Baum v. Harman International Industries, Incorporated et al
Filing
187
MEMORANDUM OF DECISION re 154 Order on Motion for Judgment on the Pleadings. Please see attached Memorandum of Decision for details. Signed by Judge Robert N. Chatigny on December 14, 2021. (Hann, L.)
Case 3:17-cv-00246-RNC Document 187 Filed 12/14/21 Page 1 of 27
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
PATRICIA B. BAUM, Individually
and on behalf of all others
similarly situated,
Plaintiff,
v.
HARMAN INTERNATIONAL
INDUSTRIES, INC., et al.,
Defendants.
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CASE NO. 3:17-cv-246(RNC)
MEMORANDUM OF DECISION
This is an action under the federal securities laws brought
by a former shareholder of Harman International Industries, Inc.
(“Harman”) individually and on behalf of a proposed class.
The
complaint alleges that Harman’s senior management used a false
and misleading proxy statement to solicit support for Harman’s
acquisition by Samsung Electronics Co., Ltd. (“Samsung”).
Plaintiff seeks compensatory damages for defendants’ alleged
violations of Sections 14(a) and 20(a) of the Securities
Exchange Act of 1934 and of Securities and Exchange Commission
Rule 14a-9.
In 2019, a motion to dismiss the complaint under Rule
12(b)(6) was granted in part and denied in part.
See Baum v.
Harman Int’l Indus., Inc., 408 F. Supp. 3d 70 (D. Conn. 2019).
Prior to that ruling, discovery had been stayed pursuant to the
1
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Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C.
§ 78u-4(b)(3)(B), which imposes an automatic stay of discovery
during the pendency of a motion to dismiss.
Before the stay was
lifted, defendants renewed their request for dismissal of the
remaining claims through the procedural vehicle of a Rule 12(c)
motion for judgment on the pleadings, which has served to extend
the stay.
This memorandum addresses the issues presented in
that motion.
The issues have been extensively briefed.
Most
significantly for present purposes, the parties have briefed the
Second Circuit’s summary order in Gray v. Wesco Aircraft
Holdings, Inc., affirming the dismissal of a minority
shareholder’s complaint for failure to adequately plead that the
allegedly misleading proxy caused the plaintiff to incur a “nonspeculative economic loss.”
847 F. App’x 35, 37 (2d Cir. 2021).
The District Court’s opinion in Wesco, see 454 F. Supp. 3d 366
(S.D.N.Y. 2020), has also been the subject of extensive
briefing.
After careful consideration of the parties’ submissions, I
am not persuaded that plaintiff’s claim should be dismissed.
For reasons discussed more fully below, I continue to believe
that the allegations of the complaint, accepted as true and
viewed most favorably to plaintiff, provide a sufficient basis
for a plausible claim that the proxy was materially misleading.
2
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Plaintiff’s complaint is similar in nature to the complaint in
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991),
where facts developed in discovery led to a plaintiff’s verdict.
The judgment was reversed by the Supreme Court on the issue of
causation because the merger did not require the approval of the
minority shareholders and, accordingly, any false statements in
the proxy were not an “essential link in effectuating the
transaction” under the causation test of Mills v. Electric AutoLite Co., 396 U.S. 375, 385 (1970).
501 U.S. at 1102.
See Virginia Bankshares,
Importantly for the present case, the Supreme
Court’s opinion provides no reason to doubt that the judgment
awarding damages to the plaintiff would have been sustained if
the merger required the minority’s approval.
Defendants contend that Wesco dooms plaintiff’s claim
because her theory of economic loss rests on allegations
concerning the inherent value of her Harman shares at the time
of the merger.
Plaintiff responds that the Second Circuit
affirmed the dismissal in Wesco, not because the damages theory
pleaded here is untenable, but because the plaintiff’s
allegations in that case were insufficient to plead a nonspeculative claim.
I agree.
Accordingly, the complaint will
not be dismissed. 1
Defendants argue that Harman’s poor performance since the
merger undercuts plaintiff’s claim, and they submit evidence in
1
3
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I.
Legal Standard
In support of the present motion, defendants repeat
arguments that were made in support of the 12(b)(6) motion and
add new arguments.
Insofar as the motion relies on arguments
previously considered and rejected, it constitutes, in
substance, a motion for reconsideration and will be treated as
such. 2
To the extent it relies on new arguments, it must satisfy
the usual standard for a motion for judgment on the pleadings. 3
support. Plaintiff responds that defendants’ reliance on
Harman’s post-merger performance implicates disputed issues of
fact requiring consideration of matters outside the pleadings
that are not subject to judicial notice. I agree and therefore
conclude that the issue of Harman’s post-merger performance
cannot be considered at this time.
