Baum v. Harman International Industries, Incorporated et al
Filing
61
ORDER granting in part and denying in part 29 Motion to Dismiss. See attached ruling and order for details. Signed by Judge Robert N. Chatigny on 10/3/19. (Morgan, Luke)
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.,
DINESH C. PALIWAL,
ADRIANE M. BROWN,
JOHN W. DIERCKSEN,
ANN M. KOROLOGOS,
ROBERT NAIL,
ABRAHAM N. REICHENTAL,
KENNETH M. REISS,
HELLENE S. RUNTAGH,
FRANK S. SKLARSKY, and
GARY G. STEEL,
Defendants.
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Case No. 3:17-cv-00246 (RNC)
RULING AND ORDER
This is a proposed class action under the federal
securities laws brought by and on behalf of shareholders of
Harman International Industries, Inc. (“Harman”).
The amended
complaint alleges that Harman and members of its board 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 and Securities and Exchange
1
Commission (“SEC”) Rule 14a-9.
Defendants move for dismissal on
the ground that plaintiff has failed to state a claim.
Plaintiff alleges that defendants sought to downplay
Harman’s value in order to make the Samsung acquisition seem
fair to shareholders.
She claims that the proxy statement (“the
proxy”) was false and misleading in four specific ways.
First,
she asserts that the proxy omitted the material fact that
Harman’s financial projections did not account for future
acquisitions, even though Harman’s growth strategy was built on
acquisitions.
Second, plaintiff argues that the proxy falsely
stated that Harman management determined that its financial
projections included more downside risk than likely upside
potential, thereby justifying the development of a less
optimistic set of financial forecasts.
These forecasts, in
turn, helped to justify a lower sale price to Samsung.
Third,
she claims that the proxy inaccurately stated that Harman does
not as a matter of course release financial projections and that
the projections contained in the proxy were not prepared for
public disclosure.
Fourth, plaintiff argues that the proxy was
false and misleading by omitting a material fact relevant to a
potential conflict of interest on the part of a financial
advisor who recommended that shareholders approve the
acquisition.
2
For reasons discussed below, plaintiff’s first and third
arguments are unavailing.
Plaintiff does, however, sufficiently
allege that the proxy was misleading as to the reason that
Harman revised its financial projections and as to a potential
conflict of interest on the part of a financial advisor.
Additionally, plaintiff has adequately pled loss causation by
asserting that Harman shareholders did not receive adequate
compensation in the acquisition.
Accordingly, the motion to
dismiss is granted in part and denied in part.
I.
Background
The following facts are drawn from the amended complaint
and accepted as true for purposes of the pending motion.
Plaintiff was at all relevant times the owner of Harman common
stock.
Harman was a Delaware corporation that maintained its
headquarters in Stamford, Connecticut.
The individual
defendants were Harman board members during the Samsung
acquisition in November 2016.
Dinesh C. Paliwal was also
Harman’s Chairman, CEO and President from 2008 until the Samsung
acquisition.
A. Harman’s Pre-Acquisition Business
Harman designs and engineers connected products and
solutions for automakers, consumers and enterprises, including
connected car systems, audio and visual products, enterprise
automation solutions, and connected services.
3
Before it was
purchased by Samsung, Harman powered its growth largely by
acquiring other companies.
In the period from February 2015 to
March 2016, Harman completed six acquisitions totaling $1.2
billion in consideration.
In an annual report issued August 11,
2016, Harman affirmed the importance of acquisitions in its
corporate growth strategy.
On January 4, 2017 -- several months
after Harman was acquired by Samsung -- Harman CEO and board
member Paliwal told Bloomberg that Harman would “definitely make
some unique technology acquisitions.”
On August 4, 2016, Paliwal and Harman’s chief financial
officer conducted a conference call, during which they presented
a slideshow called “Fourth Quarter & Full-Year Fiscal 2016
Highlights.”
One of the slides shown stated that “strategic
bolt-on acquisitions that accelerate growth” remained a key
aspect of Harman’s corporate strategy.
The slideshow also
depicted projections for Harman’s growth during fiscal years
2017, 2019, and 2021.
Paliwal expressed optimism about Harman’s
future financial performance due to its $24.1 billion backlog,
and confidence that Harman would see accelerated revenue
expansion.
On the same day as the fourth-quarter call, Harman
issued a press release providing financial projections for
fiscal years 2017-2019.
These projections accounted only for
“organic” growth, meaning that they did not incorporate
potential acquisitions.
4
B. The Samsung Acquisition
Paliwal held a number of meetings with Samsung executives
in September 2016, and Samsung expressed interest in acquiring
Harman.
Without immediately informing the other board members,
Paliwal unilaterally invited Samsung to submit a formal bid with
a specific price.
On October 4, Samsung delivered a written
acquisition proposal to Harman for $106 per share.
The other
board members learned of the letter and met on October 6.
Shortly thereafter, Samsung increased its proposal to $109 per
share.
The board met again on October 11, and authorized
Paliwal to obtain an offer of at least $112.
The same day,
Samsung agreed to increase the offer to $112 per share in cash,
predicated on an exclusivity agreement.
On October 13, 2016, Harman’s lead financial advisor, J.P.
Morgan, met with representatives of an entity identified as
“Company A.”
The representatives indicated that Company A could
submit a bid to purchase Harman for cash and stock (otherwise
known as a mixed consideration proposal).
Company A had
submitted a mixed consideration proposal the previous December
to purchase Harman for $115 per share.
J.P. Morgan and Paliwal
determined, without contemporaneous input from the other board
members, that Company A was unlikely to make a proposal that was
more attractive than $112 per share.
At Paliwal’s request, J.P.
Morgan called Company A’s representatives on October 14 and
5
requested a proposal that consisted of more cash and less stock.
Company A did not respond.
On October 14, 2016 Paliwal caused Harman to enter into an
exclusivity agreement with Samsung.
The agreement provided that
Samsung’s acquisition of Harman would be announced on November
14 and that Harman would not solicit competing proposals before
that date.
The agreement did not prohibit Harman from
attempting to negotiate a higher price with Samsung.
From
October 20-22, the management teams of Harman and Samsung held a
series of meetings to finalize the deal, which were not attended
by any board members other than Paliwal.
Samsung indicated that
it would only consummate the acquisition if Paliwal signed a
suitable employment agreement.
Paliwal responded that he could
discuss such a deal after the basics of the merger agreement
were settled.
The board met again on November 3, 2016.
J.P. Morgan and
Harman’s other financial advisor, Lazard, reviewed preliminary
financial analyses of the company.
Harman continued to do well
during this time period, and Paliwal affirmed that the company
was on track to meet its 2017 fiscal year guidance.
He also
stated that Harman would continue to make strategic, bolt-on
acquisitions.
Paliwal began negotiating his personal compensation with
Samsung on November 8, 2016.
On November 11, J.P. Morgan and
6
Lazard showed the board an updated, but still preliminary,
financial analysis.
The board authorized management to enter
into the merger agreement and finalize individual compensation
packages, and to announce the acquisition on November 14, 2016.
Over the next two days Paliwal finalized a compensation
agreement with Samsung that included a retention award of
approximately $22 million, a guarantee of no less than $21
million in long-term compensation over the next three years, and
acceleration of approximately $29 million in restricted Harman
stock and bonuses.
These payments were contingent on
consummation of the acquisition.
On November 13, 2016, the board held a meeting to formally
approve Samsung’s acquisition of Harman.
J.P. Morgan and Lazard
presented a discounted cash flow (DCF) analysis of financial
projections that management had developed through fiscal year
2021 (“the Management Projections”).
J.P. Morgan and Lazard
also presented a DCF analysis of a separate set of projections
that were based on the Management Projections, but downwardly
moderated predicted growth by 25% (“the Sensitized
Projections”).
