in the united states district court...

IN THE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO

Alan R. Spachman,

Plaintiff,

v.

Great American Insurance Company, American Financial Group, Inc., National Interstate Corporation, Joseph E. Consolino, Vito C. Peraino, Gary J. Gruber, Donald D. Larson, David W. Michelson, and Keith A. Jensen,

Defendants.

CASE NO.

JUDGE

VERIFIED COMPLAINT

(JURY DEMAND ENDORSED HEREON)

For his Complaint against defendants American Financial Group (“AFG”), Great

American Insurance Company (“Great American”), National Interstate Corporation (“National

Interstate”), Joseph E. Consolino, Vito C. Peraino, Gary J. Gruber, Donald D. Larson, David W.

Michelson, and Keith A. Jensen (collectively referred to as the “Conflicted Directors”), plaintiff

Alan R. Spachman states as follows:

PRELIMINARY STATEMENT

1. This case arises out of a coercive tender offer orchestrated by National Interstate’s

majority shareholder to acquire the company’s outstanding public shares through a flawed

process, on the basis of misleading disclosures, at an unfair price, and with the benefit of highly

material inside information that it is deliberately withholding from the public shareholders.

Plaintiff Alan Spachman is the founder of National Interstate, an independent director who

serves on the company’s board, and the owner of 9.2% of the company’s shares. He brings this

action for violations of the federal securities laws, violation of Ohio’s Control Share Acquisition

statute, and breach of fiduciary duty. He seeks injunctive relief.

Case: 5:14-cv-00509-JG Doc #: 1 Filed: 03/05/14 1 of 27. PageID #: 1

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2. After Great American launched its tender offer, Spachman and the three other

independent directors on National Interstate’s board voted to form a special committee to

evaluate the offer and negotiate with Great American for the benefit of the public, minority

shareholders. But the other six directors on National Interstate’s board — all of whom are

employed by or beholden to Great American or its parent corporation, AFG — used their

majority control of the board to block those proposals. These six Conflicted Directors have

deliberately ignored their fiduciary duties to act in the best interests of National Interstate’s

minority shareholders and to provide them with candid, truthful, and non-misleading information

about Great American’s tender offer. Rather than seeking to protect the minority shareholders,

the Conflicted Directors are actively facilitating Great American’s scheme to “squeeze out” the

public shareholders as cheaply and quickly as possible.

3. Defendants’ flagrant misconduct has received widespread condemnation from the

business and investing communities. T. Rowe Price, a major investment firm representing

clients holding approximately 8% of National Interstate’s stock, called the defendants’ conduct

“appall[ing]” and stated that in its experience it had “rarely come away with concerns as

substantial as those . . . identified here.” Institutional Shareholder Services, the leading proxy

advisory service, has likewise stated that this transaction “raised every red flag in the

semaphore.” The Wall Street Journal has run a series of stories commenting that the offeror has

dispensed with the basic protections that are “commonly used to manage conflicts that can arise

when majority shareholders offer to cash out minority investors.” And the New York Times has

stated that the conduct of the Conflicted Directors and Great American “can only be put in the

bizarre realm of corporate shenanigans.”

4. As recently as July 2013, National Interstate’s stock traded for more than $35 per

share. At that time, Great American suddenly began taking an active role in National Interstate’s


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loss reserves. The company then made a series of reserve adjustments that were followed

immediately by sharp reductions in its share price. Due in no small part to these reserve

adjustments, National Interstate’s stock price had fallen to $22 by early February 2014. It was at

this point that Great American launched this opportunistic tender offer seeking to take advantage

of the depressed value of National Interstate’s shares.

5. In connection with the tender offer, the Conflicted Directors voted for the board to

retain, at the company’s expense, a financial advisor, Duff & Phelps, LLC, to render an opinion

on the fairness of the $28 per share offer. Duff & Phelps was provided with management’s 5-

year financial projections for the company. Upon completion of its work, Duff & Phelps

concluded that the $28 price was unfair to National Interstate’s shareholders and calculated a

value range for the company between $29.51 and $35.72 per share. Duff & Phelps’s discounted

cash flow analysis using management’s five-year projections yielded an even higher valuation,

ranging from $29.86 to $36.84 per share.

6. Had the National Interstate board formed a special committee, neither the

Conflicted Directors nor Great American would have had access to the value range determined

by the committee’s financial advisor. But the Conflicted Directors got the Duff & Phelps

valuation analysis as a necessary consequence of the conflicted structure that defendants insisted

on using for National Interstate’s response to the tender offer. And in betrayal of National

Interstate’s shareholders, one or more of the Conflicted Directors, acting on behalf of Great

American and AFG, used that information, together with the five-year management projections,

in calibrating Great American’s next bid. Great American promptly took advantage of this

highly material inside information by nudging its offer to $30 per share, just 49 cents above the

very low end of the Duff & Phelps value range and just 14 cents above the bottom end of the

range implied by its discounted cash flow analysis.