“A motion for reconsideration is ‘an extraordinary remedy
to be employed sparingly in the interests of finality and
conservation of scarce judicial resources,’ and may be granted
only where a court has overlooked ‘controlling decisions or
factual matters that were put before it on the underlying
motion’ and which, if examined, might reasonably have led to a
different result.” Drapkin v. Mafco Consol. Grp., Inc., 818 F.
Supp. 2d 678, 695 (S.D.N.Y. 2011) (citations omitted) (quoting
In re Initial Public Offering Sec. Litig., 399 F.Supp.2d 298,
300 (S.D.N.Y. 2005) and Eisemann v. Greene, 204 F.3d 393, 395
n.2 (2d Cir. 2000)). Motions for reconsideration enable a court
to consider an intervening change of controlling law, new
evidence, or a need to correct a clear error or prevent a
manifest injustice. Bergerson v. N.Y. State Office of Mental
Health, 652 F.3d 277, 288-89 (2d Cir. 2011).
2
Judgment on the pleadings may be granted when “material
facts are undisputed and . . . judgment on the merits is
possible merely by considering the content of the pleadings.”
Sellers v. M.C. Floor Crafters, Inc., 842 F.2d 639, 642 (2d Cir.
1988); see Burns Int’l Sec. Servs., Inc. v. Int’l Union, United
Plant Guard Workers of Am., 47 F.3d 14, 16 (2d Cir. 1995). To
survive such a motion, a complaint generally “must contain
sufficient factual matter, accepted as true, to ‘state a claim
3
4
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This two-pronged approach comports with that of other district
courts in similar circumstances.
See Estep v. City of Somerset,
No. 10-286-ART, 2011 WL 845847, at *2 (E.D. Ky. Mar. 8, 2011);
see also Aviles v. S&P Global, Inc., No. 17-CV-2987 (JPO), 2020
WL 1689405, at *3 (S.D.N.Y. Apr. 6, 2020).
II.
A.
Discussion
Proxy Statement Regarding Management Projections
1.
The Complaint Sufficiently Alleges a Claim Based on
Subjective Falsity
Plaintiff’s Section 14(a) claim is based on a statement in
the proxy concerning certain projections of Harman’s future
performance.
The proxy stated: “senior management determined
. . . that the Management Projections . . . reflected more
downside risk . . . than likely upside potential.”
To
adequately plead a claim based on this statement, plaintiff must
allege facts permitting an inference that the statement was both
subjectively and objectively false.
Baum, 408 F. Supp. 3d at
86-87 (quoting Montanio v. Keurig Green Mountain, Inc., 237 F.
Supp. 3d 163, 170 (D. Vt. 2017)).
“In other words, the
complaint must allege ‘that the [d]efendants did not actually
to relief that is plausible on its face.’” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)). All factual allegations in the
complaint are accepted as true, and all reasonable inferences
are drawn in favor of the non-moving party. Id.
5
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hold the belief or opinion stated, and that the opinion stated
was in fact incorrect.’” Id. at 87 (quoting Montanio, 237 F.
Supp. 3d at 171).
I concluded at the motion to dismiss stage
that the complaint sufficiently alleges both.
Id.
Defendants challenge my holding as to subjective falsity. 4
I again conclude that plaintiff has sufficiently alleged
subjective falsity based, in part, on statements made by
Harman’s Chairman, CEO, and President, Dinesh C. Paliwal, before
the proxy was issued, which conflict with the statement in the
proxy quoted above.
Prior to the issuance of the prosxy,
Paliwal commented on Harman’s August 2016 Guidance, which
defendants now concede was “virtually identical” to the
Management Projections.
In his comments, Paliwal stated that
the projections contained in the 2016 Guidance “were ‘by far
very conservative’ and . . . reflected far more upside potential
Defendants argue that Omnicare, Inc. v. Laborers District
Council Construction Industry Pension Fund, 575 U.S. 175 (2015)
requires courts to use a more rigorous standard than the one
used in the prior ruling. ECF No. 89-2 at 24. Omnicare did not
change, and in fact reiterated, the longstanding proposition,
set forth in Virginia Bankshares, that the expression of an
opinion not honestly held “gives rise to liability under § 14(a)
when it is also ‘false or misleading about its subject matter.’”
Omnicare, 575 U.S. at 189 n.7 (quoting Virginia Bankshares, 501
U.S. at 1096). The standard used in the 12(b)(6) ruling tracks
Omnicare’s restatement of the Virginia Bankshares standard for
allegations of subjective falsity.
4
6
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than downside risk.”