Based on this information, the board formally
approved the acquisition at $112 per share.
C. The Proxy Statement
On January 20, 2017 the board issued a proxy statement to
solicit votes on the merger.
The proxy contained both the
7
Management Projections and the Sensitized Projections.
According to the proxy, “the Management Projections were
prepared based on assumptions reflecting the best currently
available estimates of and judgments by [Harman’s] management at
the time the Management Projections were prepared as to the
expected future results of operations and financial condition of
the Company.”
Although not labeled as such, the Management
Projections reflected only organic growth, meaning that they did
not account for future acquisitions.
In fact, the Management
Projections were very similar to the guidance that Harman had
released in August 2016.
The proxy further stated that “senior
management determined, taking into account the perspectives of
the Financial Advisors, that the Management Projections
currently reflected more downside risk . . . than likely upside
potential and that, accordingly, no further modifications to the
Management Projections were necessary or appropriate.”
The “Sensitized Projections” were based on the Management
Projections but assumed 25% less growth in revenue and earnings
before interest payments, taxes, depreciation, and amortization
(“EBITDA”).
According to the proxy, Harman’s financial advisors
developed the Sensitized Projections “taking into account the
views of management and the board as to certain potential risks
and uncertainties inherent in the Management Projections.”
8
The
Sensitized Projections were provided to the board in connection
with its evaluation of the proposed merger, but not to Samsung.
The proxy additionally stated that, “Harman does not as a
matter of course make public long-term projections as to future
performance,” and that the projections contained in the proxy
“were prepared for internal use and to assist Samsung and our
Financial Advisors with their respective due diligence
investigations of the Company or to assist the board in its
review and analysis of the proposed merger, as applicable.
The
Projections were not prepared with a view toward public
disclosure. . . .”
Appended to the proxy were fairness opinions prepared by
Harman’s financial advisors J.P. Morgan and Lazard, each
recommending that Samsung’s offer to purchase Harman for $112
per share was fair.
As discussed, the financial advisors had
conducted two DCF analyses:
one based on the Management
Projections and the other based on the Sensitized Projections.
The former produced a midpoint price of approximately $116.25
per share; the latter yielded a midpoint of approximately
$100.25 per share.
The proxy also disclosed that J.P. Morgan had provided
certain services to both Harman and Samsung in the preceding two
years.
9
Such services during such period have included acting
as joint lead arranger and joint bookrunner on the
Company’s syndicated facility in March 2015, as M&A
financial advisor to the Company on the Company’s
acquisition of Symphony Teleca in April 2015, as joint
bookrunner on offerings of debt securities by the
Company in May 2015, as joint bookrunner on the
initial public offering of Samsung SDS in October
2014, as joint global coordinator and joint bookrunner
on the initial public offering of Cheil Industries in
December 2014, as financial advisor to Parent on
Parent’s disposals of equity interests in Samsung
Techwin and Samsung Chemicals in June 2015 and as
joint bookrunner on the initial public offering of
Samsung Biologics in October 2016.
The proxy did not mention 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.
On February 17, 2017, a majority of stockholders voted to
approve Samsung’s acquisition of Harman.
Approximately 50
million out of 70 million shares, or 67%, were voted in favor of
the deal.
II.
Legal Standard
In ruling on the motion to dismiss, the Court may consider
“the complaint and the documents incorporated by reference into
the complaint (primarily the proxy statement in question).”
Montanio v. Keurig Green Mountain, Inc., 237 F. Supp. 3d 163,
166 (D. Vt. 2017) (citing Subaru Distribs. Corp. v. Subaru of
Am., Inc., 425 F.3d 119, 122 (2d Cir. 2005)).
To withstand
dismissal, a complaint generally “must contain sufficient
10
factual matter, accepted as true, to ‘state a claim 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)).
The Court must accept all factual allegations
as true and view them in the light most favorable to the
plaintiff.
Id.
The Private Securities Litigation Reform Act (“PSLRA”)
imposes additional pleading requirements on a plaintiff who
alleges that the defendant “made an untrue statement of a
material fact” or “omitted to state a material fact necessary in
order to make the statements made, in light of the circumstances
in which they were made, not misleading.”
§ 78u-4(b)(1).
15 U.S.C.
In such a case, “the complaint shall specify
each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and
belief, the complaint shall state with particularity all facts
on which that belief is formed.”
Id.
In any private action under the Securities Exchange Act
in which the plaintiff may recover money damages only
on proof that the defendant acted with a particular
state of mind, the complaint shall, with respect to
each act or omission alleged to violate this chapter,
state with particularity facts giving rise to a strong
inference that the defendant acted with the required
state of mind.
11
Id. § 78u-4(b)(2)(A).
Additionally, where a Section 14(a) claim
is premised on allegations of fraud, the plaintiff “must state
with particularity the circumstances constituting fraud,” as
required by Rule 9(b) of the Federal Rules of Civil Procedure.
See Fresno Cty. Emps.’ Ret. Ass’n v. comScore, Inc., 268 F.
Supp. 3d 526, 558 (S.D.N.Y. 2017) (citing Rombach v. Chang, 355
F.3d 164, 171 (2d Cir. 2004); In re JP Morgan Chase Sec. Litig.,
363 F. Supp. 2d 595, 636 (S.D.N.Y. 2005)).
III. Discussion
Section 14(a) of the Securities Exchange Act prohibits the
solicitation of proxy votes “in contravention of such rules and
regulations as the [Securities and Exchange] Commission may
prescribe.”
15 U.S.C. § 78n(a).
Rule 14a-9 provides,
No solicitation subject to this regulation shall be
made by means of any proxy statement, form of proxy,
notice of meeting or other communication, written or
oral, containing any statement which, at the time and
in light of the circumstances under which it is made,
is false or misleading with respect to any material
fact, or which omits to state any material fact
necessary in order to make the statements therein not
false or misleading or necessary to correct any
statement in any earlier communication with respect to
the solicitation of a proxy for the same meeting or
subject matter which has become false or misleading.
17 C.F.R. § 240.14a-9(a).
To state a claim that a defendant has violated these
provisions (collectively, “Section 14(a)”), “a plaintiff must
allege that: ‘(1) a proxy statement contained a material
12
misrepresentation or omission, which (2) caused plaintiff[’s]
injury, and (3) that the proxy solicitation itself, rather than
the particular defect in the solicitation materials, was an
essential link in the accomplishment of the transaction.’”
Montanio, 237 F. Supp. 3d at 170 (quoting Bond Opportunity Fund
v. Unilab Corp., 87 F. App’x 772, 773 (2d Cir. 2004)).
“Under
Rule 14a-9, [a] plaintiff[] need not demonstrate that the
omissions and misrepresentations resulted from knowing conduct
undertaken by the director defendants with an intent to
deceive.”
Wilson v. Great Am. Indus. Inc., 855 F.2d 987, 995
(2d Cir. 1988).
Unless a claim rests on an allegation of
knowing falsity, negligence in drafting a proxy statement is
sufficient to impose liability.
Id.
A person who directly or indirectly controls any person
liable under the Securities Exchange Act may also be held liable
under Section 20(a).
15 U.S.C. § 78t(a).
A. Management Projections’ Omission of Acquisitions
Plaintiff first alleges that the proxy was false and
misleading in that the Management Projections assumed that
Harman would not continue to acquire other companies.
She
asserts that acquisitions were an intrinsic aspect of Harman’s
business model.
Plaintiff argues that the proxy omitted a
material fact by failing to specify that the Management
Projections did not incorporate growth from future acquisitions.
13
However, plaintiff has not sufficiently alleged that this
omission rendered the proxy misleading.
Further, to the extent plaintiff claims the Management
Projections themselves were false and misleading, her claim is
defeated by the PSLRA’s safe harbor for forward-looking
statements.
i.
