United States District Court, C.D. Illinois, Peoria Division
IN RE CATERPILLAR INC. SHAREHOLDER DERIVATIVE LITIGATION This Document Relates to ALL ACTIONS
DARROW, UNITED STATES DISTRICT JUDGE
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.
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.
Nominal Defendant 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.
Director and Officer Defendants
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.
Caterpillar's Acquisition of ERA and Siwei
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,
Pre-Acquisition Insider Loans and Transfers of
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.
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
The October 12, 2011 Meeting
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
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.
The November 7, 2011 Meeting
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.
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.
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.
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.
The April 11, 2012 Meeting
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.
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.
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 ...