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7. After Great American raised its offer to $30 per share, the Conflicted Directors

asked Duff & Phelps to opine as to the fairness of the revised offer, but, upon learning that the

firm’s work had been shared with the offeror, Duff & Phelps refused to do so and indicated that

it would no longer participate in the process. No independent financial advisor has opined that

Great American’s $30 per share offer is fair to the minority shareholders.

8. To compound defendants’ breaches of fiduciary duty and the injury to National

Interstate’s minority shareholders, Great American and the Conflicted Directors simultaneously

withheld from the public shareholders the Duff & Phelps valuation analysis and the management

projections that were provided to them, while disclosing Great American’s own, considerably

lower projections for the company and its own, considerably lower valuation of the minority

shares. Although the Conflicted Directors grudgingly disclosed the Duff & Phelps valuation

range on March 3, 2014, Great American and the Conflicted Directors have persisted in their

refusal to disclose the five-year management projections. As a result, Great American is

continuing to take advantage of highly material inside information obtained from the Conflicted

Directors that it is simultaneously withholding from the National Interstate minority shareholders

who are being asked to tender their shares into the offer, and the Conflicted Directors are letting

them get away with it. The failure to disclose this material inside information to National

Interstate’s shareholders makes a mockery of the “level playing field” that is required by the

Williams Act and is a clear violation of the Act’s disclosure requirements.

9. These violations, and the harm to the minority shareholders, are exacerbated by

the coercive nature of Great American’s tender offer, which is designed to pressure the minority

shareholders into tendering their shares without regard to the fairness of the offering price. Just

days ago, Great American waived the condition that it receive ownership of at least 90% of the

company’s shares in order to consummate the offer. Great American now intends to purchase


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any and all shares tendered in the offer. As a result, if Great American acquires just 15% of

National Interstate’s outstanding shares, it will own two-thirds of the company’s shares and will

have sufficient voting power to approve unilaterally a subsequent merger at any price, including

a price below the already-unfair proposed tender offer price of $30 per share.

10. In addition, Great American has also stated publicly that it could take other

adverse action against shareholders who do not tender, even if it does not proceed with a back-

end merger. It has threatened to eliminate cumulative voting, threatened to change the board of

directors, threatened to change the company’s dividend policy, threatened to delist the

company’s shares, and threatened to deregister the shares under the Securities Exchange Act of

1934. Waiving the minimum tender condition makes Great American’s offer maximally

coercive by presenting the company’s shareholders with the choice of tendering their shares at an

unfair price or risking the considerable reduction in the value and liquidity of their shares if

Great American follows through on its retributive threats. By structuring the tender offer in this

coercive manner, the defendants are breaching their fiduciary duties to the minority shareholders.

11. In addition, the Ohio legislature has expressly recognized the potentially coercive

nature of tender offers such as this one, which use short time periods for consummation and

structures designed to encourage shareholders to tender. In an effort to protect shareholders from

the very risks presented here, the legislature enacted a Control Share Acquisition statute, which

prohibits an offeror from pursuing a tender offer for share ownership above certain voting

percentage thresholds, including a majority or more, without first seeking authorization from the

corporation’s non-interested shareholders. Great American has never sought or received

authorization from the non-interested shareholders for its 52% stake in the company, and, as a

result, any further purchases of the company’s stock through its tender offer would violate Ohio


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law. Under the Control Share Acquisition statute, the tender offer cannot proceed unless it is

approved by a majority of the non-interested shareholders.

12. Plaintiff seeks an injunction of Great American’s tender offer until such time as

defendants comply with the federal securities laws, Ohio’s Control Share Acquisition statute, and

their fiduciary duties.

PARTIES

13. Spachman is a resident of Florida.

14. AFG is an Ohio corporation with its principal place of business in Cincinnati,

Ohio. It is the parent company of Great American.

15. Great American is an Ohio corporation with its principal place of business in

Cincinnati, Ohio. It is a wholly-owned subsidiary of AFG.

16. National Interstate is an Ohio corporation with its principal place of business in

Richfield, Ohio.

17. Joseph E. Consolino is a resident of Ohio. He is chairman of National Interstate’s

board of directors, as well as executive vice president and chief financial officer of AFG.

18. Vito C. Peraino is a resident of Ohio. He is a member of National Interstate’s

board of directors, as well as general counsel and senior vice president of AFG.

19. Gary J. Gruber is a resident of Ohio. He is a member of National Interstate’s

board of directors, as well as executive vice president of Great American.