Omission of Material Fact
Plaintiff asserts that “if a [proxy] statement omits
material facts about the issuer’s inquiry into or knowledge
concerning a statement of opinion, and if those facts conflict
with what a reasonable investor would take from the statement
itself,” the issuer may be liable for the omission.
See
Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension
Fund, -- U.S. --, 135 S. Ct. 1318, 1329 (2015). 1
The argument
fails because the proxy did not suggest in any way that the
1
Although Omnicare concerned Section 11 of the Securities
Exchange Act, Section 14(a) “bars conduct similar to that
described in § 11.” 135 S. Ct. at 1326 n.2. Moreover,
Rule 14a-9’s omissions clause is nearly identical to
Section 11’s. Compare 17 C.F.R. § 240.14a-9(a)
(prohibiting filing a proxy statement that “omits to state
any material fact necessary in order to make the statements
therein not false or misleading”) with 15 U.S.C. § 77k(a)
(imposing liability for registration statement that
“omitted to state a material fact required to be stated
therein to make the statements therein not misleading”).
See also Trahan v. Interactive Intel. Grp., Inc., 308 F.
Supp. 3d 977, 987 (S.D. Ind. 2018) (applying Omnicare to a
Section 14(a) claim).
14
Management Projections were based on an assumption of future
acquisitions.
In fact, the proxy specified that the projections
presented therein, including the Management Projections, “do not
take into account any circumstances or events occurring after
the date they were prepared.”
ECF No. 29-2 at *63.
Such events
would include any acquisition that had yet to be consummated.
“[P]roxy solicitations need only provide the full objective
facts upon which investors can make their own judgments as to
value, and need not, and most often should not, embellish the
facts with speculative financial predictions.” Shaev v. Hampel,
No. 99 Civ. 10578 (RMB), 2002 WL 31413805, at *8 (S.D.N.Y. Oct.
25, 2002) (quoting Kahn v. Wien, 842 F. Supp. 667, 676 (S.D.N.Y.
1994)).
“It is well established that ‘Section 14 carries with
it no formal requirement that predictions be made as to future
behavior, and indeed, they are discouraged.’”
Id. (quoting
Krauth v. Exec. Telecard, Ltd., 890 F. Supp. 269, 288-89
(S.D.N.Y. 1995)).
Cf. Vladimir v. Bioenvision, Inc., 606 F.
Supp. 2d 473, 484-85 (S.D.N.Y. 2009) (“General statements about
a company’s financial projections or activities that do not
address the prospects for a merger do not give rise to a duty to
disclose [even] a potential merger”).
“A plaintiff asserting a claim for a material omission
under Rule 14a-9 ‘must show that there was a substantial
likelihood that the disclosure of the omitted fact would have
15
been viewed by the reasonable investor as having significantly
altered the total mix of information made available.’”
Koppel
v. 4987 Corp., 167 F.3d 125, 131-32 (2d Cir. 1999) (quoting
United Paperworkers Int’l Union v. Int’l Paper Co., 985 F.2d
1190, 1198 (2d Cir. 1993)).
Plaintiff has alleged that Harman
historically built its business through acquisitions and that
the company affirmed that acquisitions were central to its
strategy.
But she has not alleged that Harman had plans for any
specific acquisitions, and a reasonable investor would not have
assumed that the Management Projections accounted for purely
hypothetical future deals.
Disclosure of the fact that the
Management Projections did not include hypothetical future
acquisitions would not have significantly altered the total mix
of information available to Harman shareholders.
See id.
NECA-IBEW Pension Trust Fund v. Precision Castparts Corp.
is therefore unhelpful to plaintiff.
See No. 3:16-cv-01756-YY,
2017 U.S. Dist. LEXIS 165139 (D. Or. Oct. 3, 2017), adopted by
2018 U.S. Dist. LEXIS 11463 (D. Or. Jan. 24, 2018).
In
Precision Castparts, the plaintiffs similarly alleged that
Precision Castparts Corporation (“PCC”) filed a false and
misleading proxy statement that failed to incorporate future
acquisitions into its financial projections. Id. at *18.
PCC,
like Harman, had pursued growth through an acquisition-based
strategy.
Id. at *3-4.
Unlike Harman, however, PCC had
16
generated a set of financial projections that contemplated two
scenarios: one that assumed continued acquisitions, and one that
did not.
Id. at *7.
Berkshire Hathaway proposed acquiring PCC
on July 9, 2015, several months after the projections were
developed.
Id. at *9.
On July 11, PCC developed a set of
revised financial projections that did not contemplate any
future acquisitions.
Id. at *9.
more companies during July 2015.
Nonetheless, PCC acquired two
Id.
The revised projections
then provided the basis for a fairness opinion recommending that
the acquisition be completed, which in turn informed the board’s
decision to approve the acquisition.
Id. at *10-11.
PCC filed
a proxy statement soliciting shareholders’ votes, which referred
to the revised projections as the “most up-to-date and accurate
forecasts.”
Id. at *18.
The proxy further stated, “the Company
Forecasts did not assume any acquisitions other than those that
were previously announced or completed because of the inherent
uncertainty of consummating acquisitions.”
Id.
After filing
the proxy statement, PCC made a number of additional
acquisitions.
Id. at *21.
The court held that the proxy
statement’s mischaracterization of the forecasts was false and
misleading in violation of Section 14(a).
Id. at *20-22.
Precision Castparts is distinguishable from the case at
bar in two key respects.
First, plaintiff here has not alleged
that defendants prepared an alternative set of financial
17
projections that accounted for future acquisitions, and then
directed a financial advisor to ignore those projections in
developing a fairness opinion.
Second and more importantly, the
Precision Castparts plaintiffs did not allege merely that PCC
was pursuing an acquisition strategy; they alleged that PCC
completed two acquisitions in the same month that the company
eliminated acquisitions from its financial forecasts and had
other acquisitions in the pipeline.
Id. at *26-27.
The
statements in PCC’s proxy that (1) the revised projections were
the most up-to-date projections available, and (2) PCC did not
assume future acquisitions because such acquisitions were
inherently uncertain could thus be “demonstrably proven false at
the time they were made.”
Id. at *35.
Here, by contrast,
plaintiff has not alleged that defendants knew of specific
acquisitions, let alone that they had developed a more accurate
set of financial projections based on their expected deals.
Precision Castparts does not stand for the principle that any
company that has expressed a commitment to an acquisition
strategy is misleading in failing to specify whether financial
projections account for future acquisitions. 2
2
Plaintiff also cites a number of fiduciary duty cases, decided
under state law, in which courts valued companies based on
projections that assumed continued future acquisitions. These
cases have no bearing on defendants’ disclosure duties under
federal securities law.
18
Plaintiff’s reliance on Azar v. Blount Intern., Inc. is
similarly misplaced.
See No. 3:16-cv-483-SI, 2017 U.S. Dist.
LEXIS 39493 (D. Or. Mar. 20, 2017).
In Blount, as in Precision
Castparts, the plaintiffs asserted that the defendants had
developed two sets of financial projections, one more optimistic
than the other.
Id. at *5-7.
The Blount plaintiffs also
alleged with particularity that that the sunnier projections
were more accurate, and were omitted from a proxy statement
soliciting votes for an acquisition.
Id. at *12-14.
The
plaintiffs further claimed that the defendants had relied on the
more optimistic projections for their own purposes, while
presenting bleaker predictions to shareholders in order to
justify the proposed acquisition.
Id. at *24-25.
Here, as
discussed, plaintiff has not alleged that defendants developed a
hidden set of projections that accounts for future acquisitions.
Her allegation that defendants omitted any mention of
acquisitions from the proxy statement is not equivalent to a
claim of concealed financial projections.
