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In re Caterpillar Inc. Shareholder Derivative Litigation

United States District Court, C.D. Illinois, Peoria Division

September 29, 2016




         This suit arises from the acquisition of ERA Mining Machinery, Ltd (“ERA”), a Chinese mining equipment company, and its wholly owned subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., Ltd. (“Siwei”) by Caterpillar, Inc. (“Caterpillar”) in June 2012. On November 12, 2015, Plaintiffs Iron Workers Mid-South Pension Fund (“Iron Workers”), City of Sterling Heights General Employees' Retirement System (“Sterling Heights”), Michel D. Wolin, and The Ellen J. Stokar IRA (“Stokar IRA”) filed an amended consolidated derivative complaint, ECF No. 87, alleging breach of fiduciary duties and corporate waste by Caterpillar's current and former directors.

         At issue are Defendant's Motion to Dismiss the Amended Consolidated Complaint, ECF No. 90, Plaintiffs' Motion for Leave to File Under Seal, ECF No. 92, and Plaintiffs' Motion to Strike Defendants' Exhibits A, G, and I and Additional Purported Facts Not Alleged in the Complaint, ECF No. 95. For the reasons set forth below, Defendants' Motion to Dismiss is GRANTED. Plaintiffs' Motion to Strike is DENIED. Lastly, Plaintiffs' Motion for Leave to File Under Seal, ECF No. 92, is DENIED.[1]


         I. The Defendants

         a. Nominal Defendant Caterpillar

         Caterpillar (or “Company”), a publicly traded Delaware corporation with its principal executive offices located in Peoria, Illinois, is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

         b. Director and Officer Defendants

         The operative pleading in this case names seventeen individual defendants: Douglas R. Oberhelman, Edward J. Rapp, Edward B. Rust, Jr., William A. Osborn, Daniel M. Dickinson, Jesse J. Greene, Jr., Dennis A. Muilenburg, Juan Gallardo, Susan C. Schwab, Miles D. White, David L. Calhoun, Jon M. Huntsman, Jr., Eugene V. Fife, David R. Goode, Peter A. Magowan, Charles D. Powell, and Joshua I. Smith. Oberhelman has served as Caterpillar's chief executive officer since July 2010 and as its chairman since November 2010. Rapp served as a group president and chief financial officer of Caterpillar from June 2010 until January 2013; he served as Caterpillar's Group President, Resource Industries, until retiring in 2016, and was a member of Caterpillar's executive office since 2007. The remaining fifteen defendants-Rust, Osborn, Dickinson, Greene, Muilenburg, Gallardo, Schwab, White, Calhoun, Huntsman, Fife, Goode, Magowan, Powell, and Smith-were directors of Caterpillar when the challenged transaction was approved in April 2012, and when the tender offer was finalized in June 2012. Plaintiffs do not allege that any of these fifteen defendants had or has any connection to Caterpillar or any of its employees other than his service on the board.

         II. Caterpillar's Acquisition of ERA and Siwei

         Prior to its acquisition by Caterpillar in June 2012, ERA designed, manufactured, sold, and supported underground coal mining equipment in China through its wholly-owned subsidiary, Siwei.[3]

         a. Pre-Acquisition Insider Loans and Transfers of Assets

         In April 2010, two of Siwei's directors, Emory Williams and Li Rubo, lent Siwei $6.4 million to pay down nearly $20 million in loans. The loan was made at an interest rate of 8 percent a year, compounded annually. Siwei's loans with commercial banks at that time had interest rates between 4.9 and 7.4 percent. Previously, Williams and Li had helped finance ERA's purchase of Siwei in 2007 with a $2.95 million interest-free loan. Li funded his portion of the $2.95 million loan by borrowing from another company of which he and Williams were also directors. Both of these loans were fully disclosed in publicly available regulatory filings prior to Caterpillar's acquisition of Siwei.

