A series of blockbuster cases against some of the very biggest names in European business haven’t gotten the attention they warrant, in part due to Covid-19 throwing a lot of sand into the judicial machinery. Deutsche Bank, UBS, Credit Suisse and Volkswagen are part of this legal march to the sea. But we’ll focus on the case filed first, Haussmann v. Baumann, a derivative lawsuit over Bayer’s disastrous acquisition of Monsanto. The original filing was in early March; we’ve attached the new amended complaint below. We’ll use it to discuss the legal approach all these suits take. We’ll then turn to the lurid facts of the Bayer-Monsanto deal, which even to connoisseurs of corporate governance train wrecks, is quite the spectacle.
Each suit targets an epic level of value destruction, but they are not shareholder suits. They are derivative lawsuits, in which a shareholder steps in to act on behalf of a company that has been done wrong, typically by key members of its management and board. Important advisers may also be targets.
The Novel Legal Angle: Using New York Courts for Derivative Cases Against Major European Companies
The novel feature in these cases is suing in New York state court but using the parent company’s governing law, which for Bayer is the German Stock Corporation Act as the basis for asserting causes of action.1 The abstract from a 2015 article by Gerhard Wagner, Officers’ and Directors’ Liability Under German Law: A Potemkin Village:
The liability regime for officers and directors of German companies combines strict and lenient elements. Officers and directors are liable for simple negligence, they bear the burden of proof for establishing diligent conduct, and they are liable for unlimited damages. These elements are worrisome for the reason that managers are confronted with the full downside risk of the enterprise even though they do not internalize the benefits of the corporate venture. This overly strict regime is balanced by other features of the regime, namely comprehensive insurance and systematic under-enforcement. Even though the authority to enforce claims against the management is divided between three different actors – the supervisory board, the shareholders assembly, and individual shareholders – enforcement has remained the exception. Furthermore, under the current system of Directors’ and Officers’ (D&O) liability insurance, board members do not feel the bite of liability as they are protected by an insurance cover that is contracted and paid for by the corporation. Thus, the current German system may combine the worst of two worlds, i.e., the threat of personal liability for excessively high amounts of damages in exceptional cases, and the practical irrelevance of the liability regime in run-of-the-mill cases.
Notice here the low bar for misconduct: simple negligence, plus the managers and board members bear the burden of proof that they behaved well! So the linchpin of these cases is getting a non-captured court to measure corporate conduct against these standards.
Also observe another key feature: extremely generous D&O policies. That is serving as one of the deep pockets for this litigation. From the filing:
Large D&O insurance policies customarily include what is called an “insured versus insured” exclusion, intended to exclude from the insurance coverage claims by one insured, i.e., the corporation, against another insured, i.e., a corporate Supervisor or Manager or employee. Thus, were the company, an insured under such a policy, to bring the claims asserted herein, the insurer will deny coverage based on the exclusion. Purchasing this type of insurance where the premiums measure in the millions of dollars and are paid by the company is in itself a breach of the Supervisors and Manager’s duties of due care and prudence as policies without those exclusions are available and could have been purchased. The presence of an “insured versus insured” exclusion in the D&O policies means this derivative lawsuit — which does not fall within any such exclusion — is the legal vehicle best available to realize on this corporate asset for the benefit of the corporation, which after all paid 100% of the premiums.
The other deep pockets are the investment banks, Bank of America and Credit Suisse. As the suit explains, they too have duties defined under German law, yet they failed abjectly in acting as independent advisers because they were hopelessly conflicted. In addition to acting as merger advisers, they were also providing financing, since Bayer, to avoid needing to get shareholder approval, did an “all cash” deal. That in turn led to Bayer engaging in over a dozen financings, including pricey bridge loans. That meant the banks had huge incentives to see the deal close, which resulted in them not looking at the Monsanto garbage barge very hard.
The pleading describes how Bank of America, whose investment banking operations were flagging, was particularly desperate to book the income from the Bayer-Monsanto deal. The suit seeks a clawback of what it asserts are hundreds of millions of dollars in fees, plus punitive damages.
The Bayer suit has an additional hurdle that looks feasible to surmount, in that its shareholders’ agreement requires shareholder suits be brought in its home town of Leverkusen, Germany, where anyone adverse to Bayer has zero chance of getting a favorable hearing However, the shareholders’ agreement enumerates three types of action that must be brought to court in Leverkusen, and the grounds for litigation here fall well outside them.
Bayer’s Desperate, Disastrous Monsanto Deal
Even if you have been paying attention to the business press, it is hard to appreciate how appallingly bad the Monsanto deal has been for Bayer, not just in conception but also in execution. Please skim the vividly-written suit; it’s not possible in this post to convey fully how ugly the picture is.
It isn’t simply that Bayer-Monsanto has replaced AOL-Time Warner in most press reckonings as “the worst deal of all time”. Yes, nearly every penny of the $66 billion that Bayer paid for Monsanto has gone poof. Yes, Bayer is the first time in German corporate history that a public company got majority vote of no confidence from its shareholders. Yes, Bayer is at risk of bleeding out over seemingly endless Monsanto-related liability claims (Roundup has so taken the center stage that what would ordinarily be a big-deal litigation drain, Dicamba, is treated as an afterthought). Unlike any other company ever facing similar litigation, Bayer has neither taken Roundup off the market, nor reformulated it, nor put a cancer warning on it. It looks like Bayer will eventually declare bankruptcy.