20. Donald D. Larson is a resident of Ohio. He is a member of National Interstate’s

board of directors, as well as president and chief operating officer of Great American.

21. Keith A. Jensen is a resident of Ohio. He is a member of National Interstate’s

board of directors. Until his retirement in March 2013, Jensen also served as chief financial

officer of AFG.


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22. David W. Michelson is a resident of Ohio. He is a member of National

Interstate’s board of directors, as well as president and chief executive officer of National

Interstate.

JURISDICTION AND VENUE

23. This Court has subject matter jurisdiction under 28 U.S.C. §§ 1331 & 1367,

because Counts One and Two of this action arises under the federal securities law, and under 28

U.S.C. § 1332(a)(1), as the amount in controversy exceeds $75,000, exclusive of interest and

costs, and the suit is between citizens of different states.

24. Venue is appropriate in this district under 28 U.S.C. §§ 1391(b)(1) and (2).

FACTUAL ALLEGATIONS

Great American Controls National Interstate’s Board

25. In 1989, Spachman founded National Interstate as a specialty insurance company

that provides insurance products focused on the transportation vehicle industry.

26. In 1990, Great American acquired a majority ownership in the company, which it

still holds today.

27. In 2005, National Interstate consummated an initial public offering of its common

shares, and as a result became publicly traded on the NASDAQ Stock Exchange.

28. After the initial public offering, Great American continued to retain ownership of

a majority of common shares in National Interstate.

29. Great American has used its voting power to elect to National Interstate’s board

individuals who work for Great American and its parent AFG.

30. By virtue of its control of National Interstate’s board of directors, Great American

is able to control National Interstate’s operations and management.


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31. At the end of 2007, Spachman retired as chief executive officer of National

Interstate and the board replaced him with David W. Michelson, who also serves as a member of

National Interstate’s board.

32. On February 15, 2013, the Great American-controlled board removed Spachman

as chairman of the board and replaced him with Joseph E. Consolino, the executive vice

president and chief financial officer of AFG.

33. As of today, four of National Interstate’s directors serve as executive officers of

Great American or its parent corporation AFG, one director is a retired executive officer of AFG,

and one is National Interstate’s chief executive officer.

34. Thus, of the ten directors on National Interstate’s board, a minority of four,

including Spachman, serve as independent directors not otherwise affiliated with National

Interstate, Great American, or AFG.

Great American Launches a Tender Offer

35. On or about January 29, 2014, management presented the National Interstate

board with a proposed press release that included preliminary, unaudited results for 2013. These

results also reflected further reserve adjustments recommended by Great American.

Management stated that it needed to issue the press release so that it would be able to discuss the

numbers at an upcoming analyst conference. Troublingly, however, nobody told the independent

directors that the timing of the release was not consistent with prior years, and instead was

approximately one week earlier than usual. At that board meeting, none of the Conflicted

Directors informed the independent directors of Great American’s imminent tender offer.

36. The National Interstate board approved the press release, and when the

preliminary results were released, National Interstate’s stock price fell 5.4% — opening at


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$22.17 per share on February 5, 2014. On that same day, Great American made a tender offer to

purchase the outstanding shares of National Interstate for $28 per share.

37. Although some or all of the Conflicted Directors were aware that Great American

would be making a tender offer, neither the Conflicted Directors nor Great American informed

the independent members of National Interstate’s board of that fact. Plaintiff learned about the

tender offer after Great American issued a press release on the morning of February 5.

38. On February 5, 2014, AFG, on behalf of Great American, filed a Schedule TO

disclosing that the four directors employed by Great American and AFG had already decided to

tender their shares of National Interstate. Even though National Interstate’s shares had traded

above the $28 offer price for much of 2013, and had traded over $30 per share as recently as

October 2013, AFG and Great American opined that National Interstate’s common stock “was

not likely to trade at or above the $28 offer price in the near future.” Great American did not cite

to — and did not have — any independent financial advice to support that prognosis.

39. In fact, Great American was wrong. National Interstate’s shares jumped to

$29.01 per share by the end of the day on February 5, and have traded above $28 per share since

that date.

The Conflicted Directors Respond to the Tender Offer

40. Under Section 14(d)(9) of the Securities Exchange Act of 1934, National

Interstate’s board of directors was required to review the tender offer and make a

recommendation to the company’s shareholders within 10 business days of the date of the offer

as to whether they should tender their shares at the proposed offer price.

41. Following the tender offer, at a board meeting on February 7, 2013, Spachman

requested that the board appoint a special committee of the four independent board members to

review the tender offer and to make the required recommendation to the minority shareholders.


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The formation of such a committee is customary when a majority of the target’s board is

affiliated with or controlled by the offeror.