In addition, he stated that he was “very
confident” in Harman’s ability to “hit[] the numbers” contained
in the 2016 Guidance.
ECF. No. 16 at ¶¶ 10, 59, 70, 72. 5
Defendants argue that Paliwal’s prior statements are not
inconsistent with the statement in the proxy.
They assert that
what Paliwal described as “by far very conservative” was not the
Management Projections generally (or their August 2016
Paliwal used the phrase “by far very conservative” in a
September 2016 presentation at the RBC Capital Markets Global
Industries Conference. See ECF No. 89-9 (transcript of
presentation). After some opening discussion, the presenter and
Paliwal engage in the following exchange:
5
JOE SPAK: Right. And then the other thing you
brought up was take rates, which, as you mentioned,
have been fairly consistently trending up, about 300
basis points -- this is an industry number -- a year.
We agree with you that it seems like at some point
there is going to be a more massive inflection there.
And it also seems, and I would be curious to get
your point of view, within your guidance range that
seems to be -- production you can’t control. I guess
take rates you can’t really control as well, but it
seems like take rates is a big leverage, where you
come off of it, for you to maybe do a little bit
better than you have guided. Is there any sensitivity
you could give us to maybe what 100 basis points of
take rate means for you?
DINESH PALIWAL: Absolutely, and first of all, I
reiterate and totally agree with you. I think our
guidance for 2017 or actually outlook for 2021 is by
far very conservative, because if you don’t believe in
autonomous or semi-autonomous experience, that is a
different story, but I don’t think anybody in this
room thinks that we're going to go backward. I don’t
think so.
Id. at 5 (emphasis added).
7
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analogues) but rather a single assumption used in developing the
projections, specifically, an assumption that industry take
rates would grow by 3% a year.
ECF No. 89-2 at 18-19.
Relying
on this premise, defendants urge that describing a single
assumption as “conservative” is not inconsistent with
management’s subsequent determination that the overall guidance
had more downside risk than upside potential.
Id. at 19, 22.
Defendants’ interpretation of Paliwal’s statements is
unavailing at this juncture.
Despite defendants’ assertions to
the contrary, 6 the complaint explicitly alleges that the “by far
very conservative” language applied to the projections as a
whole.
See ECF No. 16 at ¶ 72 (“This . . . statement [in the
proxy] is both objectively and subjectively false and conflicts
with Paliwal’s repeated statements to analysts that the Organic
Growth/Management Projections were ‘by far very conservative’
and that those same projections reflected far more upside
potential than downside risk.”).
In assessing the plausibility
of this allegation, any ambiguities in Paliwal’s statements must
be construed in favor of the plaintiff.
Shore v. Charlotte-
Mecklenburg Hosp. Auth., 412 F. Supp. 3d 568, 573 (M.D.N.C.
2019) (“A court may consider facts and documents subject to
See ECF No. 103 at 3 (“To be clear: Nowhere in her
pleading does plaintiff allege that Paliwal described Harman’s
overall guidance as ‘conservative.’”).
6
8
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judicial notice, provided that the court construe such facts in
the light most favorable to the non-moving party.”); accord USHA
Holdings, LLC v. Franchise India Holdings Ltd., 11 F. Supp. 3d
244, 270 (E.D.N.Y. 2014) (“At this stage of the litigation,
‘documents are construed in the light most favorable to
plaintiff and all doubts are resolved in its favor’ . . . .” )
(quoting CutCo Indus., Inc. v. Naughton, 806 F.2d 361, 365 (2d
Cir. 2014))).
If the statement so construed can reasonably be
read to refer to the Management Projections as a whole, that is
sufficient.
I continue to think such an interpretation is reasonable.
Paliwal’s statement that “our guidance for 2017 or actually
outlook for 2021 is by far very conservative” does not
necessarily refer exclusively to take rates, given the broader
context of the discussion, which involved a question about
Harman’s midterm guidance.
Indeed, at the time of the 12(b)(6)
motion, defendants described the subject of Paliwal’s
characterization more broadly; they noted that “backlog and take
rates . . . were the topics under discussion when Paliwal made
his prior statements.
Compl. ¶ 60 (quoting cautionary language
on backlog and take rates from August 2016 press release.).”
ECF No. 29-1 at 24 (emphasis added).
Furthermore, Paliwal’s
statement that he was “very confident” about “hitting the
9
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numbers” (in the projections), can reasonably be interpreted as
a reference to more than just take rates. 7
Defendants’ reliance on Martin v. Quartermain, 732 F.
