facts arid circt1.rnstances ~~.rv·.u1g rise to tb.e a1 ~eged brt:ac.b of suc.h reprf-.~serrtation:, V./arrar1ty or c:..Yvt·11ant or nfher lr1d(:rr1r1ifJabI(: 111atter describt~d in ~S~S~1i~1!1 ~~~~~LL or ~~~~~~~1i~~ff~tS!.~~€~~~-" as a1)_plicat~le; al1d (iii) takil1g 1r1t.o accotu-rt the;1T.naticn-1 to rN-_i\.S[)i\(~] at such tin·1e:- a .n.::;:tso11abi:y deta..ilcd clesc.r~r~tio.n o(; ~n·t::.i a reaso.nablt: estirr1ate of the total 1 Sect~on 9.02~ not n.~le\..-ant here~ set~ fbrt.h the S(:Jhng Sharehokh:)r3~ r~ght of·b-~de~r:.n~fication th:s_n1 N'ASI)i\(~ and hs. and ~frorn _t-"'TEN. fbr any I)a.rnages re~~uhing fi·orn br~acbt:s h:-l l\·J..:\S))i-\{~ of an:y repre~~entat:ion~{ and or any ccn/enants ~n tht~ \.:ferger _;\.greernent. ~;ubsidiades ,~·/::irr~::.nti0s 65·:·~45l2Gi4 SH.~\H~~HtJLD~~R REPRESENT.~\Th/E V$. N.~SDAC~ ()~~X ~3ROUP ~~1otk~n t~t~q. No . O::.H.~ 5 of 9 [*FILED: 6] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 al11ount of: the I)axnages inc.urred or exr~ected to be lnc.urred by fJ\L~\S[l/\(~~~ as ~1 dir{~;ct r~~suit of stH.:h aUeged breach or other i_nclern.nifiable .n1atter clesc.ribed in ~L~~~~!j~?IL2,::_~2I or SY~~ti~~:n__ ;~_,:~!~~~ as ai)p1ic.a.b1e.·)' Closing Date. Defendants contend that the Claim Notice also "contained'' NASDAQ's claim that FTEN breached representations and warranties pursuant to section 9,01 (a), (Defa' Reply Memo., at 9~ 10 [emphasis omitted].) In arguing that the Claim Notice asse1is a claim for indernnification not only for tax liabilities, but also for breaches of representations and warranties regarding those tax liabilities, defendants selectively rely on a statement in the Clairn Notice that Ni\.SDAQ's damages were inctmed as a result of breaches of representations regarding taxes. (I.g_,, at 10.) The statement, however, provides in foll: "Although these Damages were also incurred as a result of breaches of certain representations in respect of Taxes set fmih in Section 4.13 of the Merger Agreement, vvhich would be indemnified against under Section 9.01(a) of the 1'.tforger Agreement, Section 9.0l(e) provides that to the extent an indemnification claim can be made under both Sections 9.0l(a) and 9.0l(e), the claim shall first be indemnified against under Section 9.01(e)." (Claim Notice, at 3~4.) The Claim Notice thus, by its terms, asserts a claim for indemnification pursuant to section 9.01 (e) for "Taxes of the Target Companies," not a claim for indernnification 651145/2014 SHAREHOLDER REPRESENTATIVE vs. NASDAQ OMX GROUP Motion Seq. No. 006 6 of 9 Page !i of 9 [*FILED: 7] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 pursuant to section 9. 0 l (a) for "any breach of any representation or warranty contained in Arli_~kJV .... "2 Moreover, the Claim Notice fails to comply with section 9.06 (quoted above), as it does not set forth the information required by that section-narnely, the specific representations and warranties of section 4.13 that are alleged to have been breached, the circumstances giving rise to the breach, and the damages. As this Claim Notice therefore cannot serve as the basis for the counterclaim for breaches of representations and vvarranties, and as no other notice was served prior to the Claim Expiration Date, "all liability" with respect to the representations and wmTanties has been "extinguished" pursuant to section 9.03 (a), 3 Defendants' fraud counterclaim is also baITed by section 9.03 (a) of the Merger Agreement. Defendants' fraud claim is based on the representations and warranties made in section 4.13 of the J\.forger Agreement. Specifically, defendants' proposed answer alleges that "[t]he Section 4. 13 warranties were false because FTEN did owe sales tax for its sales made in Chicago, New Jersey, New York, and Texas," and that "FTEN's warranties, in Section 4.13, were intended to deceive Nasdaq and to induce Nasdaq to purchase FTEN at the sales price of approximately $110 million," (Proposed Answer, i14i 82, 86.) The proposed answer also alleges that "Nasdaq relied upon FTEN's warranties, in Section 4. 13, that FTEN did not owe sale taxes. 2 ln summarizing the Claim Notice in the Prior Decision, the court stated that the Claim Notice asseited a claim for indemnification pursuant to section 9.01 (e} of the :tv1erger Agreement for "incurred Damages in respect of unpaid sales Taxes .... " The court also stated that "[a]ltemative!y, the Claim Notice asserted an indemnification claim for these Damages under Merger Agreement§ 9.0l (a)." (Prior Decision, at* 3, 8.) As discussed above, however, no claim had been made for indemnification for pre-merger taxes based on breaches or representations and warranties. This statement as to the alternative claim was therefore not necessary to the Prior Decision. In denying NASDAQ !eave to amend to add a second counterclaim for indemnification for pre~merger taxes based on breaches ofrepresentations and 'vVammties regarding those ta.,-xes, the court notes that NASDAQ already has a viable pending counterclaim for a declaratory judgment that it is entitled to indemnification for pre~merger tax Habiliiies. NASDAQ claims that it will be entitled to statutory interest on the pending counterclaim but explains that it brought the motion for leave to amend in order to "eliminate any possible question" over its entitlement to such interest (Defs.' Memo, In Supp., at 9.) 