Cf. Campbell v.
Transgenomic, Inc., 916 F.3d 1121, 1125-26 (8th Cir. 2019)
(concluding that summary judgement for the defendant was
inappropriate where proxy omitted projected net income/loss of
company with which merger was proposed, and which defendant’s
board had reviewed before approving the merger).
19
Laborers’ Local #231 Pension Fund v. Cowan, while more
similar to this case, is also distinguishable.
2018 WL 3243975 (D. Del. July 2, 2018).
See No. 17-478,
In Cowan, the
plaintiffs alleged that the defendant, as the chairman of
Lionbridge Technologies, Inc. (“Lionbridge”), had omitted a
material fact from a proxy statement in violation of Section
14(a).
Id. at *1, *11.
The proxy statement expressed support
for Lionbridge’s acquisition by HIG Capital, LLC, based, among
other things, on a fairness opinion provided by Lionbridge’s
financial advisor.
Id. at *2-3.
The fairness opinion was
premised on financial projections provided by Lionbridge that
neglected to incorporate growth from future acquisitions.
at *2.
Id.
The court permitted plaintiffs to proceed with their
claim that the proxy was misleading by citing the fairness
opinion as a “positive reason” to support the merger, but
omitting the fact that the fairness opinion relied on financial
projections that did not account for future acquisitions.
Id.
at *11.
Cowan bears resemblance to this case in that Lionbridge had
publicly highlighted its acquisition growth strategy before the
merger.
Id. at *1.
However, the proxy at issue in Cowan stated
that Lionbridge’s economic forecasts did not account for any
“transaction or event . . . that may occur and that was not
anticipated when the forecasts were prepared.”
20
Id. at *2
(emphasis added).
This suggests that the projections did
account for transactions that were anticipated at the time.
Harman’s proxy, by contrast, stated simply that the projections
“do not take into account any circumstances or events occurring
after the date they were prepared.”
ECF No. 29-2 at *63. 3
More
importantly, the plaintiffs in Cowan did not assert only that
Lionbridge had publicly touted its acquisition-powered growth
strategy; they alleged that Lionbridge completed an acquisition
three days after the merger closed.
Id. at *4.
Plaintiff here,
again, has not alleged facts that would show that Harman
similarly had a known acquisition in the pipeline.
Additionally, prior to the merger, Lionbridge had completed a
major reorganization to facilitate its acquisition growth
strategy, and its board cited “the ability to access capital to
fund acquisitions” as a reason to merge with HIG.
Id. at *2.
The potential for acquisitions following the merger were far
less hypothetical than in the case at bar.
3
Plaintiff’s argument that this is “boilerplate language”
because it frequently appears in proxy statements is misplaced.
As discussed below, a defendant cannot claim the PSLRA’s safe
harbor for forward-looking statements by using “boilerplate
cautionary language.” Slayton v. Am. Exp. Co., 604 F.3d 758,
772 (2d Cir. 2010). This rule, however, does not apply to
plaintiff’s claim that defendants omitted a material fact, which
she recognizes is governed by Omnicare rather than the body of
law regarding forward-looking statements.
21
Koppel is also unhelpful to plaintiff.
See 167 F.3d 125.
In Koppel, the defendants solicited shareholder support for a
deal to sell a building.
Id. at 129.
The deal continued a
lease and distributed millions of dollars in sale proceeds to
the lessee, even though the lessee had defaulted on its
obligations under the lease.
Id.
The solicitation recommended
approving the deal based on a report that had been prepared
under the false assumption that the lessee was in full
compliance with the lease terms.
Id.
The Second Circuit held
that the Koppel plaintiffs stated a valid claim under Rule 14a-9
because the solicitation did not disclose that the report was
premised on a false assumption.
Id. at 133.
The plaintiffs
sufficiently alleged that the lessee had in fact defaulted on
its obligations.
Id.
Here, by contrast, plaintiff has not
alleged that Harman was planning any specific acquisitions at
the time the proxy statement was filed.
She has thus not pled
facts that would prove the Management Projections were based on
a false assumption.
Cf. In re Trump Hotels S’holder Derivative
Litig., Nos. 96 Civ. 7820 DAB, 96 Civ. 8527 DAB, 2000 WL
1371317, at *14 (S.D.N.Y. Sept. 21, 2000) (denying motion to
dismiss where defendants knew or should have known the fact that
a planned expansion would not take place, when fairness opinion
incorrectly assumed that expansion would occur).
22
Defendants had no obligation to specify that the Management
Projections did not factor in potential acquisitions.
Plaintiff
has not alleged with particularity facts that would show that
this omission rendered the proxy misleading.
§ 78u-4(b)(1).
See 15 U.S.C.
She has thus not adequately pled that the
omission was material. 4
ii.
Safe Harbor
Defendants argue that the Management Projections fall
within the PSLRA safe harbor.
The safe harbor protects any
forward-looking statement that is either (1) “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;” (2) immaterial; or (3) the plaintiff
4
Defendants argue that a reasonable investor would have been
aware that the Management Projections did not incorporate
potential acquisitions because those projections were similar to
the August 2016 guidance. The August 2016 forecasts captured
only “organic” growth, meaning that they did not incorporate
potential acquisitions. However, “[t]here are serious
limitations on a corporation's ability to charge its
stockholders with knowledge of information omitted from a
document such as a proxy statement or prospectus on the basis
that the information is public knowledge and otherwise available
to them.” comScore, Inc., 268 F. Supp. 3d at 562 (quoting
Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726, 736 (2d
Cir. 1987)). It would be unreasonable to expect the average
shareholder to realize that the Management Projections did not
account for acquisitions simply by comparing them to the August
2016 organic projections, if the proxy statement had in fact
implied otherwise.
23
fails to prove that the statement was made with actual knowledge
that it was false or misleading.
15 U.S.C. § 78u-5(c)(1).
The
safe harbor is written in the disjunctive; a statement is
protected if it satisfies any one of these three requirements.
Slayton, 604 F.3d at 766.
Plaintiff is correct that “the safe harbor provision does
not protect the statements in the Proxy underlying the Board’s
assessment about the Management Projections.
Such unprotected
statements of present or historical fact include the Board’s
description of how the Management Projections were developed.”
See City of Hialeah Emps.’ Retirement Sys. v. FEI Co., 289 F.
Supp. 3d 1162, 1173 (D. Or. 2018).
not protect material omissions.”
“The safe harbor also does
In re Salix Pharms., Ltd., 14-
CV-8925 (KMW), 2016 U.S. Dist. LEXIS 54202, at *29 (S.D.N.Y.
Apr. 22, 2016).
For this reason, the safe harbor would not
protect defendants from liability for the proxy’s failure to
disclose the fact that the Management Projections did not
account for acquisitions, if that fact were material.
discussed above, it is not.
As
However, to the extent that
plaintiff argues the Management Projections themselves were
false and misleading for failing to account for future
acquisitions, the safe harbor does preclude this claim.
In plaintiff’s view, the safe harbor provision is designed
to protect companies from “fraud by hindsight” lawsuits when
24
optimistic projections for growth are not borne out.
However,
courts have consistently held that the safe harbor may apply to
Section 14(a) when a plaintiff alleges that a proxy statement
contained false statements or material omissions.
See, e.g.,
Hialeah, 289 F. Supp. 3d at 1173; Trahan, 308 F. Supp. 3d at
994; Shaev, 2002 WL 31413805, at *7.
See also 15 U.S.C.
§ 78u-5(c)(1) (providing for application of safe harbor
provision in any private action arising under the Act “based on
an untrue statement of a material fact or omission of a material
fact,” with exceptions not relevant here); Paradise Wire & Cable
Defined Ben. Pension Plan v. Weil, No. CCB-17-132, 2018 WL
1535496, at *5 (D. Md. Mar. 28, 2018) (“[F]orecasts of future
performance not worded as guarantees are generally not
actionable under federal securities law.”) (internal quotation
marks omitted).