42. Spachman and the other independent directors recognized that the interests of the

Conflicted Directors were not aligned with the interests of the minority shareholders and that the

Conflicted Directors therefore would not be able to review the tender offer in an objective, fair,

and unbiased manner.

43. The board rejected Spachman’s proposal by a vote of 6-4, with all six of the

Conflicted Directors voting not to form a special committee and all of the independent directors

voting to form such a committee. At the meeting, defendant Peraino stated that he did not

believe that he had a conflict of interest in connection with Great American’s tender offer,

notwithstanding that he serves as the general counsel of Great American’s parent company,

AFG, has been paid millions of dollars by AFG over the past several years, and owns

approximately $3.3 million of AFG stock (as compared with owning approximately $30,000 of

National Interstate stock).

44. After the Conflicted Directors refused to create a special committee of

independent directors to review the tender offer, Spachman requested that the company provide

the independent board members with separate professional advisors to assist those board

members in assessing the pending tender offer. The Conflicted Directors refused this request.

45. Thus, the company and the Conflicted Directors, all of whom have an interest in

seeing the tender offer completed at the lowest possible price, have repeatedly refused to make

use of a readily available mechanism to provide information to National Interstate’s shareholders

regarding the fairness of the offer that is independent of the perspective of Great American and

AFG.


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46. In addition to breaching their fiduciary duties, the Conflicted Directors are also

violating National Interstate’s Code of Ethics and Conduct, which requires that directors “avoid

apparent conflicts of interest that may occur where a reasonable observer might assume there is a

conflict of interest,” and “refrain from any related decision making process.” Significantly, in its

tender offer materials, Great American acknowledges that the Conflicted Directors are subject to

conflicts of interest with respect to the tender offer. Thus, by insisting on participating in the

review of the tender offer, the Conflicted Directors, by Great American’s own admission, are

violating National Interstate’s Code of Ethics and Conduct.

47. AFG has likewise violated its Code of Ethics, which prohibits AFG from taking

“unfair advantage of anyone through manipulation, concealment, abuse of privileged

information, misrepresentation of material facts, or any other unfair dealing practice” and

requires “the Co-CEOs and each senior financial officer promptly to bring to the attention of

AFG’s Audit Committee any material information of which such person may become aware that

affects the disclosures made by AFG in its public filings or otherwise.”

48. Neither AFG nor National Interstate has disclosed the code of conduct violations

of the Conflicted Directors, in direct violation of the reporting requirements of the Securities

Exchange Act. Section 406(b) of the Sarbanes-Oxley Act and its implementing rules require

“immediate disclosure” on Form 8-K or via Internet dissemination of any change to, or waiver

from, the company’s code of ethics for its principal executive and accounting officers.

49. Indeed, at every turn, the Conflicted Directors have blocked independent review

of the fairness of Great American’s tender offer. Moving forward without a special committee of

independent board members, the Conflicted Directors caused the board to engage the financial

advisory and investment banking firm Duff & Phelps, LLC, to provide the board with an opinion


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on the fairness of Great American’s tender offer. National Interstate provided Duff & Phelps

with five-year management projections to use in connection with its valuation analysis.

50. In a letter to National Interstate dated February 11, 2014, Spachman requested

that he be “afforded the opportunity to meet with Duff & Phelps, without members of

management or their advisors . . . present[.]” Spachman intended to share with Duff and Phelps

his views on the value of National Interstate as well as the opportunistic timing of the Great

American tender offer. Counsel for Duff & Phelps informed Spachman’s counsel, by letter, that

“as a matter of customary practice, [the firm] is amenable to meeting with the directors of the

companies engaged by it as a courtesy ancillary to its preparation and delivery of a fairness

opinion.” Counsel for Duff & Phelps further explained that because of the terms of its

engagement letter it needed permission for such a meeting from a majority of the National

Interstate directors. But the Conflicted Directors blocked Spachman’s request for a meeting with

Duff & Phelps, and the meeting never happened.

51. On February 15, 2014, Duff & Phelps provided the board with a written report

stating that Great American’s tender offer to purchase the outstanding shares of National

Interstate for $28 per share “is not fair from a financial point of view to [the minority]

shareholders . . . .”

52. Duff & Phelps further advised the board that it had calculated a valuation range

for the shares of National Interstate stock of $29.51 to $35.72. To arrive at this valuation range,

Duff & Phelps used a series of valuation metrics, including discounted cash flow, comparable

company, and comparable transaction analyses. Not one of the valuation metrics employed by

Duff & Phelps showed the $28 price to be fair. And the discounted cash flow analysis, which

was based on five-year projections supplied by National Interstate management, showed the

company worth $36.84 per share at the high end of the value range.