3 651145/2014 SHAREHOLDER REPRESENTATIVE vs. NASDAQ OMX GROUP Motkm Seq. No. 006 7 of 9 Page 7 of 9 [*FILED: 8] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM NYSCEF DOC. NO. 189 INDEX NO. 651145/2014 RECEIVED NYSCEF: 11/30/2018 If the Selling Shareholders had not made this representation, Nasdaq would not have purchased FTEN at the agreed-upon purchase price." (Id., ii 87.) Defendants correctly assert that the Merger Agreement provides that indemnification shall be the sole rernedy for breach of any representation or waiTanty, except in the case of "actual fraud" with respect to an Article IV representation or warranty. (Defs.' Reply Memo., at 10~ 11 [internal quotation marks omitted].) Section 9.05 provides that except in the case of such actual fraud, NASDAQ's relief against various ind]vidual representatives ofFTEN shall be limited to indemnification under Article IX or recourse to specified accounts. Section 9.10 further provides, in the pertinent pmi: "Exclusive Remedy. Except in the case of actual fraud (i.e,, an intentional misrepresentation in bad faith or ·with rnalicious intent of a material fact) by a member of the Knowledge Group 4 with respect to a representation or warranty in ArH~J~JY of this Agreernent, the right of each party hereto to assert indemnification claims and receive indemnification payments pursuant to this t\ni.fl~J:X shall, from and after the Effective Time, 5 be the sole and exclusive right and remedy exercisable by such paiiy with respect to any breach by any other party hereto of any covenant, representation, warranty, or othenvise urn:k~r this Agreement .... " As defendants also correctly assert, the Merger Agreement does not require a Claim Notice for claims asserting actual fraud. (Defs.' Reply Memo., at 11.) Sections 9.03 (b) and 9.06 of the Merger Agreement, quoted above, provide for a Claim Notice only for indemnification claims specified in section 9.01, also quoted above. These provisions do not address the timeliness of defendants' fraud clairn. Contrary to defendants' apparent contention (see Dds.' Reply Memo., 4 "Knowledge Group" is a group of individuals defined in section 1.0 l of the Merger Agreement. 5 "Effective Time" is the date and time at which the Merger shali become effectlve·-··-l.e., "the date and time that the filing ofihe Certificate of Merger has been accepted by the Secretary of State of the State of Delaware, or at such later time as is specified in the Certificate of I\.forger." (Merger Agreement, §§ LO 1, 2.03 .) 65114512014 SHAREHOLDER REPRESENTATIVE Motion Seq. No. 006 vs. NASDAQ OMX GROUP 8 of 9 Page 3 of 9 [*FILED: 9] NEW YORK COUNTY CLERK 11/30/2018 10:53 AM INDEX NO. 651145/2014 NYSCEF DOC. NO. 189 at 10~11), RECEIVED NYSCEF: 11/30/2018 although sections 9.05 and 9.10 ext:mpt actual fraud clairns fro.m the exclusive remedy of indemnification, those sections do not affect the limitations period for claims, including fraud claims, based on breaches of representations and wcmanties. That limitations period is set forth in section 9.03 (a), which provides in pertinent part: "Except as set forth in S~~c;_t_i~\!J..2,.QJJh} [i.e. unless a Claim Notice has been delivered setting forth an indemnification claim], all of the representations and \varranties of the parties set forth in this Agreement terminate and expire, and shall cease to be of any force or effect, at 5:00 p.m. (Eastern Time) upon the date that is the 18 month anniversary of the Closing Date (the "qJ1jmJ~.~dn~lh2n Date"), and all liability of the parties hereto with respect to such representations and wan-anties Un9.l.H~li.TI£ for indemnification for breach of such representations and warranties under this Art!.QL~ IX), shall thereupon be extinguished." (emphasis added.) By its terms, section 9.03 (a) extinguishes "all liability" vvith respect to breaches of representations and warranties, and not only liability for indemnification for such breaches. It is undisputed that the fraud counterclaim is based on the Article JV representations and \Varranties, and that the fraud claim was not asserted before these representations and wammties "terminate[d]" and liability based upon thern was "extinguished." NASDAQ's proposed third counterclaim for fraud is therefore not viable. It is accordingly hereby ORDERED that the motion of defr:ndants NASDAQ Ol\/lX Group, Inc. and FTEN, Inc. for leave to file the second amended answer is denied. This constitutes the decision and order of the court ..··: _..-·1 .~.-/"....· ·:~ ./<:/~··'· 11/2912018 ................................................................................................ --.--.-.~~~~ """""l:Z. ~'''.:::t:Ltf_:?::,,.i~:·::_(~:'!::{~~~:::~:.~:~~. . . . . . ~~~~~~~~~~~~~~ DATE CHECK ONE: . APPLICATION: CHECK IF APPROPRIATE: j"")("'i i ....... [_·_·] CASE DISPOSED i -: i ~-----·f ~ MAR9f S'.::fR!EDMAN, J.S.C. / ,/ NON-FINAL driPosmON ! : GRANTED IN PART GRANTED SETTLE ORDER L.. . j SUBMIT ORDER INCLUDES TRANSFER/REASSIGN L.".! FIDUCIARY APPOINTMENT l-·······: 651145/2014 SHAREHOLDER REPRESENTATIVE Moti!:m Seq. No, 006 V$. NASDAQ OMX GROUP 9 of 9 D D OTHER REFERENCE Page 9 of 9