Defendants argue that the Management Projections were
identified as forward-looking statements and accompanied by
meaningful cautionary language.
The Management Projections were
“plainly forward-looking -- [they] project[] results in the
future.”
Slayton, 604 F.3d at 769.
See also 15 U.S.C.
§ 78u-5(i)(1)(A) (defining “forward-looking statement” to
include “a statement containing a projection of revenues”).
The
proxy also explained that statements using words like “estimate”
25
– such as the Management Projections -– qualify as “forwardlooking statements.”
ECF No. 29-2 at *29, *62.
“The defendants, however, carry the burden of demonstrating
that they are protected by the meaningful cautionary language
prong of the safe harbor.”
Slayton, 604 F.3d at 773.
The PSLRA
defines “meaningful cautionary statements” as those that
“identify[] important factors that could cause actual results to
differ materially from those in the forward-looking statement.”
15 U.S.C. § 78u-5(c)(1)(A)(i).
Defendants “must demonstrate
that their cautionary language was not boilerplate and conveyed
substantive information.”
Slayton, 604 F.3d at 772.
Plaintiff
argues that the cautionary language in the proxy falls short of
this standard.
But the proxy contained a lengthy “cautionary
statement concerning forward-looking statements,” ECF No. 29-2
at *29, as well as cautionary language specific to the
Management Projections, id. at *62.
These warnings identified
factors that could cause results to be different from those
predicted, including industry performance; regulatory, market
and financial conditions; and “risks related to the distraction
of management’s attention from the Company’s ongoing business
operations due to the pendency of the merger.”
Id. at *29, *62.
Plaintiff compares the cautionary language here to the
cautionary language at issue in In re Harman International
Industries, Inc. Securities Litigation, 791 F.3d 90 (D.C. Cir.
26
2015).
In that case, the plaintiffs alleged that statements
about Harman’s personal navigational device (“PND”) products
made on three conference calls were misleading.
Id. at 95.
The
Court of Appeals for the District of Columbia dismissed as
“boilerplate” the moderator’s verbal warning that, “‘certain
statements by the Company during this call are forward-looking
statements’ that ‘include the Company’s beliefs and expectations
as to future events and trends affecting the Company’s business
and are subject to risks and uncertainties,” and an annual
report’s general statement that the company could experience
difficulties if it failed to meet certain benchmarks or was
outstripped by competitors.
Id. at 97, 103-104.
Here, by
contrast, the proxy contained detailed cautionary language in
two locations that identified specific factors that could affect
financial outcomes.
More importantly, in the 2015 Harman case,
“the purportedly cautionary statements were not meaningful
because they were misleading in light of historical fact,”
namely that much of Harman’s PND product inventory was already
obsolete.
Id. at 104.
In this case, as discussed, plaintiff
has not alleged with particularity any historical facts that
would show that Harman had plans or expectations that should
have altered the Management Projections.
§ 78u-4(b)(1).
27
See 15 U.S.C.
Plaintiff further asserts that cautionary language cannot
shield the Management Projections, because no cautionary
language can protect a statement that is materially false or
misleading.
See Slayton, 604 F.3d at 770.
unavailing for the same reason:
This argument is
plaintiff has not sufficiently
alleged that the Management Projections were materially false or
misleading.
Finally, plaintiff asserts that to bring a
statement within the safe harbor, cautionary language must
address the specific risk that defendants allegedly failed to
disclose.
See Salix, 2016 U.S. LEXIS 54202, at *34.
However,
plaintiff has not established that predicting Harman’s future
without anticipating hypothetical acquisitions presented any
risk.
Even if the Management Projections were not protected by
meaningful cautionary language, “[t]he safe harbor provision
also requires dismissal if the plaintiffs do not ‘prove that the
forward-looking statement was made or approved by [an executive
officer] with actual knowledge by that officer that the
statement was false or misleading.’”
Id. (quoting 15 U.S.C.
§ 78u-5(c)(1)(B)) (emphasis in original) (internal alterations
omitted).
As discussed, plaintiff has alleged that Harman
previously invested heavily in acquisitions, and that its
leadership stated on a number of occasions that this strategy
would continue.
She has not pointed to any specific
28
acquisitions that Harman had in the pipeline.
The facts alleged
do not give rise to a “strong inference” that defendants had
actual knowledge that the Management Projections were inaccurate
for failing to account for future acquisitions, as required by
the PSLRA.
See 15 U.S.C. § 78u-4(b)(2)(A).
[I]n determining whether the pleaded facts give rise
to a ‘strong’ inference of scienter, we must take into
account plausible opposing inferences . . . . A
complaint will survive only if a reasonable person
would deem the inference of scienter cogent and at
least as compelling as any opposing inference one
could draw from the facts alleged.
Slayton, 604 F.3d at 774 (quoting Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 323, 324 (2007)).
The facts
alleged most reasonably support the inference that the
Management Projections did not account for future acquisitions
because no such acquisitions were planned.
This is more
compelling than the inference that defendants knew the
Management Projections were inaccurate for their failure to
incorporate hypothetical deals.
Plaintiff’s reliance on Precision Castparts is again
misplaced for the same reason.
There, the plaintiffs argued
that PCC’s characterization of the revised projections, rather
than the projections themselves, were false and misleading.
2017 U.S. Dist. LEXIS 165139, at *32.
The court concluded that
the challenged statements were not protected by the safe harbor
simply because “if the statements can be demonstrably proven
29
false at the time they were made, as they were in this case,
they are not forward-looking statements.”
Id. at *35.
The
court did not, however, conclude that plaintiffs sufficiently
alleged that defendants had actual knowledge that the revised
projections themselves were false.
Cf. id. at *23 (defendants’
stated belief in acquisition strategy contradicted their
statement of present fact that future acquisitions were
inherently uncertain).
For these reasons, plaintiff cannot show that defendants
violated Section 14(a) by failing to incorporate future
acquisitions into the Management Projections. 5
B. Opinion Statement Regarding Management Projections
Plaintiff next argues that the proxy was false and
misleading in stating that, taking into account the financial
advisors’ perspectives, Harman’s senior management determined
that the Management Projections contained greater downside risk
5
Under the judicially created “bespeaks caution doctrine, a
misstatement or omission will be considered immaterial if
cautionary language is sufficiently specific to render reliance
on the false or omitted statement unreasonable.” Shaev, 2002 WL
31413805, at *6. Defendants argue that because of the
cautionary language used in the proxy, any omission was
immaterial as a matter of law. I do not agree that an omission
regarding development of the Management Projections, which
informed the fairness opinions and the board’s approval of the
merger, would be immaterial as a matter of law. See Wilson, 855
F.2d at 922 (“Material facts include . . . those facts which
affect the probable future of the company.”) (internal citation
omitted). However, plaintiff has not shown that any omission
was material for reasons discussed above.
30
than upside potential.
“A statement of a corporate board’s
reasoning, belief, or opinion can be . . . actionable as a
material misrepresentation under Section 14(a).”
Montanio, 237
F. Supp. 3d at 170 (citing Va. Bankshares, Inc. v. Sandberg, 501
U.S. 1083, 1092 (1991)).
Plaintiff asserts that this statement
was material because it misled shareholders into discounting the
Management Projections.
This assessment of the Management
Projections also justified creation of the Sensitized
Projections, which informed the fairness opinions and the
proxy’s recommendation that shareholders approve Samsung’s
acquisition of Harman.
Defendants do not appear to dispute the statement’s
materiality.
Rather, they take the position that the statement
is protected by the safe harbor as an assumption underlying or
relating to the Management Projections.
