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Civil: Indiana Court of Appeals Affirms Dismissal of Biomet Derivative Action
Posted in Litigation

Today, the Indiana Court of Appeals affirmed a trial court’s dismissal of a derivative action filed by two former shareholders of Biomet, Inc.  In Long v. Biomet, Inc., the Court of Appeals concluded:  (1) the shareholders lost standing to maintain their derivative action once the sale of all of Biomet’s shares to, and the company’s merger with, a new owner was completed; and (2) the former shareholders’ rights, if any, had to be vindicated through the appraisal procedure set forth in the dissenters’ rights statute, Indiana Code section 23-1-44-8.

The two former shareholders in Long filed derivative actions in September 2006, alleging that Biomet directors and officers had breached their fiduciary duties by participating in improper stock option backdating.  Shortly after the suits were filed, Biomet announced its intention to sell the company to private-equity investors.  Before the sale was completed, a special committee of Biomet’s board of directors announced its conclusion that option backdating had occurred, but that the derivative actions were not in the best interests of the company.

The shareholder-plaintiffs amended their complaint to allege that the defendants were breaching a fiduciary duty by “seeking to indemnify themselves by selling the company at an inadequate price.”  By the end of September 2007, all of Biomet’s public shareholders – including the two plaintiffs – were cashed out at $46 per share. 

Once the sale and merger were complete, the defendants argued that the shareholder-plaintiffs no longer had standing.  Judge Darden, writing for the panel in Long, concluded that the Indiana Supreme Court’s 1977 decision in Gabhart v. Gabhart, 370 N.E.2d 345 (Ind. 1977), foreclosed the former shareholders’ action.  Under Gabhart, the panel concluded, Biomet’s assets and liabilities were all transferred to the surviving corporation by operation of law.  This included any causes of action.

The panel also concluded that Gabhart’s “equitable limitation” on this principle – arising when each shareholder of the surviving corporation “had participated in the wrong complained of” or when the merger “is effected solely for the purpose of shielding wrongdoers from liability” – did not apply.  As a result, the former shareholders no longer had standing to assert their claims.

The court in Long also concluded that, to the extent the former shareholders had a claim, it had to be addressed pursuant to the appraisal process in the dissenters’ rights statute, Indiana Code section 23-1-44-8.  The court reasoned that, at base, the plaintiffs’ derivative action was an attempt to “seek additional compensation for [their] shares.”  In other words, the question was whether the $46-per-share price paid to the plaintiffs properly reflected the value of any claim (as an asset transferred to the Buyer) by Biomet against its officers and directors.  That, the court concluded, was a question that had to be addressed through the statutory appraisal process.



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