App’x 37 (2d Cir. 2018) (summary order) is misplaced. There, as
here, the defendant company issued positive projections and
later walked them back. The Second Circuit affirmed the
district court’s grant of the defendants’ motion to dismiss,
opining that none of the statements constituted “a material
misrepresentation or omission.” Id. at 40. The case is
distinguishable because the plaintiffs in Martin “primarily
focused” on the omission theory of liability. Id. at 41.
Omission-based claims require a different analysis than claims
based on subjective falsity. In addition, the Second Circuit
relied on the fact that “all the relevant allegations in the
complaint suggest that . . . [the defendant] believed that” the
optimistic estimates would prove accurate. Id. at 40-41. Among
other things, a theory of subjective falsity would have required
accepting that the defendant “invested tens of millions of
dollars into drilling and associated studies in a venture that
it secretly believed would not be profitable.” In re Pretium
Res. Inc. Sec. Litig., 256 F. Supp. 3d 459, 478 (S.D.N.Y. 2017),
aff’d Martin, 732 F. App’x 37. Plaintiff’s claims in this case
are not similarly implausible.
7
Other cases on which defendant relies are inapposite.
Tongue v. Sanofi was a case about material omissions, not
subjective falsity. 816 F.3d 199, 212 (2d Cir. 2016)
(“Plaintiffs’ case essentially boils down to an allegation that
the statements were misleading for failure to include a fact
that would have potentially undermined Defendants’ optimistic
projections.”). As was Oklahoma Firefighters Pension &
Retirement System v. Xerox Corp., 300 F. Supp. 3d 551, 576
(S.D.N.Y. 2018) (“[Plaintiff] does not argue that these
statements fall within the first category of
opinions Omnicare recognizes as actionable: [Plaintiff] does not
allege that Xerox’s officers held beliefs other than those they
professed, or that the facts embedded in these opinions were
untrue.”), aff’d Ark. Pub. Emps. Ret. Sys. v. Xerox Corp., 771
F. App’x 51 (2d Cir. 2019).
10
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2.
The Complaint Sufficiently Pleads Fraud
Plaintiff’s fraud theory is that Harman’s senior management
did not actually determine or believe that the Management
Projections reflected more downside risk than likely upside
potential.
I concluded at the 12(b)(6) stage that this theory
is sufficiently supported by the allegations of the complaint.
Baum, 408 F. Supp. 3d at 89.
In doing so, I relied on
plaintiff’s allegations that defendants had a financial
incentive to make the acquisition look more attractive.
Id. at
87 (citing Slayton v. Am. Exp. Co., 604 F.3d 758, 776 (2d Cir.
2010) (“[M]otive can be a relevant factor, and ‘personal
financial gain may weigh heavily in favor of a scienter
inference.’” (quoting Tellabs, Inc. v. Makor Issues & Rts.,
Ltd., 551 U.S. 308, 325 (2007)))).
Defendants continue to argue that because Paliwal owned
Harman stock, he had no motive to sell the company’s shares at a
price favorable to Samsung.
However, the complaint alleges that
the financial difference between Paliwal’s final compensation
agreement with Samsung and his compensation with an independent
Harman was more than $50 million.
Accordingly, plaintiff
adequately alleges that Paliwal “benefitted in a concrete and
personal way from the purported fraud.”
216 F.3d 300, 311 (2d Cir. 2000).
11
See Novak v. Kasaks,
Case 3:17-cv-00246-RNC Document 187 Filed 12/14/21 Page 12 of 27
In addition to plausibly alleging a financial motive for
the alleged fraud, plaintiff plausibly alleges that, in
furtherance of the fraud, Harman’s senior management arranged
for the creation of “Sensitized Projections,” which were based
on the Management Projections but assumed, without good cause,
25% less growth in revenue and earnings.
The complaint alleges
that the Sensitized Projections were developed by Harman’s
financial advisors based on input from senior management,
provided to the Board in connection with its evaluation of the
proposed merger, then touted in the proxy as a “Reason[] for the
Merger.”
Defendants cite Wesco but that case differs from this one
in two key respects.
Unlike plaintiff here, the plaintiff in
Wesco failed to plausibly allege motive on the part of the CEO
to complete a transaction at the expense of shareholders.
F. Supp. 3d at 396.
454
And, although Wesco’s management updated
its Initial Projections with a more pessimistic set of
projections (as here), those changes were preceded by a series
of negative developments that rendered the Initial Projections
obsolete.
Id. at 397.
As a result, “[t]he sets of statements
and reports [we]re not contradictory but can be easily
reconciled.”
Id. at 398. 8
These same distinctions exist with regard to defendants’
other cases. In In re Analogic Corp. Shareholder Litigation,
8
12
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3.