§ 78u-5(i)(1)(D).
See 15 U.S.C.
However, the statement plainly reflects
Harman’s assessment of the Management Projections, rather than
an assumption on which the Management Projections were based.
The statement also explains the decision to generate the
Sensitized Projections, which plaintiff asserts were critical to
the acquisition’s consummation.
I agree with plaintiff that it
is a statement of reason or belief and as such may provide a
basis for liability.
Va. Bankshares, 501 U.S. at 1092.
See
also Hialeah, 289 F. Supp. 3d at 1175 (“The Board’s assessment
31
that the Higher Projections were likely less realistic than the
Lower Projections was a statement of opinion or belief.”) 6;
Bumgarner v. Williams Cos., No. 16-CV-26-GKF-FHM, 2016 U.S.
Dist. LEXIS 72540, at *8 (N.D. Okl. June 3, 3016) (“Defendants’
explanation for reducing the projected synergies is a statement
of existing fact and may be verified based on information now
available.”).
In order to be actionable under Section 14(a), “[t]he
statements must be subjectively false -- they misstate the
actual opinions, beliefs, or motivations of the speaker -- and
they must be objectively false -- ‘false or misleading with
respect to the underlying subject matter [the statements]
address.’”
Montanio, 237 F. Supp. 3d at 170 (quoting Fait v.
Regions Fin. Corp., 655 F.3d 105, 111 (2d Cir. 2011)).
“In
other words, the complaint must allege ‘that the [d]efendants
did not actually hold the belief or opinion stated, and that the
opinion stated was in fact incorrect.’”
Id. at 171 (quoting
Fisher v. Kanas, 467 F. Supp. 2d 275, 282 (E.D.N.Y. 2006))
6
In Hialeah, the court analyzed defendants’ endorsement of a
particular set of projections as both a forward-looking
statement and as a statement of opinion or belief. 289 F. Supp.
3d at 1173, 1175. Here, the statement at issue is more clearly
a statement of opinion, as it does not merely express confidence
or a lack thereof in a particular set of financial predictions;
rather, it offers a specific analysis of the risk reflected and
justifies the development and use of a new set of projections.
32
(internal alterations omitted).
Plaintiff sufficiently alleges
both subjective and objective falsity.
Subjective falsity turns on “whether [p]laintiff properly
alleged that [d]efendants knew their statements about the
[Management] Projections were false.”
In re Hot Topic Sec.
Litig., CV 13-02939 SJO (JCx), 2014 U.S. Dist. LEXIS 180513, at
*18 (D. Or. May 2, 2014).
Plaintiff here asserts that Paliwal
called the August 2016 financial projections “by far very
conservative.”
Those projections contained very similar
predictions for revenue and EBITDA as the Management
Projections.
Indeed, the August 2016 forecasts represented the
Management Projections rounded to the nearest hundred million
and included the same fiscal years with the exception of 2020.
ECF No. 16 at *28.
Defendants argue that plaintiff cannot rely on Paliwal’s
earlier statements because the August 2016 guidance because it
contained distinct analysis from the Management Projections.
The August 2016 projections included only revenue and EBITDA,
whereas the Management Projections encompassed other metrics,
such as depreciation and amortization, capital expenditures, and
unlevered cash flow.
Additionally, the August figures did not
include revenue or EBITDA figures for 2020.
unconvincing.
This argument is
Paliwal expressed confidence in Harman’s revenue
growth overall; his comments were unrelated to the additional
33
metrics that were included in the Management Projections and
were not specific to 2020.
See e.g., ECF No. 16 at *20 (“Longer
term, we are confident that we will see accelerated revenue
expansion from our automotive backlog. . . .”).
Moreover, plaintiff alleges that the defendants harbored an
economic incentive to make the acquisition look more attractive.
In particular, Paliwal stood to gain millions of dollars if the
acquisition was completed.
See Slayton, 604 F.3d at 776
(“[M]otive can be a relevant factor, and ‘personal financial
gain may weigh heavily in favor of a scienter inference.’”)
(quoting Tellabs, Inc., 551 U.S. at 325).
At this stage,
plaintiff has sufficiently alleged that defendants downplayed
the accuracy of the Management Projections, not because of their
honestly held beliefs, but rather to convince shareholders that
the merger was a fair deal.
Hot Topic is instructive with respect to objective falsity.
2014 U.S. Dist. LEXIS 180513.
In that case, Hot Topic had
developed a set of long-range financial projections (“LRP
projections”) in early 2012.
Id. at *4.
made an offer to acquire the company.
Id.
In early 2013, a buyer
Hot Topic rejected
the initial offer, and then developed a set of revised
projections that significantly downgraded the company’s expected
growth.
Id.
Hot Topic subsequently accepted a slightly higher
offer from the buyer, instructed its financial advisor to base a
34
fairness opinion on the revised projections, and filed a proxy
statement soliciting votes for the acquisition.
Id. at *6-7.
The proxy described the revised projections as more accurate
than the LRP projections.
Id. at *7.
The court concluded the
plaintiffs sufficiently alleged this statement was objectively
false because “a projection that is seriously undermined by
undisclosed facts or unreasonable assumptions or that does not
follow generally accepted accounting principles is likely to be
false.”
Id. at *15.
The court relied on a number of factors that have close
analogues in the case at bar.
First, the revised projections
downwardly moderated growth from Torrid -- one of Hot Topic’s
subsidiaries -- despite the company’s past praise for Torrid’s
growth.
Id.
Similarly, here, the challenged statement
contradicts Paliwal’s past expressions of optimism regarding
Harman’s growth.
Second, the revised projections assumed a slow
buildout of new stores that conflicted with Hot Topic’s stated
goals for expansion.
Id.
In this case, plaintiff claims that
the Management Projections did not account for future
acquisitions, which resulted in a relatively modest forecast.
As discussed above, plaintiff cannot show that the Management
Projection’s omission of growth from acquisitions rendered them
inaccurate.
However, because the Management Projections did not
reflect Harman’s stated goal of making new acquisitions, at a
35
minimum, it is plausible that they were not overly optimistic as
the proxy suggested.
Third, Hot Topic’s revisions to gross
revenue were belied by the company’s strong improvements in that
area in the two preceding years.
Id. at *16-17.
Harman
similarly delivered record revenue in 2016 and had a $24.1
billion backlog.
ECF No. 16 at *15.
See also Blount, 2017 U.S.
Dist. LEXIS 39493, at *13 (“These positive financial indicators
provide sufficient, specific reasons to support the allegation
that the more optimistic September Projections were more
accurate than the more pessimistic November and December
Projections.”).
Fourth and finally, Hot Topic provided only the
LRP projections to the buyer, indicating that those projections
sufficiently reflected the company’s prospects.
LEXIS 180513 at *17.
2014 U.S. Dist.
Harman likewise only provided the
Management Projections to Samsung; the Sensitized Projections
were employed solely for the fairness opinion, the board’s
evaluation of the merger, and the proxy.
ECF No. 29-2 at *64.
Defendants liken the case at bar to Hialeah.
Supp. 3d 1162.
See 289 F.
In Hialeah, the defendant company, FEI, had
developed two sets of financial forecasts in the course of its
2015 annual financial review and planning process: the Higher
Projections and the Lower Projections.
Id. at 1167.
The Higher
Projections were compiled by aggregating department-specific
projections provided by managers of business units across FEI.
36
Id.
The Lower Projections modified the Higher Projections by
“applying adjustments developed by FEI senior management to
reflect FEI group-level dynamics.”
Id.
In May 2016, in the
midst of negotiating an acquisition, the FEI board began calling
the Higher Projections unrealistic.
Id. at 1168-69.
The board
provided the Lower Projections to its financial advisor, who
issued an opinion determining that the proposed acquisition was
fair.
