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Citing a purported secret meeting between then-Towers Watson & Co. CEO John J. Haley and an investor, during which Mr. Haley was allegedly promised a six-fold pay increase in exchange for his support of 2016’s $18 billion merger with Willis Group Holdings PLC, a federal appeals court has reinstated a shareholder lawsuit filed by former Towers Watson shareholders.
Friday’s ruling by the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, in In Re: Willis Towers Watson PLC Proxy Litigation follows a July ruling by the Delaware Chancery Court that dismissed a similar lawsuit, which also claimed Mr. Haley agreed to the lowest offer shareholders would accept because he had been offered a pay increase.
A major Willis Investor, San Francisco-based ValueAct Capital Management LP, and its CEO, Jeffrey Ubben, were closely involved in the negotiations, according to Friday’s ruling.
ValueAct, which normally invests in firms for three to five years, had held shares in Willis for five years and sought to increase its stake’s value before it sold, said the ruling.
In a September 2015 meeting before the shareholder vote on the merger, Mr. Ubben, who was a future member of Willis Towers Watson’s compensation committee, allegedly discussed a proposed compensation plan with Mr. Haley for his services as CEO of the combined company, under which Mr. Haley stood to received $165 million in compensation over three years, depending on Willis Towers Watson’s performance, which was a more than six-fold increase from the $25 million he stood to make as CEO of Towers, according to the ruling.
Mr. Haley “didn’t disclose the pay plan to the Towers directors or shareholders,” according to the ruling. A month later, in October 2015, Towers filed a proxy statement with the U.S. Securities and Exchange Commission in anticipation of a shareholder vote on the merger.
“The proxy stated that the Towers board had considered all conflicts of interest, even though the board wasn’t aware of Haley and Ubben’s discussions about compensation,” said the ruling.
Mr. Haley “never intended to negotiate the best deal for Towers shareholders,” according to the plaintiffs, said the ruling. “Instead, he sought only the minimum concession necessary to convince Towers shareholders to approve the merger,” said the decision. Towers shareholders approve the merger in December 2015.
University of California regents, on behalf of themselves and other shareholders, filed suit against Willis Towers Watson naming as defendants Willis Towers Watson, Towers, Willis, Mr. Haley and former Willis CEO Dominic Casserley.
The U.S. District Court in Alexandria, Virginia, dismissed the litigation on the grounds the complaint was barred by a statute of limitations and that it “failed to allege that the facts omitted from proxy documents were material.”
On the issue of the proxy document, the majority opinion said, “It’s true that shareholders knew Haley would make more money after the merger.
“But they didn’t know that — before the merger had closed — Haley had entered secret discussions with Ubben, who was slated for a year on WTW’s Compensation Committee, of a more than a six-fold increased in his current composition.
“As alleged in the complaint, Haley had a powerful interest in closing the merger to get the compensation he’d discussed with Ubben, even if the terms were unfavorable for Towers shareholders,” said the ruling.
On the statute of limitations issue, the majority opinion said both sides agree the District Court had used the wrong standard in its ruling. “We express no opinion on whether the defendants can prove, after discovery, that the suit is time barred,” the appeals court decision said.
The panel remanded the case for further proceedings.
The dissenting opinion said while the merger’s terms may have been “unfair and inadequate for the Towers shareholders,” they “were adequately disclosed in the proxy statement that solicited votes for the merger… And despite public criticism of those terms by vocal Towers shareholders, independent analysts and financial media outlets, the merger passed with over sixty percent of Towers shareholders voting for the merger.”
The plaintiffs’ attorney in the case had no comment, while defendant attorneys did not respond to a request for comment.
Towers Watson & Co. has delayed its special shareholders meeting on its proposed merger with Willis Group Holdings P.L.C. until no later than Dec. 16.