Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 1 of 9 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA JAMES RYAN, DAVID ALLEN AND ) RONALD SHERMAN, on Behalf of ) Themselves and All Others Similarly Situated,) ) Plaintiffs, ) ) v. ) ) WILLIAM WALTON, JOHN FIRESTONE, ) Civil Action No. 1:10-CV-00145 (RMC) ANTHONY GARCIA, LAWRENCE ) HEBERT, LAURA VAN ROIJEN, ) BROOKS BROWNE, ALEX POLLOCK, ) MARC RACICOT, ANN BATES, ) EDWARD MATHIAS, ROBERT LONG, ) JOAN SWEENEY, ALLIED CAPITAL ) CORPORATION, ARES CAPITAL ) CORPORATION and ARCC ODYSSEY ) CORPORATION ) ) Defendants. ) DEFENDANTS EMERGENCY MOTION TO STAY THIS ACTION AND REQUEST FOR COURT CONFERENCE BASED ON ORDER OF MARYLAND COURT PRELIMINARILY APPROVING SETTLEMENT AGREEMENT Defendants in this putative class action respectfully move this Court on an emergency basis to stay all proceedings in this action. 1 Defendants further request a conference with the Court at the earliest time possible in advance of the hearing currently scheduled for March 24, 2010 to discuss whether this action should be stayed in light of the settlement of the same claims in the consolidated action in Maryland and the order preliminarily approving that settlement issued by the Circuit Court for Montgomery County, Maryland ( Maryland Court ) on March 18, 2010. As discussed in earlier submissions to this Court, there are currently pending in three separate jurisdictions (this Court, the Superior Court for the District of Columbia, and the 1 Pursuant to LCvR 7(m), counsel for the Allied Defendants have met and conferred with counsel for plaintiffs regarding this Emergency Motion and the potential for resolving the matter without Court intervention. The parties were unable to reach agreement. Defendants Ares Capital Corporation and ARCC Odyssey Corporation support the relief requested in this motion.
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 2 of 9 Maryland Court) three separate but nearly identical putative class actions challenging the proposed merger between defendants Allied Capital Corporation ( Allied ) and Ares Capital Corporation ( Ares ). In each of the three actions, the plaintiffs purport to represent the interests of the same class of Allied shareholders, assert claims that are similar in all material respects, and seek the same relief, including a preliminary injunction barring the Allied shareholders from voting in favor of the proposed merger on March 26, 2010.2 On March 17, 2010, defendants in the Maryland action the same defendants in this action entered into a Stipulation of Settlement (the Settlement Agreement ) with the plaintiffs in that action to settle all claims by all Allied shareholders that relate in any way to the proposed Allied-Ares merger. See Third Decl. of Todd Hettenbach, Ex. 1 ( Settlement Agreement ). As consideration for the settlement, Ares and Allied filed a Proxy Supplement that included additional disclosures to Allied s shareholders on a variety of topics, including (1) the relationship between Allied, Ares, Bank of America/Merrill Lynch, and Sandler O Neill; (2) Allied s exploration of strategic alternatives; (3) the financial analyses performed by Bank of America/Merrill Lynch and Sandler O Neill; (4) the offers by Prospect Capital Corporation ( Prospect ); and (5) negotiation of certain terms of the merger agreement. See id. at 6. The plaintiffs in the Maryland action concluded that those supplemental disclosures, when coupled with the previous disclosures, will permit Allied s shareholders to make a fully informed decision on the proposed merger. Id. at 7. The Settlement Agreement designates a Settlement Class consisting of all persons or entities who held, directly or indirectly and beneficially or of record, shares of Allied common stock... at any time from June 1, 2008 through the date when the Allied-Ares merger becomes 2 See Allied Defs. Opp. to Mot. for Prelim. Inj. & Cross-Mot. to Stay ( Defs. Mem. ), at 39-45 (February 5, 2010); Allied Defs. Reply to Pl. s Opp. to Cross-Mot. to Stay & Resp. to Pl. s Supp. Mem. ( Defs. Reply Br. ), at 3, 7, 9 (March 4, 2010). 2