Id. at 1169.
The board filed a proxy statement
recommending that shareholders vote to approve the acquisition
and providing both sets of projections.
Id.
The proxy
explained that the Lower Projections were more realistic because
the Higher Projections reflected an upside case across all
business units, which was inconsistent with FEI’s past
experience.
Id.
FEI shareholders then brought suit alleging,
among other things, that this statement was false and
misleading.
Id. at 1170.
The Hialeah court concluded that “the facts stated by
[p]laintiff in this case are not as compelling as those stated
in Hot Topic.”
on two grounds.
Id. at 1176.
The court distinguished Hot Topic
First, in Hot Topic the defendants had
developed the more pessimistic set of financial projections on
the eve of the acquisition.
Id.
Second, in Hot Topic the new
projections conflicted with the defendants’ public statements
regarding expected growth.
Id.
So too here.
37
Additionally, in
Hialeah, the FEI board provided a reasonable basis for relying
on the Lower Projections: that it could not realistically expect
each individual business unit to meet its financial goals in any
given year. Id.
Here, the proxy simply stated that Harman
management determined, considering the financial advisors’
perspectives, “based on various economic and technological
trends and developments in the industries in which the Company
competes, . . . there existed downside risk that was not
reflected in the Management Projections.”
ECF No. 29-2 at *62.
This vague explanation for relying on a relatively pessimistic
forecast is far less convincing than one provided by FEI in
Hialeah. 7
Defendants’ reliance on Montanio is similarly unavailing.
See 237 F. Supp. 3d 163.
In Montanio, the plaintiffs alleged
that Keurig filed a proxy statement that was false and
misleading, among other things, by assigning a 50% probability
7
Defendants argue that Paliwal’s statements about the August
2016 guidance are further distinguishable because the proxy
specified that, in accordance with the views of its financial
advisors, management determined the Management Projections
reflected downside risk. It is of course plausible that
management could change its view of its own forecasts based on
input from its financial advisors. However, the proxy also
stated that “the Financial Advisors, based on certain
assumptions and directions provided by the Company’s management,
prepared for the board certain adjusted projections,” i.e. the
Sensitized Projections. ECF No. 29-2 at *62. The financial
advisors’ role in determining that the Sensitized Projections
should be developed is thus somewhat unclear from the proxy.
38
weighting to the success of a new appliance called Keurig Kold.
Id. at 168-69.
The court rejected the argument that this
statement could be proven objectively false by prior expressions
of optimism regarding Keurig Kold’s future.
Id. at 173.
But
because those statements were made before Keurig Kold was placed
on the market, they were purely speculative.
Id.
The court
explained that “in Hot Topic, the Revised Projections contained
reduced estimates of growth which were contrary to recent stated
success,” whereas the earlier statements regarding Keurig Kold
“were never actually used as a benchmark for the company’s
success.”
Id.
The case at bar is more similar to Hot Topic
than it is to Hialeah or Montanio.
Harman achieved record
revenue growth in 2016, and used the Management Projections,
rather than the Sensitized Projections, as a benchmark prior to
filing the proxy.
Given plaintiff’s allegations, the inference that
defendants wanted to justify creating the Sensitized
Projections, thereby making the Samsung acquisition seem fair,
is at least as compelling as the explanation provided by the
proxy.
Slayton, 604 F.3d at 774.
Taken together, the facts
alleged support a strong inference that defendants did not truly
believe that the Management Projections contained more downside
risk than upside potential.
See 15 U.S.C. § 78u-4(b)(2)(A).
39
This statement may provide a basis for liability under Section
14(a).
C. Statements that Management Projections Were Not Previously
Disclosed
Plaintiff next asserts that the proxy misleadingly
indicated that the Management Projections had not been
previously released.
She points out that in August 2016 Harman
publicly disclosed its organic projections for fiscal years
2017-2019 and 2021, which as discussed were similar to the
Management Projections.
Plaintiff alleges that the following
statements were therefore false:
(1) “The Company does not as a
matter of course make public long-term projections as to future
performance . . . .”; (2) “The Projections were prepared for
internal use . . . . The Projections were not prepared with a
view toward public disclosure.”
According to plaintiff, these
statements discouraged shareholders from finding the August 2016
organic projections, thereby compounding the proxy’s other
allegedly misleading statements.
Plaintiff appears to suggest
that if a reasonable shareholder had consulted the organic
projections, she would have realized that the Management
Projections were materially the same, and therefore, (1) did not
incorporate growth based on future acquisitions; and (2) did not
include more downside risk than likely upside potential.
40
This claim fails because plaintiff has not pled any facts
that would show that the statements related to public disclosure
are false and misleading.
15 U.S.C. § 78u-4(b)(1).
That Harman
released one set of forecasts in August 2016 does not contradict
the statement that the company “does not, as a matter of course,
make public long-term projections as to future performance.”
Plaintiff points to no other occasion on which Harman disclosed
such projections.
Although she argues that “as a matter of
course” describes an event that is “to be expected as a natural
or logical consequence,” Harman’s one-time release of financial
projections does not meet this standard.
Nor has plaintiff sufficiently alleged that the
“Projections” were not developed for internal use.
The proxy
defines “Projections” to include the Management Projections, the
Sensitized Projections, and additional extrapolations associated
with each.
Plaintiff has not alleged that this full panoply of
forecasts was publicly disclosed at any point.
Plaintiff argues
that even if only the Management Projections were previously
publicized, the challenged statement would only be half true.
However, the complaint does not even allege this much.
The
Management Projections included analysis not encompassed by the
August 2016 forecast, including, among other things, revenue and
EBITDA for fiscal year 2020, depreciation and amortization, and
unlevered free cash flow.
ECF No. 29-2 at *63.
41
Plaintiff has
not adequately alleged that the described statements are false
or misleading.
D. J.P. Morgan’s Potential Conflict of Interest
Fourth and finally, plaintiff alleges that the proxy
omitted a material fact in describing J.P. Morgan’s relationship
with Samsung.
The proxy disclosed that in the two years
previous years, J.P. Morgan and its affiliates had been
compensated for providing certain services to both Samsung and
Harman.
Such services during such period have included acting
as joint lead arranger and joint bookrunner on the
Company’s syndicated facility in March 2015, as M&A
financial advisor to the Company on the Company’s
acquisition of Symphony Teleca in April 2015, as joint
bookrunner on offerings of debt securities by the
Company in May 2015, as joint bookrunner on the
initial public offering of Samsung SDS in October
2014, as joint global coordinator and joint bookrunner
on the initial public offering of Cheil Industries in
December 2014, as financial advisor to Parent on
Parent’s disposals of equity interests in Samsung
Techwin and Samsung Chemicals in June 2015 and as
joint bookrunner on the initial public offering of
Samsung Biologics in October 2016.
ECF No. 29-2 at *54.
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.
I agree.
The complaint explains that a potential conflict of
interest by J.P. Morgan would be material because J.P. Morgan
42
conducted the unsuccessful acquisition negotiations with
Company A and prepared a fairness opinion recommending that the
acquisition by Samsung be approved.
“[T]he failure to disclose
even potential conflicts of interest may be actionable under
federal securities law.”
IBEW Local 98 Pension Fund v. Cent.
Vt. Pub. Serv. Corp., No. 11-cv-222, 2012 U.S. Dist. LEXIS
36784, at *40 (D. Vt. Mar. 19, 2012) (quoting Kahn, 842 F. Supp.
at 677).
“The relevant inquiry is not whether an actual
conflict of interest existed, but rather whether full disclosure
of potential conflicts of interest has been made.”
Wilson, 855
F.2d at 994.
Defendants argue that the proxy did not fail to disclose a
potential conflict because it stated that J.P. Morgan had
provided services to Harman and Samsung.