         Siwei's regulatory filings from around this same time show additional transfers of assets between Siwei and related companies. In one instance, Siwei off-loaded an industrial tank manufacturing business, valued at nearly $5 million, to a company of which a Siwei director and former substantial shareholder had taken majority stake four months earlier for “nil consideration.” Siwei's regulatory filings identify the assets as loss-making; Siwei, however, continued to purchase equipment and services from the new company, at times paying above market rate. In another instance, Siwei transferred a 7.5 percent stake in a mining equipment firm to one of its partners to offset “trade payables” (i.e., liabilities owed to a supplier).

         b. The October 12, 2011 Meeting[4]

         Caterpillar's board of directors first considered purchasing Siwei at its October 12, 2011 meeting. At that meeting, Steve Wunning, who was then the president of Caterpillar's mining equipment division, made a presentation to the board regarding Siwei and how its acquisition promoted the Company's interests and objectives. The presentation included information about: China's mid-tier underground mining equipment market, which consisted of state-owned enterprises and three investor-owned companies (one of which was Siwei); various competitive considerations, including that one of the Company's competitors was in the process of acquiring one of these three investor-owned mid-tier underground mining equipment companies; Siwei, including its history, facilities, products, customer base, management, and ownership structure; and alternatives to an acquisition of Siwei, including other external and organic growth options. Wunning also discussed the potential purchase price, synergy range, valuation, status of negotiations, and a timeline for completing the acquisition. The timeline contemplated finalizing due diligence by the end of October and obtaining the board's approval of the transaction in early November.

         During Wunning's presentation, members of the board asked Wunning questions relating to the potential acquisition of Siwei, including questions about the market, competition, and Siwei's management and ownership.

         c. The November 7, 2011 Meeting[5]

         The board next considered the Siwei acquisition at a special telephonic meeting held on November 7, 2011, during which Wunning presented on the basis for the proposed purchase price of Siwei and the terms of the Company's proposed cash tender offer. The proposed offer included an “earn out” feature, intended at least in part to reduce the risk associated with the acquisition, with the payout to be based on Siwei's 2012 and 2013 financial performance and payable in 2013 and 2014. The Company planned to require Siwei's principal shareholders to accept the earn out for at least 30 percent of their shares, and expected that 25 percent of Siwei's overall shares would be purchased as earn out shares. Wunning informed the board that Caterpillar would provide Siwei with a $50 million working capital loan (or bridge loan) contemporaneously with the tender offer.

         Wunning also presented on “matters of concern that had been identified during due diligence and the manner in which the Company proposed to resolve the outstanding issues.” Nov. 7, 2011 Bd. Mtg Min. 2, Am. Compl. Ex. B, ECF No. 87-2. These “matters of concern” included: (1) the age of Siwei's accounts receivable-on average, 320 days old; (2) unresolved land use rights and operating permits; (3) outstanding overtime payments-requiring a catch-up payment of up to $20 million; and (4) the need to make improvements to certain facilities. Exec. Sum. 11, Am. Compl. Ex. B, ECF No. 87-2. The Company proposed to resolve these issues by negotiating a lower acquisition price.

         During the November 7, 2011 meeting, members of the board discussed and questioned Wunning about the need for a bridge loan, regulatory approvals, cash flow projections, major sources of projected synergies, the background of Siwei's principal owners, the purchase price premium, receivables aging, retention of key employees, and the projected rate of return, among other things. At the conclusion of the meeting, the board resolved to approve the Siwei acquisition, including the $50 million bridge loan.

         On November 10, 2011, Caterpillar announced that it had made a pre-conditional voluntary offer for all of Siwei's issued shares. The preliminary purchase price was approximately $690 million-a 33 percent premium above Siwei's pre-acquisition stock price. This price consisted of $233 million in net assets and $467 million in goodwill.

         d. The April 11, 2012 Meeting

         Wunning provided the board with an update on the Siwei acquisition prior to the board's April 11, 2012 meeting. Siwei had reported a $2 million loss for 2011, compared to its earlier forecast of $16 million in profits. Siwei's accounts receivable had also increased from, on average, 320 days outstanding to 371 days outstanding.

         The board discussed the earnings shortfall with Wunning at the April 11, 2012 board meeting, and was advised that the acquisition was still considered “strategically attractive” despite the shortfall. The meeting minutes do not show that the board discussed or questioned Wunning about whether the Company should proceed with the Siwei acquisition or attempt to reduce the purchase price.

         Caterpillar completed its tender offer on June 6, 2012. The Company's quarterly report on Form 10-Q, filed with the Securities and Exchange Commission (“SEC”) on August 6, 2012, reports that the final purchase price was $671 million, consisting of $194 million in net assets and $476 million in goodwill. In its annual report on Form 10-K, filed with the SEC on February 19, 2013, Caterpillar ...

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