The Statement in the Proxy Is Not Protected by the
PSLRA’s Safe Harbor
Defendants continue to rely on the PSLRA’s safe harbor for
forward-looking statements as a bar against liability.
In their
view, the statement at issue - that the Management Projections
“reflected more downside risk . . . than likely upside
potential” – is a perfect example of a forward-looking statement
under the statute.
the 12(b)(6) stage.
I considered and rejected this argument at
Baum, 408 F. Supp. 3d at 86.
I review that decision for clear error.
Accordingly,
See Bergerson, 652 F.3d
at 288-89.
The PSLRA provides in relevant part that “a person . . .
shall not be liable with respect to any forward-looking
statement . . . if and to the extent that” the statement is
the plaintiff failed to plead “any facts that would demonstrate
that the [pessimistic] projections were not actually the most
reliable.” No. 18-cv-11301-ADB, 2019 WL 4804800, at *10 (D.
Mass. Sept. 30, 2019). The Analogic defendants offered explicit
statements “describing the Company’s previous failures in
meeting projections,” including repeated disappointments
relative to each of the four previous operating plans. Id. at
*11. Furthermore, the defendants’ interests apparently aligned
with that of the shareholders. Id. at *13. Similarly, in Golub
v. Gigamon Inc., a more pessimistic set of projections was
created only after “what [the company] acknowledged was a
surprisingly poor Q3 2017.” 372 F. Supp. 3d 1033, 1051 (N.D.
Cal. 2019). In this case, defendants point to no intervening
changes in the company’s economic situation that prompted the
Sensitized Projections.
13
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“identified as a forward-looking statement, and is accompanied
by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially
from those in the forward-looking statement.”
5(c)(1).
15 U.S.C. § 78u-
Under the Act’s definition, a “forward-looking
statement” includes “any statement of the assumptions underlying
or relating to” an otherwise defined forward-looking statement
such as a “statement of future economic performance,” or a
“statement containing a projection of . . . earnings.”
§ 78u-5(i)(1).
Id.
Defendants have the burden of proving that a
statement falls within the safe harbor.
Golesorkhi v. Green
Mountain Coffee Roasters, Inc., 973 F. Supp. 2d 541, 554 (D. Vt.
2013).
Defendants argue that the statement in the proxy concerning
the Management Projections is protected because it constitutes
(a) a statement of “future economic performance,” (b) “a
statement containing a projection of . . . earnings,” or (c) a
“statement of the assumptions . . . relating to” either a
statement of future economic performance or a statement
containing a projection of earnings.
I continue to think that
the statement is not protected by the safe harbor.
The statement at issue – in full, “the Company’s senior
management determined . . . that the Management Projections
currently reflected more downside risk . . . than likely upside
14
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potential” – does not fall within the bounds of the safe harbor.
Defendants focus on the latter half of the statement and argue
that it is a statement of “the assumptions underlying or
relating to” the Management Projections, which were themselves
unquestionably forward-looking.
But focusing on the dependent
clause mistakes the nature of the statement and the claim.
The
statement makes one clear assertion of historical fact: that
“the Company’s senior management determined” something.
Management literally made a determination.
As plaintiff’s
counsel pointed out during oral argument, this can easily be
proven – or not – at trial.
See Omnicare, 575 U.S. at 183 (“A
fact is ‘a thing done or existing’ or ‘[a]n actual happening.’”
(alteration in original) (quoting Webster’s New International
Dictionary 782 (1927))).
The statement also implies that Harman’s senior management,
at the time of the statement, actually held a certain belief
about the Management Projections: that they “currently”
contained more downside risk than likely upside potential.
This
statement, professing management’s opinion at the time the
statement was made,
does not depend on the occurrence of future events. An
opinion is false for the purposes of securities fraud if
the speaker disbelieves the opinion (“subjective
falsity”) and if it is objectively unreasonable at the
time spoken (“objective falsity”).
Statements of
present opinion do not implicate the policy rationales
underlying the safe harbor because future events cannot
15
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render them false – they are true or false at the moment
spoken.
Wendy Gerwick Couture, Mixed Statements: The Safe Harbor’s Rocky
Shore, 39 Sec. Reg. L.J. 257, 265 (2011).
Defendants rely on cases that express concern about
excluding from the safe harbor statements of present belief in
the accuracy of projections.
See Wesco, 454 F.Supp.3d at 389
(“Expressing confidence or lack thereof in a given projection is
not different from making a projection.” (quoting Golub, 372 F.
Supp. 3d at 1048)).
under the PSLRA.
That concern merits careful consideration
But it need not be dispositive when a forward-
looking statement in a proxy encompasses a false statement of
historical fact in furtherance of an alleged fraud.