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 3 of 9 effective. Id. at 8. The Settlement Agreement settles all claims that the Settlement Class brought or could have brought including claims based on federal law challenging the merger of defendants Allied and Ares. Id. at 9-10. 3 The intent of the Settlement Agreement was to reach a single, comprehensive settlement with all Allied shareholders affected by the merger. The parties filed the Settlement Agreement, along with a request for an order preliminarily approving the settlement, with the Maryland Court on March 17, 2010. In considering the request, the Maryland Court believed it appropriate to provide plaintiffs in this action and the action pending in D.C. Superior Court notice and an opportunity to be heard on whether the Maryland Court should preliminarily approve the Settlement Agreement. Accordingly, the Maryland Court ordered defendants to provide plaintiffs in this action and the action pending in D.C. Superior Court with the Settlement Agreement and proposed order preliminarily approving the settlement, and to notify them of the opportunity to be heard through written submissions and a hearing on March 18, 2010. On March 18, 2010, the Maryland Court held a lengthy hearing on the Maryland parties request for an order preliminarily approving the settlement. In advance of the hearing, the plaintiffs in this action and the D.C. Superior Court action submitted in writing the grounds for their opposition to entry of the order. Plaintiffs in this action and the D.C. Superior Court action also appeared at the nearly two-hour hearing to orally recite the grounds for their opposition. 3 As class counsel in the Maryland action informed the Maryland Court, those plaintiffs agreed to the terms of the Settlement Agreement only after conducting discovery and assessing potential claims with the assistance of a financial expert that they retained. The Settlement Agreement recognizes Ares consent under the terms of the Merger Agreement to Allied s intention to declare a special dividend of $0.20 per share to Allied shareholders (with a total value of approximately $36 million) in connection with approval of the merger transaction, and the plaintiffs conclusion that the special dividend will provide Allied s shareholders with tangible additional consideration if the merger is approved. Id. at 7. Following the announcement of this dividend, Prospect Capital, a company that had expressed interest in making a bid for Allied, announced (on March 5, 2010) that it no longer had any interest in doing so.
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 4 of 9 After the parties to all three actions had the opportunity to be heard, the Maryland Court issued a Preliminary Approval of Class Action Settlement and Revised Scheduling Order. See Third Decl. of Todd Hettenbach, Ex. 2 ( Maryland Order ). The Maryland Order certified the Settlement Class of Allied shareholders as defined in the Settlement Agreement as a non-opt out class, and appointed the Maryland plaintiffs as Settlement Class representatives. See id. at 2, 3. The Maryland Court further found that: the settlement appears to be the product of serious, informed, non-collusive negotiations ; the settlement does not improperly grant preferential treatment to Settlement Class representatives or segments of the Settlement Class ; and the settlement falls within the range of possible approval. Id. at 3. Based on those findings, the Maryland Order preliminarily approved the Settlement Agreement as fair, reasonable, and adequate to the members of the Settlement Class. Id. The Maryland Order also established procedures and deadlines in advance of a settlement hearing scheduled for July 29, 2010, at which the Maryland Court will determine whether to issue a final order and judgment approving the class action settlement. Id. at 3-4. The Maryland Court recognizes that it is without authority to enjoin this Court from proceeding with this action despite the preliminary approval of the Settlement Agreement. Nevertheless, pending further consideration of the Settlement Agreement at the settlement hearing, the Maryland Order provides that all members of the Settlement