It is that unlike AOL-Time Warner, initially hailed as a brilliant tie-up but quickly went a cropper when the dot-com mania ended, virtually all major analysts and shareholders hated the idea of the deal from the date it was announced, and the business press was just as critical. Monsanto was already recognized as being dependent on Roundup when more and more consumers and experts were concerned about glyphosate risks.
And most important, the deal went ahead for the worst possible reason: Bayer management wanted to bulk up so as not to be acquired. The real motive was to keep current management in place to preserve their lofty pay and high status.
Monsanto was the only major candidate left standing, for the obvious reasons. Both the chemical and the pharma industries had seen decades of consolidation, and Bayer was a tempting target by having little debt and not having kept up with the agglomeration game. When Pfizer’s bid for Allergan fell apart due to an adverse tax ruling,2 long-standing and highly regarded CEO Marijn Dekkers, who had long opposed the idea of Monsanto deal, suddenly retired. The “two Werners,” Chairman Werner Wenning and the surprise new CEO, Werner Baumann, both of whom had long pushed to buy Monsanto, were in charge and moved forward rapidly with their plan.
Except they couldn’t, save tying an anchor to Bayer in the form of a $2 billion breakup fee. Bayer could do only limited due diligence on Monsanto due to the fact that they were competitors and the acquisition was subject to anti-trust review in the US and Germany. Those assessments usually take months; this one took 24.
In the meantime, Bayer out of obstinancy or ignorance chose to ignore signs that the evidence of glyphosate’s cancer risks were becoming solid enough to kick off a tidal wave of suits. Recall that the transaction closed in June 2018. From the filing:
After the WHO concluded in March 2015 that Glyphosate was “probably carcinogenic to humans” (especially to those exposed to spraying) in September 2015, the EPA of California — a huge agricultural state and market for Roundup — issued a Notice of Intent to list Glyphosate as a chemical “known to cause cancer.” The California EPA formally classified Glyphosate as “a known carcinogen” in July 2017. Individuals alleging personal injury due to Roundup exposure now had a greatly enhanced ability to sue, as such findings provided support for the causation element necessary for the Roundup cancer suits to succeed.
Do not forget that the surfacatnts in Roundup increased its cancer risk. Oh, and as part of the anti-trust review, Bayer had to sell its non-glyphosate herbicide, Liberty, making it dependent on Roundup.
The litigation has gone as badly for Bayer as it possibly could have. Rather than try to settle cases, Monsanto allowed them to go to trial and Bayer did not attempt a last-ditch volte-face. The first case delivered an enormous verdict, a $289 million judgment, with $250 million of that punitive damages. Bayer fared just as badly in appellate court:
To make matters worse — if that was possible, in July 2020 Bayer then lost its appeal in the key first case of the Roundup litigation war — a devastating decision that rejected all the legal/scientific arguments Bayer’s executives promised would defeat and stop the suits. The opinion upheld the factual findings and a punitive damages award based on Monsanto’s conduct vis a- vis Roundup, i.e., “malice and oppression.” On July 20, 2020 Law 360 reported:
Monsanto Loses Cancer Liability Fight in 1st Roundup Appeal:
A California appellate court on Monday affirmed a jury’s finding that Monsanto Co. is liable for a former school groundskeeper’s cancer in the first case to go to trial over Roundup’s alleged links to cancer…
A unanimous three-judge Court of Appeal panel rejected arguments by Bayer … that plaintiff DeWayne “Lee” Johnson failed to prove liability and causation, and that Johnson’s failure-to-warn claims are preempted by federal law. … Monsanto challenged the trial court’s findings on a number of legal fronts…
“None of these arguments are persuasive,” the opinion said.
As the filing explains in much more detail, Bayer’s efforts to reach a global settlement have simply resulted in the company paying $13 billion but not stopping all of the current cases, let alone future ones. Remember, Bayer is continuing to sell the same dangerous Roundup, with no change in formulation and no cancer warning. That’s a prescription for yet more suits, particularly when facts like this are already part of the record:
The trials also made public internal documents in which Monsanto admitted Glyphosate is “geno-toxic” (i.e., causes cancer) and that Monsanto had provided strict warnings to their own employees to wear chemical goggles, boots and other safety protection when exposed to Roundup, and an internal study in which its scientists recommended people wear gloves and boots when using the company’s lawn and garden concentrate.
Finally, you might ask, who is behind this campaign? The lead attorney is Clifford Roberts of Roberts & Roberts, a boutique New York firm specializing in complex corporate litigation. Famed criminal defense lawyer Benjamin Branfman is also part of the team, which seems an odd choice. Michelle Lerach’s firm Bottinni & Bottinni rounds out the roster. The similarity of the writing style of this filing to the Kentucky Retirement System case Mayberry v. KKR (more informal, more narrative, and much more factual backup than the norm) says the Lerachs are providing a lot of the muscle.
So pass the popcorn. If this case gets past the jousting over using New York courts to get at German companies, it will expose even more ugly, self-serving behavior.
1 A May 2020 motion and order in a derivative suit filed in New York court, In Re Renren Inc., is a very helpful precedent for this litigation strategy, see below.
2 In 2002, there were rumors that Pfizer was considering a bid for Bayer.