See NECA-
IBEW Health & Welfare Fund v. Pitney Bowes Inc., No. 3:09-cv01740 (VLB), 2013 WL 1188050, at *17 (D. Conn. Mar. 23,
2013)(collecting cases).
B.
The Complaint Adequately Pleads Loss Causation
As stated at the outset, I agree with plaintiff that
defendants’ reliance on the Second Circuit’s summary order in
Wesco is misplaced.
In Wesco, the plaintiff alleged
that the Proxy misleadingly portrayed Wesco’s future
financial performance and valuation in a depressed
light in order to induce shareholders to approve the
inadequate merger consideration ($11.05 per Wesco
share) offered by [the buyer]. According to [the
plaintiff], Wesco shareholders suffered an economic
loss based on the difference between the merger
consideration and the intrinsic fair value of the
shares.
16
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Wesco, 847 F. App’x at 36.
The District Court held that the
plaintiff failed to adequately plead loss causation; the Second
Circuit affirmed.
Id. at 37.
As the Second Circuit explained, although research analysts
had estimated that bidders might offer Wesco substantially more
than the merger consideration, the analysts’ estimates were
insufficient to establish loss causation in light of
“contradict[ory]” allegations that several potential buyers,
with access to confidential information, “in fact offered” bids
well below the amount of the estimates.
Id.
The Second Circuit
was also unpersuaded that Wesco’s Initial Projections of future
financial performance, prepared by the company when it started
to explore a merger, reflected a higher “implied value of
Wesco’s shares.”
Id.
The court noted that the complaint failed
“to allege that the Initial Projections were sufficiently
likely, or that shareholders faced a genuine choice ‘between the
Merger and the achievement of the Initial [] Projections.’” Id.
(alteration in original).
The court concluded that the Initial
Projections were not “sufficiently likely” only after
considering the surrounding circumstances in their totality.
See id. at 38 (noting that Wesco had a long history of financial
underperformance and that 13 out of 14 potential acquirers lost
interest in Wesco).
17
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The allegations here are materially different.
Plaintiff
alleges that Harman received an offer to pay a higher price than
Samsung paid; Harman’s exclusivity arrangement with Samsung
prevented solicitation of other bids; and Harman did not
underperform prior to the merger agreement with Samsung.
Only
one of the allegations in Wesco has an analogue here – Wesco’s
stock traded below the deal price before the merger’s
announcement.
But merger announcements typically are followed
by a rise in price, as plaintiff points out.
Defendants contend that after Wesco, a minority shareholder
cannot recover damages based on the “inherent” value of her
shares at the time of the merger because such a claim is “too
speculative.”
However, in cases brought by minority
shareholders who have been cashed-out as a result of a merger,
courts have applied a measure of damages that compares the value
of what the plaintiff received and the fair value of the shares. 9
The Supreme Court has stated that the correct measure of
“actual damages” for violations of the Exchange Act is “the
difference between the fair value of all that the [plaintiff]
received and the fair value of what he would have received had
there been no fraudulent conduct.” Affiliated Ute Citizens v.
United States, 406 U.S. 128, 155 (1972) (referring to 15 U.S.C.
§ 78bb(a)(1), which limits recovery for Exchange Act violations
to “actual damages”). The Court’s statement could be
interpreted to mean that a minority shareholder who has been
cashed-out must prove that the acquiring company (or another
bidder) was prepared to pay a higher price for the shares. But
the Court’s statement has not been read that narrowly. Instead,
minority shareholders have been able to recover the difference
between the merger price and the “fair value” of the shares
9
18
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In Virginia Bankshares, for example, the minority shareholder
relied on this measure of damages in seeking compensation
measured by the difference between the merger price and the fair
value of his shares at the time of the transaction, which the
trier of fact found to be $18 per share. 10
501 U.S. at 1089.
The Supreme Court’s opinion reversing the judgment expresses no
disagreement with permitting the trier of fact to use this
measure of damages in a proper case.
Nor does the Second Circuit’s summary order in Wesco state
or imply that the measure of damages used in Virginia Bankshares
is an improper method of determining actual damages in this
context.
Rather, as the summary order explains, the complaint’s
allegation that the shares were intrinsically worth more than
the merger price was “too speculative to plead economic loss.”
847 F. App’x at 37.
Viewed in light of the allegations of the
complaint, the court’s holding is unremarkable.
In fraud
actions, like any other, “[r]ecovery of damages will not be
allowed when the evidence leaves the existence of damages
uncertain or speculative.”
22 Am. Jur. 2d § 339.
The holding
without having to prove what a third party would have paid to
acquire the company. This measure of damages corresponds to the
out-of-pocket theory of damages that applies when a seller sues
a buyer for fraudulent inducement.
