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Kahn v. Rusckowski

July 1, 2010

ALAN R. KAHN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
v.
STEPHEN H. RUSCKOWSKI, CLEMENT REVETTI, JR., GREGORY M. SEBASKY, SCOTT M. WEISENHOFF, MARK E. SCHWARZ, BRIAN O'DONOGHUE, WARREN E. PINCKERT II, EDWARD SIEGEL, MEDQUIST, INC. AND KONINKLIJKE PHILIPS ELECTRONICS N.V., DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Chancery Division, Burlington County, Docket No. C-0007-08.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued September 24, 2009

Before Judges Skillman, Fuentes and Simonelli.

Plaintiff Alan R. Kahn appeals from the November 21, 2008 Chancery Division order granting defendants' motion to dismiss his amended complaint pursuant to Rule 4:6-2(e) for failure to state a claim upon which relief can be granted. We affirm in part, reverse in part and remand for further proceedings.

Plaintiff is a minority shareholder in defendant MedQuist, Inc. (MedQuist), a publicly-traded New Jersey corporation and "provider of medical transcription technology and services... [to] health systems, hospitals and large group medical practices throughout the United States."

Defendant Koninklijke Philips Electronics N.V. (Philips) owned approximately seventy percent, or over twenty-six million shares, of MedQuist's common stock. A "Governance Agreement" between Philips and MedQuist required, in part, that MedQuist's Board of Directors (Board) shall consist of eleven directors: MedQuist's Chief Executive Officer; a MedQuist Officer designated by MedQuist's Chief Executive Officer; six directors designated by Philips, "all of whom may be directors, officers, employees, [a]ffiliates or [a]ssociates of [Philips]" (Philips Directors); and three directors not affiliated with Philips (Independent Directors).

The Governance Agreement also established a "Supervisory Committee" whose responsibilities included "the general oversight, administration, amendment and enforcement... of any other agreements or arrangements between [MedQuist]... and [Philips]... which would be required" to be disclosed to the Securities and Exchange Commission (SEC). The Supervisory Committee had to include the Independent Directors.

In 2004, MedQuist became embroiled in a controversy involving client overbilling, which resulted in several lawsuits. Also, as a result of MedQuist's inability to timely file its 2003 Annual Report with the SEC, NASDAQ, the securities exchange listing the stock, de-listed MedQuist's common shares.

On July 6, 2007, Philips publicly announced that it viewed its MedQuist ownership interest as a non-core holding and was reviewing options with respect thereto. In view of this announcement, on July 11, 2007, MedQuist publicly announced that the Board had retained Bear, Stearns & Co., Inc. (Bear Stearns) to advise it on strategic alternatives for the company.

On November 2, 2007, Philips publicly announced its decision to sell its entire interest in MedQuist "if a satisfactory price and other acceptable terms can be realized." Philips also announced its intention to pursue a transaction in which MedQuist's other shareholders will be offered the same consideration as Philips, subject to any necessary approval of the [Board]. Accordingly, Philips intends to coordinate with MedQuist in conducting an auction for such sale with all interested potential purchasers. However, there can be no full assurance as to either the ultimate structure of any resulting transaction or whether any transaction will occur.

That same day, in light of Philips's decision to sell its MedQuist shares, MedQuist publicly announced its intent to evaluate whether a sale of the entire company was in MedQuist's and the minority shareholders' best interests.

A November 8, 2007 amendment to the Governance Agreement reduced the Board to seven members. The Board now consisted of four Philips Directors, defendants Stephen H. Rusckowski, Clement Revetti, Jr., Gregory M. Sebasky, and Scott M. Weisenhoff,*fn1 and three Independent Directors, N. John Simmons, Jr., Richard H. Stowe, and John H. Underwood. MedQuist appointed the Independent Directors to a "Special Committee," which it established to evaluate any proposals MedQuist received regarding the sale of the company, and to recommend to the Board whether to accept or reject those proposals.

On November 9, 2007, the Board publicly announced that the Independent Directors/Special Committee members had resigned due to a disagreement about their role "in the conduct of the [e]valuation [of the sale of MedQuist] and any resulting sale process resulting from the [e]valuation[.]" Shortly thereafter, the Board appointed defendants Mark E. Schwarz, ...


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