Class, and any of them, to the extent permitted by law, are barred and enjoined from asserting, commencing, prosecuting, assisting, instigating or in any way participating in the commencement or continuation of prosecution of any action or other proceeding, in any form, asserting any claims, either directly, representatively, derivatively, or in any other capacity, which have been or could have been asserted, or which arise out of, or relate in any way to, the Acquisition, the Strategic Alternatives and the evaluation thereof, the Merger Agreement, the Prospect Offers, the Registration Statement, the Preliminary Proxy Statement, the Definitive Proxy Statement, the Proxy Supplement, the 4
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 5 of 9 Supplemental Disclosures, or any [related] public filings and/or other disclosures or statements (whether written or oral) made by Allied and/or Ares or their agents... Id. at 5. The Maryland Order further provides that any member of the Settlement Class who wishes to object to the settlement may do so only in the Maryland Court under the procedures specified in the Maryland Order; and that any member of the Settlement Class who fails to do so shall have waived the right to object (including any right of appeal) and shall be forever barred from objecting to the settlement. Id. at 8. The provisions of the Maryland Order plainly cover the plaintiffs in this federal action. 4 Should the Maryland Court finally approve the settlement, all of plaintiffs claims here will be barred. See Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367 (1996) (federal courts must give preclusive effect to state-court settlements even when claims settled include claims within the exclusive jurisdiction of the federal courts); see also Nottingham Partners v. Trans- Lux Corp., 925 F.2d 29, 34 (1st Cir. 1991) ( [A]s a matter of federal law, a state court can approve and enforce a settlement which requires a party to release claims... under exclusive 4 Indeed, the allegations, the parties, and the relief sought in this action are nearly identical to those in the Maryland action. First, the allegations in both actions are the same. Both sets of plaintiffs allege that 1) Allied and the individual defendants failed to negotiate sufficient consideration from Ares ( compare Am. Compl. 14-28 with Consolidated Amended Class Action Complaint, In re Allied Capital Corporation Shareholder Litigation, 25-27, 35-43, 61 (Md. Cir. Ct. Feb. 1, 2010)); (2) Allied and the individual defendants refused to give proper consideration to Prospect s competing merger solicitation ( compare Am. Compl. 29-44 with Md. Compl. 28-33, 62-70); and (3) the joint proxy statements issued by Allied and Ares contained mis-statements and/or omissions ( compare Am. Compl. 49-87 with Md. Compl. 44-53, 74-76). Second, the parties in the two actions are virtually identical. The defendants in both actions are the same, i.e., Allied and its current directors, Ares, and ARCC Odyssey; and the plaintiffs in both actions are the same, i.e, an identical putative class of Allied public shareholders in both actions. Compare Am. Compl. 93 ( Plaintiffs bring this action as a class action... individually and on behalf of the public shareholders of the Company, who are being and will be harmed by Defendants actions. ) with Md. Compl. 77 ( Plaintiffs bring[] this action as a class action... individually and on behalf of all holders of Allied Capital common stock who are being and will be harmed by the conduct of the Individual Defendants as herein alleged. ). Third, plaintiffs here and the plaintiffs in the Maryland action are seeking the same relief. Both sets of plaintiffs argue that they are entitled to an injunction prohibiting the consummation of the merger ( compare Am. Compl. 108, 112, 120, 124(D) with Md. Compl. 82, 86, 87(C)); and both sets of plaintiffs are seeking a declaration that the merger agreement is unenforceable, a grant of an injunction requiring the individual defendants to properly exercise their fiduciary duty, establishment of a constructive trust, and an award of attorneys fees. Compare Am. Compl. 124 with Md. Compl. 87.