Defendants further
assert that by using the word “included” before listing the
services that J.P. Morgan had furnished, the proxy made clear
that the list was not exhaustive.
However, by only listing
engagements that ended before J.P. Morgan issued its fairness
opinion in November 2016, the proxy could have led shareholders
to incorrectly believe that J.P. Morgan had no ongoing business
relationship with Samsung apart from the acquisition.
No. 29-2 at *176.
See ECF
Even assuming that defendants were not
obligated to enumerate all potential conflicts of interest on
43
the part of their financial advisors, the proxy could be read to
suggest, falsely, that no potential conflict currently existed.
The omitted fact was material because “there is a
substantial likelihood that a reasonable shareholder would
consider it important in deciding how to vote.”
Inc. v. Northway, Inc. 426 U.S. 438, 449 (1976).
TSC Indus.,
Harman
shareholders should have been given the opportunity to assess
for themselves whether J.P. Morgan’s ongoing relationship with
Samsung was material.
See Wilson, 855 F.2d at 994.
To the
extent materiality cannot be determined at this stage, it
presents a mixed question of fact and law that must be resolved
by a jury.
See id.; comScore, 268 F. Supp. 3d at 562.
Because the facts alleged support a strong inference that
defendants acted negligently in failing to disclose J.P.
Morgan’s ongoing relationship with Samsung, they are sufficient
to state a claim under Section 14(a).
See Wilson, 855 F.2d at
987 (“As a matter of law, the preparation of a proxy statement
by corporate insiders containing materially false or misleading
statements or omitting a material fact is sufficient to satisfy
the . . . negligence standard.”). 8
8
Because this claim does not sound in fraud, plaintiff need not
satisfy the particularity requirements of Rule 9(b) of the
Federal Rules of Civil Procedure. comScore, 268 F. Supp. 3d at
557-58.
44
E. Loss Causation
As discussed, in order to prevail under Section 14(a),
plaintiff must allege that the purported violation caused her
injury.
Montanio, 237 F. Supp. 3d at 170.
See also 15 U.S.C.
§ 78u-4(b)(4) (“[P]laintiff shall have the burden of proving
that the act or omission of the defendant . . . caused the loss
for which the plaintiff seeks to recover damages.”).
Defendants
argue that plaintiff’s claims must be dismissed for the
independent reason that she has failed to plead loss causation.
I disagree.
Two components of causation are required in a federal
securities action:
transaction causation and loss causation.
Koppel, 167 F.3d at 137.
To satisfy transaction causation, a
plaintiff must show a material violation of the proxy rules, and
that the proxy solicitation was an “essential link” in
establishing the unfavorable transaction.
237 F. Supp. 3d at 170.
See id.; Montanio,
Defendants do not dispute that
shareholder approval was required for the acquisition.
transaction causation is plainly met.
As such,
Multiple courts have also
found that where, as here, a plaintiff asserts that shareholders
were misled into approving an acquisition that undervalued the
company, loss causation is adequately alleged.
See, e.g.,
Precision Castparts, 2017 U.S. Dist. LEXIS 165139, at *9;
45
Blount, 2017 U.S. Dist. LEXIS 39493, at *32; Hot Topic, 2014
U.S. Dist. LEXIS 180513, at *10.
Loss causation “has often been described as proximate
cause, meaning that the damages suffered by plaintiff must be a
foreseeable consequence of any misrepresentation or material
omission.”
Castellano v. Young & Rubicam, Inc., 257 F.3d 171,
186 (2d Cir. 2001).
In other words, a plaintiff, having
established “reliance” via transaction causation, must also
establish that reasonably foreseeable damages flowed from that
reliance.
Id.
Here, that means that plaintiff must simply
plausibly allege that the shareholders’ approval of the
acquisition damaged her.
She has plainly done so.
Plaintiff
notes that the Management Projections produced a price of
approximately $116.25 per share, which is greater than the $112
per share that shareholders ultimately received.
The lower
price paid to shareholders, plaintiff alleges, is a result of
material omissions or false statements that justified the
production of a weaker set of projections, which, in turn, were
relied upon by a potentially conflicted adviser in producing a
fairness statement that endorsed the $112 price.
This is not an
attenuated causal chain that presents a difficult question of
proximate cause.
Plaintiff has alleged loss causation.
Defendants cite Minzer v. Keegan to argue that plaintiff
has failed to plead causation because she has not shown that,
46
but for the alleged violations, a reasonable shareholder would
have voted against the acquisition.
Cir. 2000).
See 218 F.3d 144, 149 (2d
Minzer, however, provides the definition of
materiality, not the standard for loss causation, which is set
forth above.
See id. (“[I]n the proxy context this definition
of materiality assumes that the omitted information would have
influenced a reasonable shareholder against the proposed
transaction for which proxies are sought.”).
Defendants also rely on Little Gem Life Scis. LLC v. Orphan
Med., Inc., in which a complaint was dismissed for failing to
plead loss causation where the plaintiff asserted only that, but
for the alleged omissions, the shareholders would not have
approved the unfavorable transaction.
See No. 06-1377 ADM/ABJ,
2007 WL 541677, at *7 (D. Minn. Feb. 16, 2007).
They ignore the
body of more recent case law holding that allegations such as
plaintiff’s are sufficient to plead loss causation.
As one
district court explained in a published decision,
[Plaintiff] does not set forth his proposed damages
model —- he states that the class “suffered damages
and actual economic losses . . . in an amount to be
determined at trial. . . .” He sets forth, however a
causal chain from the misrepresentations to the
transaction, to the alleged damages. It is not
immediately apparent what more a defendant could
desire at the pleading stage.
Lane v. Page, 727 F. Supp. 2d 1214, 1231 (D.N.M. 2010).
See
also Suez Equity Inv’rs, L.P. v. Toronto-Dominion Bank, 250 F.3d
47
87, 97-98 (2d Cir. 2001) (“[P]laintiffs may allege . . . loss
causation by averring . . . that the defendants’
misrepresentations induced a disparity between the transaction
price and the true ‘investment quality’ of the securities at the
time of transaction.”).
Plaintiff has sufficiently pled loss
causation. 9
F. Control Person Liability
Section 20(a) provides liability for any person who
directly or indirectly controls any person liable under the
Securities Exchange Act.
15 U.S.C. § 78t(a).
Plaintiff alleges
that the individual defendants were controlling persons of
Harman by virtue of their position as directors of the board.
Defendants argue only that Section 20(a) liability cannot
lie because plaintiff has failed to state a claim under Section
14(a).
Because plaintiff has adequately pled a violation of the
securities laws to the extent discussed above, defendants’
motion to dismiss the Section 20(a) claim is denied.
9
See Perez
Defendants also suggest that plaintiff should have sought a
preliminary injunction prior to the shareholder vote, rather
than seeking damages after the fact. They do not, however,
dispute that plaintiff has a right to pursue damages at this
stage. Additionally, defendants argue that many of plaintiff’s
allegations smack of corporate mismanagement, which is not
actionable under federal securities law. This does not,
however, bar plaintiff from relief on the claims that, for
reason discussed above, are actionable under Section 14(a).
48
v. Higher One Holdings, Inc., No. 3:14-cv-755 (AWT), 2017 U.S.
Dist. LEXIS 156175, at *25-26 (D. Conn. Sept. 25, 2017).
IV.
Conclusion
The motion is granted in part and denied in part.
Plaintiff’s claims based on defendants’ opinion statement
regarding the Management Projections and J.P. Morgan’s potential
conflict of interest may proceed under Sections 14(a) and 20(a)
of the Securities Exchange Act.
So ordered this 3rd day of October 2019.
/s/ RNC
Robert N. Chatigny
United States District Judge
49
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