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53. In utter disregard of the interests of the National Interstate minority shareholders,

the Conflicted Directors used the Duff & Phelps analysis, including the full range of values

calculated by Duff & Phelps, on behalf of Great American and AFG.

54. On February 17, 2014, defendant Joseph Consolino, who serves the dual — and in

this case, directly conflicting — roles as chairman of the National Interstate board and executive

vice president and chief financial officer of AFG, provided the National Interstate board

members with AFG’s analysis of the value of shares of National Interstate stock. Consolino’s

analysis was sent on AFG letterhead and purports to calculate a valuation range substantially

lower than the range calculated by Duff & Phelps. Abandoning any pretense of being faithful to

National Interstate’s minority shareholders, Consolino was attempting to refute the Duff &

Phelps opinion and talk down the value of National Interstate shares.

55. With the benefit of knowing the valuation range calculated by Duff & Phelps, and

having management’s five-year projections, Great American manipulated its offer and increased

its bid to $30 per share, just 49 cents above the lowest point of that range.

56. The Conflicted Directors then asked Duff & Phelps to opine on the fairness of the

new $30 offer. But the investment firm, uncomfortable with the fact that their analysis had been

shared with the offeror, declined to do any further work on the matter.

57. On February 18, 2014, Great American and National Interstate issued press

releases announcing the increase. In doing so, neither Great American nor National Interstate

disclosed that (1) the National Interstate board had refused to form a special committee of the

independent directors to evaluate and negotiate the offer, (2) Duff & Phelps, the valuation expert,

had concluded that $28 per share was not fair to the shareholders, (3) Duff & Phelps had

determined a valuation range of $29.51 to 35.72 per share, (4) the Conflicted Directors had


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improperly shared Duff & Phelps’s valuation range with the offeror, or (5) Duff & Phelps had

refused to opine on the fairness of Great American’s manipulative offer.

58. On February 19, 2014, Spachman received a draft of National Interstate’s

Schedule 14D-9. With only limited time to review the draft, Spachman sent written comments

identifying a number of ways in which the draft Schedule 14D-9 was materially misleading.

59. Later that day, the company filed the Schedule 14D-9 with the SEC without

making the changes suggested by Spachman. The Conflicted Directors disingenuously stayed

“neutral” on the tender offer, leaving the minority shareholders to evaluate the offer for

themselves. The company’s Schedule 14D-9 failed to disclose that Duff & Phelps had

determined a per share valuation for National Interstate’s stock, failed to disclose that range, and

failed to disclose the five-year management projections for the company. The filing also failed

to disclose that the Conflicted Directors had shared the Duff & Phelps analysis with Great

American and AFG, which permitted them to calibrate their next offer at the lowest possible

level of the Duff & Phelps range. Spachman promptly filed his own Schedule 14D-9 with the

SEC, denouncing the bid as opportunistic, coercive, and unfair.

60. While concealing the Duff & Phelps valuation and management projections from

National Interstate’s shareholders, AFG and Great American provided them with their own,

substantially lower, valuation analyses. In the Schedule TO, Great American purported to offer a

“fairness determination,” which purported to conclude, based on a variety of metrics, that its

offer was fair. Great American’s analyses, however, yielded substantially lower valuations than

those of Duff & Phelps.

61. On March 3, the Conflicted Directors filed an amended Section 14D-9, which

included the Duff & Phelps valuation range. The amended disclosure continues to omit the

circumstances surrounding Great American’s access to the Duff & Phelps range or its use of that


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inside information to calibrate its revised offer. The amended disclosure also continues to omit

management’s financial projections of National Interstate’s future earnings, which were provided

to Duff & Phelps and Great American.

Great American’s Tender Offer Elicits Widespread Condemnation

62. Defendants’ flagrant misconduct has received widespread condemnation from the

business and investing community.

63. On February 25, 2014, T. Rowe Price, a financial advisor representing clients who

hold approximately 8% of National Interstate’s shares, filed a Schedule 14D-9 that publicly

disclosed a letter it had sent to the Conflicted Directors the previous day. In the letter, T. Rowe

Price stated that it was “quite troubled about both the process the National Interstate Board

undertook to evaluate the transaction as well as the consideration offered.” T. Rowe Price

described the defendants’ conduct as “appall[ing],” and stated that in its vast experience it had

“rarely come away with concerns as substantial as those . . . identified here.” T. Rowe Price

further stated that all of the Conflicted Directors faced conflicts of interests and that it “would

have expected the Board to have made every effort to mitigate its conflict, to the best of its

ability, using well-established techniques such as (a) establishing an independent review

committee comprising the independent members of the Board; (b) facilitating the use of separate

legal counsel and valuation expertise by the independent review committee; and (c) insisting on

some form of a majority-of-the-minority clause for shareholder approval of the offer.”