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 6 of 9 jurisdiction federal statutes even though the state court could not adjudicate claims arising under such statutes. ) To avoid duplicative litigation and inconsistent judgments, this Court should grant a stay pending the Maryland Court s decision on whether to grant final approval of the settlement of plaintiffs claims. See Gabelli v. Sikes Corp., 1990 WL 213119, at *5 (S.D.N.Y. Dec. 14, 1990) ( [A] stay is proper in the instant action because of the imminent possibility that the Florida courts will dispose of the exclusive federal issue by approving the settlement and its attendant releases. ); In re RC2 Corp. Toy Lead Paint Prods. Liability Litig., 2008 WL 548772, *5 (N.D. Ill. Feb. 20, 2008) (granting stay pending state court consideration of proposed settlement when the state court s approval of the settlement will have a substantial effect on some or all of Plaintiffs claims before this Court ). Should the plaintiffs object to the terms of the Settlement Agreement, they can return to the Maryland Court where they first brought their claims against defendants to voice those objections. Should the Maryland Court approve the settlement, however, the plaintiffs claims here would be forever barred. Under these circumstances, a stay will eliminate the threat of duplicative, piecemeal litigation and permit the Maryland Court to fully and finally resolve the class s claims. Plaintiffs in this action have no legitimate grounds for objecting to a stay of this action. As discussed in detail in earlier submissions, the named plaintiffs in this federal action first brought their claims in Maryland, stating unequivocally that the Maryland Court was their chosen forum and the best forum in which to resolve all challenges to the Allied-Ares merger. 5 Plaintiffs in this action and their counsel successfully moved to have all of the Maryland cases transferred to the Maryland Court; and plaintiffs counsel also moved to be appointed lead 5 See, e.g., Defs. Mem. at 1, 4-9; Allied Defs. Opp. to Mot. for Expedited Discovery ( Defs. Opp.), at 1-2, 5-8 (February 3, 2010). 6
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 7 of 9 counsel for that consolidated litigation. 6 Just days after losing their bid for appointment as lead counsel, and after the Maryland Court consolidated all of the cases (the relief the plaintiffs insisted should occur), in a blatant effort to forum shop, counsel for the plaintiffs dismissed two of their three Maryland cases and re-filed them in this Court, effectively abandoning the very forum they insisted should hear all the cases. Plaintiffs counsel before this Court were perfectly happy to proceed in Maryland until different counsel was appointed by the Maryland Court to serve as lead counsel. Unable to control the consolidated action, counsel for the plaintiffs decided that they would hedge their bets by keeping one of their three actions in the Maryland Court (where it is part of the settled cases in that forum), while moving the other two actions to federal court, where they hoped to gain control of events including in particular, control over any fees awarded. It is difficult to imagine a more blatant misuse of this Court s time and resources. Thus, for the reasons stated, defendants respectfully request that this Court enter an order staying all proceedings in this action pending the Maryland Court s consideration of whether to approve the settlement in the parallel class action. Dated: March 18, 2010 Respectfully submitted, See Defs. Mem. at 1, 5-6; Defs. Opp. at 1, 6-7. /s/ Thomas F. Connell Thomas F. Connell Todd Hettenbach WILMER CUTLER PICKERING HALE and DORR LLP 1875 Pennsylvania Ave., N.W. Washington, DC 20006 (202) 663-6000 Counsel for Defendants Allied Capital Corporation, William L. Walton, Ann Torre Bates, 7
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 8 of 9 Brooks H. Browne, John D. Firestone, Anthony T. Garcia, Lawrence I. Herbert, Robert E. Long, Alex J. Pollock, Marc F. Racicot, Joan M. Sweeney, Laura W. Van Roijen, John M. Scheurer, Edward J. Mathias [.]
Case 1:10-cv-00145-RMC Document 29 Filed 03/18/10 Page 9 of 9 CERTIFICATE OF SERVICE I, Thomas F. Connell, hereby certify that on this 18th day of March 2010, I caused to be served a copy of the foregoing through the Court s ECF filing system to the following: Donald J. Enright FINKELSTEIN THOMPSON LLP 1050 30th Street, NW Washington, DC 20007 Phone: (202) 337-8000 Email: denright@finkelsteinthompson.com Attorney for Plaintiffs Jacqueline W. Perrell PROSKAUER ROSE LLP 1001 Pennsylvania Avenue, NW Suite 400 South Washington, DC 20004 Phone: (202) 416-5821 Email: jperrell@proskauer.com Attorney for Defendants Ares Capital Corporation and ARCC Odyssey Corp. A copy of the foregoing was also sent via electronic mail to the following: Donald J. Enright, Esq. Michael G. McLellan, Esq. Finkelstein Thompson LLP The Duvall Foundry 1050 30th Street, N.W. Washington, DC 20007 and Juan E. Monteverde, Esq. Ian T. Matyjewicz, Esq. Levi & Korsinsky, LLP 30 Broad Street, 15th Floor New York, New York 10004 Attorneys for Plaintiffs /s/ Thomas F. Connell 9