The jury’s award appears to have been based on the book
value of the bank’s real estate assets at the time of the
merger.
10
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in Wesco that the plaintiff’s allegation of intrinsic value was
too speculative is plainly based on the particular facts alleged
there, as is typically the case when the court chooses to
dispose of an appeal by summary order.
Defendants seem to suggest that any claim for damages based
on projections should be rejected because projections by their
nature involve speculation.
However, projections are used in
appraisal litigation under state statutes requiring “fair value”
to be determined in light of “all relevant factors,” Del. Code
Ann. tit. 8, § 262, using “concepts and methods then customary
in the relevant securities and financial markets.”
Corp. Law § 623.
N.Y. Bus.
See Ronald J. Colombo, § 7:4, Law of Corporate
Officers & Directors: Rights, Duties, & Liabilities (2021-2022).
Commentators have strongly criticized the inefficiency of
statutory appraisal litigation, which has given rise to
“appraisal arbitrage” – “a trading and litigation strategy that
is predicated on deal dissenters receiving appraisal remedies in
excess of the deal prices from which they dissent.”
William J.
Carney & Keith Sharfman, The Death of Appraisal Arbitrage:
Ending Windfalls for Deal Dissenters, 43 Del. J. Corp. L. 61
(2018).
But Wesco does not preclude reliance on projections to
raise a triable issue of “fair value” in litigation under
section 14(a).
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The language of the summary order is instructive.
The
Second Circuit rejected the plaintiff’s claim as “too
speculative” because it was predicated on projections that were
not “sufficiently likely.”
This language implies that a claim
should not be rejected as “too speculative” when it takes
account of projections that are “sufficiently likely.”
Defendants have not shown that the Management Projections fail
this test.
In the absence of such a showing, plaintiff’s
allegations provide a sufficient basis for pleading a nonspeculative claim.
In addition to their arguments based on Wesco, defendants
argue that “plaintiff must ‘specifically assert[] a causal
connection between the concealed information’ and her inability
to receive more than $112 per share.”
ECF No. 89-2 at 37
(emphasis omitted) (quoting Emergent Cap. Inv. Mgmt., LLC v.
Stonepath Grp., Inc., 343 F.3d 189, 198 (2d Cir. 2003)).
Defendants’ argument is unavailing because plaintiff’s primary
claim does not rely on any “concealed information.”
Rather, the
complaint alleges that Harman’s senior management fraudulently
induced the Board and shareholders to believe that the
Management Projections were overly optimistic when, in reality,
Harman’s senior management believed them to be either correct or
conservative.
As a result, shareholders were misled into
ratifying a sale at a price that undervalued the company’s
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shares.
The “risk that caused the loss,” as alleged, is the
“risk” that the Management Projections were basically correct or
actually pessimistic.
That “risk” fell “within the zone of
risk” created by defendants’ alleged misrepresentation that they
believed the Management Projections were overly optimistic.
Emergent Capital discusses Suez Equity Investors, L.P. v.
Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001), in a way that
lends support to plaintiff’s damages theory.
In Suez Equity,
the plaintiffs not only alleged “a disparity between the price
they had paid for the company’s securities and the securities’
‘true’ value at the time of the purchase,” importantly, they
also “asserted a causal connection between the concealed
information — i.e., the executive’s history — and the ultimate
failure of the venture.”
Emergent, 343 F.3d at 198.
Put
differently, the plaintiffs successfully pleaded that (1) the
defendants concealed a lack of managerial ability, which led the
plaintiffs to purchase the security, and (2) the same lack of
managerial ability harmed the plaintiffs by causing loss.
Here,
plaintiff similarly alleges that Harman’s senior management (1)
misrepresented the Management Projections as having more
downside risk than upside potential, and (2) the
misrepresentation was damaging to her because it resulted in
approval of the merger at a price below the fair value of her
shares.
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C.
Claims Against Independent Directors
Defendants seek dismissal of the claims against the
individual directors, arguing that the complaint “is totally
devoid of any facts about these nine men and women – let alone
particularized facts suggesting that they committed fraud.” 11
ECF No. 89-2 at 39.
Plaintiff responds that because she has
pleaded a knowing misrepresentation by Paliwal, she need only
plead negligence as to the directors, and that their signatures
on the proxy demonstrate negligence under Wilson v. Great
American Industries, Inc., 855 F.2d 987 (2d Cir. 1988).
Plaintiff is correct.
Her § 14(a) claim is predicated on
Paliwal’s allegedly fraudulent conduct, and because she
satisfies the heightened pleading burden as to him, her claims
against the outside directors require her to plead only
negligence.