64. The following day, Institutional Shareholder Services, the nation’s leading proxy

advisory service, issued a report stating that Great American’s tender offer “raise[s] every red

flag in the semaphore.” ISS stated that it “is difficult to consider the offer compelling” when

even the financial advisor hired by the board found the initial offer unfair, and noted that the


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reasons offered by the Conflicted Directors in favor of tendering “raise the question whether they

are competent stewards of shareholder value.”

65. The Wall Street Journal has likewise run a series of stories commenting that

defendants have dispensed with the basic protections that are “commonly used to manage

conflicts that can arise when majority shareholders offer to cash out minority investors.” In an

article published on February 20, Harvey Pitt, former Chairman of the SEC, was quoted as

saying that the use of such a special committee is “standard operating procedure” in these types

of transactions. According to Mr. Pitt, failure to cede to an independent group “can poison the

well for whatever decisions flow from that,” and he stated that he expected “a court to look quite

suspiciously” at the National Interstate board’s failure to use a special committee in this case

66. And in a February 25 “Dealbook” column, the New York Times accurately

described defendants’ boardroom conduct as “corporate shenanigans” and stated that Great

American’s coercive tender offer is replete with “threats that appear specifically designed to

push National Interstate shareholders into tendering.”

Great American’s Tender Offer is Unfair and Coercive

67. Great American’s tender offer is intentionally designed to be highly coercive and

to pressure the minority shareholders into tendering their shares without regard to the fairness of

the offering price.

68. Great American initially purported to condition the tender offer on acquiring

ownership of at least 90% of the common shares of National Interstate, but declared that it could

waive that condition. On March 3, 2014, Great American waived the minimum tender condition

and extended the offer date to March 17.

69. Without the 90% minimum tender condition, Great American’s tender offer is

maximally coercive for National Interstate’s minority shareholders. If Great American acquires


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just 15% of National Interstate’s outstanding shares, it will own two-thirds of the company’s

shares and will have sufficient voting power to approve unilaterally a subsequent merger at any

price, including a price below the already-unfair proposed tender offer price of $30 per share.

The offer document makes Great American’s threat to do this quite explicitly, in order to create a

“prisoner’s dilemma” for National Interstate’s shareholders.

70. Great American has expressly refused to commit to pursuing a merger for the

company’s remaining shares if it acquires control. As a result, shareholders who do not tender

risk being minority shareholders in a fully controlled company and may be subject to a

subsequent unilateral merger at an even lower price or other abusive tactics.

71. Indeed, Great American’s Schedule TO stated expressly that if Great American

waived the minimum condition it will purchase all of the shares tendered and, in that event,

specifically threatened to pursue several options that would harm the non-tendering shareholders,

including changing the board of directors, changing the company’s dividend policy, delisting the

company’s shares and deregistering the shares under the Securities Exchange Act of 1934.

72. Great American has also warned that if it waived the minimum tender condition,

the number of National Interstate shares that trade publicly could be reduced, which could affect

the liquidity or market value of the shares and could result in the shares being delisted for the

NASDAQ Stock Market.

73. After Great American waived the Minimum Tender Condition, the Conflicted

Directors filed an amended Schedule 14D-9 with the SEC warning that shareholders who failed

to tender “may not receive value for their shares equal to the Amended Offer Price and may be

unable to sell their shares at or above the Amended Offer Price.”


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74. Accordingly, because of the coercive design of the tender offer, any shareholder

who rejects Great American’s tender offer does so at his peril, and may find himself left with

shares that are greatly reduced in value and liquidity. The prisoner’s dilemma is thus created.

75. Great American is attempting to leverage the coercive nature of its offer to

purchase National Interstate’s common shares at an unfair price. The Conflicted Directors have

simply abandoned their duty of loyalty to the minority shareholders, and instead have at every

turn sought to facilitate Great American’s takeover at the lowest possible price.

COUNT ONE Violations of the Exchange Act

(Against National Interstate and the Conflicted Directors)

76. Plaintiff repeats and realleges all of the allegations contained in the preceding

paragraphs of this Complaint as if fully rewritten herein.

77. Section 14(d)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”)

provides that

[i]t shall be unlawful for any person . . . to make a tender offer for . . . any class of equity security … unless at the time copies of the offer . . . are first published or sent or given to security holders such person has filed with the Commission a statement containing . . . information as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. All requests or invitations for tenders . . . shall be filed as part of such statement and shall contain such of the information contained in such statement as the Commission may by rules and regulations prescribe.

The rules and regulations referenced in Section 14(d)(1) are set forth in Regulation 14D, which

was promulgated by the SEC under the Exchange Act.

78. Section 14(e) of the Exchange Act makes it unlawful

for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent,


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deceptive, or manipulative acts or practices, in connection with any tender offer . . . .

