How one Ohio lawsuit could quell legitimate shareholder activism in the state 

A pending legal decision is expected any day now that could alter the business climate for publicly traded companies in Ohio. 

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The litigation in Franklin County, Ohio Court of Common Pleas concerns alleged violations of the state’s so-called “anti-greenmail” statute — Ohio Revised Code Section 1707.043 — and raises issues about Ohio state securities law. 

The Ohio Division of Securities defines “greenmail” as a “manipulative practice” of “staging a hostile takeover bid in order to manipulate a firm into repurchasing its own common stock at a premium above current [market] price.” 

Ohio’s anti-greenmail statute aims to thwart greenmail campaigns and prevent manipulative practices by an entity that proposes to acquire control of an Ohio corporation.  

Specifically, the statute authorizes Ohio corporations and their shareholders “to recover any profits realized by a person from the sale of the corporation’s shares when the shares are sold within 18 months after such person proposed to acquire control of the corporation or publicly disclosed the intention or possibility of making such proposal,” the statute says.

The securities case in question was brought back in 2021 by Robbins Geller Rudman & Dowd LLP, a California plaintiff firm representing the Corpus Christi Firefighters’ Retirement System against Macellum Capital Management and Ancora Holdings, the Ohio-based asset manager that recently made news by purportedly nominating former Ohio Governor John Kasich to the board of Norfolk Southern. 

The case stems from Ancora and Macellum’s active shareholder engagement in 2020 with Columbus, Ohio-based Big Lots Inc., one of America’s largest home discount retailers.

The lawsuit claims that Macellum and Ancora engaged in an unlawful greenmail campaign designed to affect the market trading of Big Lots’ publicly traded common stock. The Macellum/Ancora defendants did so to increase the profits they received, or might receive, from publicly proposing to acquire control of Big Lots, which they did on March 6, 2020, and then selling their Big Lots stock at inflated prices within 18 months thereafter, which commenced in August 2020, the lawsuit says.

“Ohio Revised Code Section 1707.043 outlaws precisely this type of greenmailing,” allege the plaintiffs, who seek a jury trial. “The Macellum/Ancora defendants violated Ohio law and must now disgorge the profits they derived from their unlawful conduct.”

Bunk, say numerous sources. 

Under the definition of greenmailing, experts say there was no greenmail in this case because Ancora and Macellum did not attempt to take control of Big Lots, and Big Lots did not buy shares from Ancora and Macellum at a premium above market price. 

Rather, Ancora and Macellum submitted mostly independent director nominees for shareholder consideration and all of Ancora and Macellum’s transactions occurred on the open market.

This case involves “a plain vanilla proxy contest” in which the defendants’ goal was to persuade management to sell and lease back some of its properties, which they thought would help Big Lots’ financial position, according to Phillip Goldstein, a co-founder of Bulldog Investors, a principal of the firm, and its lead investment strategist.

“As anyone familiar with securities law knows, greenmail occurs when a corporation buys the shares of a “greenmailer” at a premium to the market price to avert a takeover threat,” Goldstein told Financial Regulation News. “As far as I know, that did not occur here, and no one has alleged that the defendants ever proposed to sell their shares to Big Lots.”

Goldstein also pointed out that the state’s Anti-Greenmail statute does not define a manipulative practice, “but in my opinion, it would require some sort of deception, which has not been alleged,” he said.

On the contrary, the defendants seem to have been candid about their plans, said Goldstein.

“And, without a definition, no one would know what is legal or illegal, which seems very unfair,” he said. “How can you punish someone for an action that he had no reason to think was improper?”

In fact, other sources also think that the Ohio statute may be written too broadly, and therefore provided an opening for just such a lawsuit to be filed. 

And because the activists sold their Big Lots shares within 18 months of purchasing them — a time restriction that’s part of the statute — the plaintiffs also thought they had some foundation for filing a lawsuit.

The Ohio Department of Commerce’s Division of Securities, for instance, filed an amicus brief stating that Section 1707.043 was enacted for the specific purpose of preventing a particular manipulative practice called “greenmailing.”

“The legislature intended that the statute be applied to prevent only this manipulative practice,” the Division of Securities said. “Construing this statute beyond its stated purpose and its intended scope would very likely chill healthy market behaviors that are neither manipulative nor greenmail by design, behaviors like good faith proxy campaigns that specifically inure to the benefit of an Ohio corporation.”

Likewise, the Greater Cleveland Partnership filed an amicus brief in support of Ancora and Macellum, and asked the court to adopt the Ohio Division of Securities’ interpretation of Ohio’s anti-greenmail statute.

“Further, the Greater Cleveland Partnership respectfully requests that this court reject plaintiff’s vague and open-ended interpretation of the anti-greenmail statute because it would chill investment in corporations located in Ohio, create the risk of more litigation, and harm the state’s economy,” the partnership said. 

Luke Milligan, a law professor and director of the Ordered Liberty Program at the University of Louisville’s Louis D. Brandeis School of Law, also made the case that there needs to be more clarity and certainty in Ohio regulatory law, particularly as it pertains to the anti-greenmailing statute.

In an article Milligan published by the Ohio Alliance for Civil Justice, he also noted that the statute does not include a definition of the term “manipulative practices,” nor does it spell out specific types of conduct covered by that term.

“The breadth and open texture of the term “manipulative practices” in the context of Section 1707.043 litigation is cause for concern, raising the question: How can Ohioans (and those doing business with Ohioans) have confidence that their business actions will not be recast as a “manipulative practice”… by a court in a future, high-stakes Section 1707.043 litigation matter?” Milligan wrote.

Shareholders and corporate actors are entitled to clarity and certainty, he continued. 

“A you-know-it-when-you-see-it approach to construing Section 1707.043 provides neither,” wrote Milligan. “Moreover, a broad and unbounded understanding of “manipulative practices” in the context of Section 1707.043 litigation could invite challenges to the statute’s constitutionality on grounds of vagueness and overbreadth.”

A narrower understanding of “manipulative practices,” similar to that of the Ohio Division of Securities, would ease these concerns, Milligan said, and provide welcomed clarity and certainty, and ensure a proper degree of uniformity in future litigation matters.

The case is in front of Judge Daniel Hawkins at the Franklin County Court of Common Pleas, a Republican candidate for the Ohio Supreme Court who is set to rule on summary judgment soon, though when contacted his office did not say precisely when. 

Having read the court filings, Goldstein thinks the judge should dismiss the case. “But I have seen enough bad decisions by judges to be reluctant to make a prediction,” he added.

Goldstein does think the case “is driven by a law firm that purports to advocate on behalf of shareholder rights.”

And when asked why the Corpus Christi Firefighters’ Retirement System, which is an owner of Big Lots common stock, would file this lawsuit, Goldstein said he’s not sure.

Goldstein doesn’t see any reason to pursue this lawsuit, which he said will provide no benefit whatsoever to the pension fund if it wins.

“If I were a firefighter or retiree, I would question why the trustees are willing to have the fund serve as a figurehead plaintiff or devote any fund resources to this lawsuit,” he added.