“[N]egligence is not a state of mind,” Beck v.
Dobrowski, 559 F.3d 680, 682 (7th Cir. 2009), so plaintiff need
not “state with particularity facts giving rise to a strong
inference that the [director] defendant[s] acted with the
required state of mind,” see 15 U.S.C. § 78u-4(b)(2)(A); accord
Fresno Cnty. Emps.’ Ret. Ass’n v. comScore, Inc., 268 F. Supp.
Because I conclude the § 14(a) claim survives, the
§ 20(a) control-person liability claim against the director
defendants also remains viable. See Baum, 408 F. Supp. 3d at
93. The remainder of this section addresses defendants’
arguments about the § 14(a) claims against the outside
directors.
11
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3d 526, 559 (S.D.N.Y. 2017) (rejecting argument that claims of
negligence are subject to the PSLRA’s elevated pleading
standard).
The complaint states the “circumstances constituting
fraud” with particularity, so plaintiff’s allegations that the
directors prepared and disseminated a proxy containing a
misleading statement are sufficient.
See Wilson, 855 F.2d at
995; Dekalb Cnty. Pension Fund v. Transocean Ltd., 817 F.3d 393,
408 n.90, 409 (2d Cir. 2016).
D.
The Complaint Sufficiently Pleads that the Proxy Omitted a
Material Fact Concerning J.P. Morgan’s Relationship with
Samsung
Defendants also move for judgment on the pleadings as to
plaintiff’s other surviving claim: that the proxy was false and
misleading by omitting a material fact relevant to a potential
conflict of interest on the part of J.P. Morgan, which
recommended that shareholders approve the acquisition.
In my
prior opinion, I stated: “Plaintiff alleges that the proxy
omitted a material fact by neglecting to disclose that J.P.
Morgan Asset Management served as an investment manager for a
Samsung affiliate during the same time period that J.P. Morgan
acted as a financial advisor on the Samsung-Harman deal.
agree.”
Baum, 408 F. Supp. 3d at 91.
I
This conclusion was not
clear error under the standard for reconsideration.
Defendants argue that the proxy was not misleading because
(1) it facially purports to disclose only conflicts between J.P.
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Morgan and its affiliates and “Samsung,” and does not extend its
disclosure to “Samsung affiliates”; (2) the Samsung affiliate at
issue here is a subsidiary of a “completely separate entity,”
Samsung Life Insurance Co., Ltd.; (3) plaintiff has failed to
demonstrate why a reasonable stockholder would care about this
potential conflict, in part because Lazard also provided
fairness opinions; and (4) plaintiff fails to adequately plead
negligence.
I take these arguments in turn.
As to the first and second arguments, defendants are
correct that the plain text of the proxy purports to disclose
only relationships between J.P. Morgan and its affiliates, on
the one hand, and “Samsung,” as defined by the proxy to mean
“Samsung Electronics, Co., Ltd,” on the other.
Samsung affiliates is made.
No mention of
However, the proxy subsequently
discloses relationships between J.P. Morgan or its affiliates
and Samsung entities separate from Samsung Electronics Co.,
Ltd., thereby suggesting that the proxy will be honest and
complete about J.P. Morgan’s relationships with its affiliates.
The alleged omission to disclose the concurrent relationship
with a subsidiary of Samsung Life Insurance Co. might well prove
insufficient to support recovery.
Viewed in a plaintiff-
friendly manner, however, it is marginally sufficient to support
a claim.
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Defendants’ third argument – that Lazard issued a separate
fairness opinion – does not merit reconsideration because the
complaint alleges that J.P. Morgan played a special role above
and beyond the role played by Lazard, all while operating under
an undisclosed potential conflict of interest.
Defendants’ fourth argument, that plaintiff fails to
sufficiently plead negligence because the proxy merely repeated
the list of conflicts provided by J.P. Morgan, is also
unavailing at this point.
The Second Circuit’s decision in
Wilson holds that preparation of a proxy containing a material
omission is negligent.
409 (reiterating same).
855 F.2d at 995; see Dekalb, 817 F.3d at
It is not clear that more is required
to adequately allege a negligence claim in this case.
See
comScore, 268 F. Supp. 3d at 560, 562 (recounting the Wilson
standard and describing it as a “low bar”).
Defendants’ broader
arguments about materiality are mixed questions of law and fact
not appropriate for resolution on the pleadings.
See Baum, 408
F. Supp. 3d at 91.
III.
Conclusion
For the foregoing reasons, the motion for judgment on the
pleadings has been denied.
Dated: December 14, 2021.
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____________________________
Robert N. Chatigny
United States District Judge
27
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