79. SEC Rule 14e-3 provides that

it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of section 14(e) of the Act for any other person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly from . . . the issuer of the securities sought or to be sought by such tender offer.

80. On February 19, 2014, the Conflicted Directors caused National Interstate to file a

Schedule 14D-9. The Schedule 14D-9 took no position on Great American’s tender offer with

the SEC.

81. For the reasons set forth above, including National Interstate’s failure to include

management projections and failure to describe the sharing of confidential information with

Great American, National Interstate’s Schedule 14D-9 is materially misleading and constitutes a

fraudulent, deceptive or manipulative act in connection with Great American’s tender offer.

Among other things, National Interstate’s filing fails to disclose management’s five-year

projections, the bidder’s use of material non-public information, including the Duff & Phelps

range of values, to manipulate and calibrate its bid, the coercive nature of the tender offer, and

the intent of the Conflicted Directors to further the interests of the bidder. As a result, National

Interstate’s filing is interfering with the right of its shareholders to properly consider Great

American’s tender offer, and is part of an effort to coerce plaintiff, as well as other shareholders,

into accepting Great American’s unfair tender offer.

82. Plaintiff seeks declaratory relief stating that National Interstate’s statements and

disclosures in conjunction with its Schedule 14D-9 violate Section 14(e) of the Exchange Act.


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83. Plaintiff further seeks an order requiring National Interstate to correct by public

means its material misstatements and omissions or otherwise fraudulent, deceptive or

manipulative acts or statements.

84. Plaintiff has no adequate remedy at law.

COUNT TWO Violations of the Exchange Act

(Against AFG and Great American)



86. Section 14(e) of the Exchange Act makes it unlawful

for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer . . . .

87. On February 5, 2014, AFG filed a Schedule TO on behalf of Great American with

the Securities and Exchange Commission, which they amended on February 18, 2014, and again

on March 5, 2014.

88. For the reasons set forth above, AFG and Great American’s Schedule TO is

materially misleading and constitutes a fraudulent, deceptive or manipulative act in connection

with the Great American tender offer. Among other things, AFG and Great American’s filing

fails to disclose management’s five-year projections, Great American’s use of material non-

public information wrongfully obtained from the Conflicted Directors, including the Duff &

Phelps range of values, to manipulate its bid, and the coercive nature of the tender offer. As a

result, AFG and Great American’s filing is interfering with the right of its shareholders to

properly consider Great American’s tender offer, and is part of an effort to coerce plaintiff, as

well as other shareholders, into accepting Great American’s unfair tender offer.


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89. Plaintiff seeks declaratory relief stating that Great American’s statements and

disclosures in conjunction with its Schedule TO violate Section 14(e) of the Exchange Act.

90. Plaintiff further seeks an order requiring Great American to correct by public

means its material misstatements and omissions or otherwise fraudulent, deceptive or

manipulative acts or statements.


COUNT THREE Breach of Fiduciary Duty

(Against the AFG, Great American and the Conflicted Directors)



93. The Conflicted Directors owe fiduciary duties to the minority shareholders of

National Interstate, including plaintiff. These duties include the duties of loyalty, candor, care,

and good faith.

94. These fiduciary duties include an obligation to conduct a fair review and

recommendation on the tender offer and to implement a process that is reasonably designed to

protect the interests of all shareholders, including the minority shareholders.

95. The Conflicted Directors have the means to conduct a fair review of the tender

offer by appointing a special committee of the board consisting of the independent board

members, by authorizing the special committee to negotiate on behalf of the minority

shareholders, and by authorizing the special committee to engage legal counsel and a financial

advisor at National Interstate’s expense.

96. By deliberately refusing to take these steps despite their clear conflicts of interest,

the Conflicted Directors are advancing the interests of Great American and AFG at the expense

of the minority shareholders, and they have breached their fiduciary duties to those shareholders.


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97. Moreover, by providing the Duff & Phelps opinion to Great American and AFG,

the Conflicted Directors have conferred an advantage on Great American and AFG while placing

the minority shareholders at a disadvantage in achieving a fair price for their National Interstate

shares.

98. Such acts constitute a complete disregard by the Interested Shareholders for the

best interests of the minority shareholders.

99. Additionally, Great American, as the majority shareholder, has a fiduciary duty to

the minority shareholders to make a purchase offer at a price that reflects fair value for the

common shares of National Interstate.

100. The price that Great American has offered does not reflect fair value of National

Interstate’s common shares and is contrary to the minority shareholders’ best interests.

101. Great American’s and the Conflicted Directors’ breaches of fiduciary duty have

been and are willful and malicious.

102. As a direct and proximate result of Defendants’ actions, plaintiff has been, and

will continue to be, damaged.


COUNT FOUR Violation of R.C. § 1701.831

(Against Great American)



105. The Ohio legislature has found that tender offers deny a company’s shareholders a

fair opportunity to engage in reasoned decision-making because of, among other things, the short

time periods in which they can be consummated, the use of structures designed to encourage


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prompt tenders, and the fact that individual shareholders typically receive or obtain tender offer

materials much later than institutional shareholders.

106. The Ohio legislature has concluded that it is in the public interest for shareholders

to have a reasonable opportunity to express their views in connection with a proposed tender

offer. The Ohio legislature has also concluded that it is in the public interest to provide

evenhanded protection of offerors and shareholders from fraudulent and manipulative

transactions arising in connection with control acquisitions.

107. To protect the public interest, Ohio has enacted a Control Share Acquisition

Statute, R.C. § 1701.831, which places limits on the ability of an offeror to pursue a tender offer

without first seeking authorization from the corporation’s non-interested shareholders (i.e., those

shareholders not seeking to make the control share acquisition).

108. Ohio’s Control Share Acquisition Statute provides that a person may not, without

prior authorization from a corporation’s shareholders, directly or indirectly acquire, “shares of an

issuing public corporation that, when added to all other shares of the issuing public corporation

in respect of which the person may exercise or direct the exercise of voting power . . . , would

entitle the person, immediately after the acquisition, directly or indirectly, alone or with others,

to exercise or direct the exercise of the voting power of the issuing public corporation in the

election of directors within any of the following ranges of such voting power: (a) One-fifth or

more but less than one-third of such voting power; (b) One-third or more but less than a majority

of such voting power; (c) A majority or more of such voting power.” R.C. § 1701.01(Z)(1).

109. A person who seeks to acquire shares of an issuing public corporation who will be

“entitled, immediately thereafter, to exercise or direct the exercise of voting power . . . within the

same range theretofore attained by that person,” is excepted from the Control Share Acquisition

statute only if that person obtained those shares “either in compliance with the provisions of [the


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Control Share Acquisition statute] or as a result solely of the issuing public corporation’s

purchase of shares issued by it.” R.C. § 1701.01(Z)(2).

110. Great American’s tender offer falls within Ohio’s Control Share Acquisition

Statute because it seeks to obtain voting power “within the range” of “a majority or more” of

National Interstate’s voting power and its shareholdings were not previously obtained “in

compliance with the provisions of” the Control Share Acquisition Statute. Great American

purchased its shares of National Interstate in 1990 before the company was public and subject to

the Control Share Acquisition statute. As a result, it never received approval from a majority of

National Interstate’s other shareholders to exceed any of thresholds set forth in the statute.

111. When National Interstate went public in 2005, the company disclosed that it was

subject to Ohio’s Control Share Acquisition Statute and was choosing not to opt out of the

protections of the statute. In the prospectus that National Interstate disseminated to potential

buyers, the company further disclosed that the statute could impede a potential merger. The

prospectus did not inform National Interstate’s future public shareholders that Great American

believed that it could acquire additional shares without being subject to the statute.

112. Although the tender offer is subject to Ohio’s Control Share Acquisition Statute,

neither Great American nor the Conflicted Directors has made any effort to obtain prior

authorization from National Interstate’s shareholders or otherwise comply with the Control Share

Acquisition Statute.


WHEREFORE, plaintiff prays for judgment as follows:

A. Enjoining, preliminarily and permanently, Great American’s tender offer

from being consummated.


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B. If the transaction is consummated, awarding Spachman compensatory and

punitive damages.

C. Directing that defendants account to the minority shareholders for all

damages caused by them and all profits or benefits obtained as a result of

their breaches of fiduciary duties.

E. Awarding Spachman all costs of Court and reasonable attorneys’ fees and

expenses incurred herein.

H. Awarding any and all such further legal or equitable relief that this Court

may deem appropriate.

Dated: March 5, 2014

/s/Daniel R. Warren Daniel R. Warren (0054595) Thomas D. Warren (0077541) James A. Slater Jr. (0074524) BAKER & HOSTETLER LLP 1900 East Ninth Street, Ste. 3200 Cleveland, OH 44114-3485 Telephone: 216.621.0200 Facsimile: 216.696.0740 [email protected] [email protected] OF COUNSEL: Stephen R. DiPrima Benjamin D. Klein WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, NY 10019 Telephone: 212.403.1000 Facsimile: 212.403.2000 [email protected] [email protected]

Attorneys for Plaintiff Alan R. Spachman.


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JURY DEMAND

Plaintiff Alan R. Spachman hereby demands a jury trial as to all issues so triable.

/s/Daniel R. Warren

One of the attorneys for Alan R. Spachman


in the united states district court...

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