Scott v. DST Systems, Inc. et al

Filing 36

MEMORANDUM OPINION. Signed by Judge Richard G. Andrews on 8/23/2019. Associated Cases: 1:18-cv-00286-RGA, 1:18-cv-00322-RGA(nms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

BRIAN SCOTT, Individually and on Behalf
of All Others Similarly Situated,
Plaintiff,
V.

DST SYSTEMS, INC. , STEPHEN C.
HOOLEY, GARY D. FORSEE, CHARLES
EDGAR HALDEMAN, SAMUEL G. LISS ,
JEROME H. BAILEY, JOSEPH C.
ANTONELLIS , LOWELL L. BRYAN, and
LYNN DORSEY BLEIL,

Civil Action No. I: 18-cv-00286-RGA

Defendants.
JAMES D. WILLIAMS ,
Plaintiff,
vs.
DST SYSTEMS, INC. , STEPHEN C.
HOOLEY, CHARLES E. HALDEMAN,
SAMUEL G. LISS, LOWELL L. BRYAN,
LYNN D. BUEL, JEROME H. BAILEY,
JOSEPH C. ANTONELLIS, and GARY D.
FORSEE,

Civil Action No. I: 18-cv-00322-RGA

Defendants.

MEMORANDUM OPINION

August ~

2019

Presently before me are Plaintiff Brian Scott's Motion for Attorney Fees' (C.A. 18-286, D.I.
19) and Plaintiff James Williams's Motion for Attorney Fees (C.A. 18-322, D.I. 7). The Parties
have briefed the motions (C.A. 18-286, D.I. 20, 25, 28; C.A. 18-322, D.I 8, 16, 19) and
submitted supplemental briefing at my request (C.A. 18-286, D.I. 32, 33; C.A. 18-322, D.I. 23 ,
26). Scott seeks $115,000. (C.A. 18-286, D.I. 20 at 1). Williams seeks $100,000. (C.A. 18322, D.I. 8 at 24). For the reasons discussed more fully below, I will deny Plaintiffs' motions.

I.

BACKGROUND

These cases stem from the March 28, 2018 merger of DST Systems, Inc. ("DST") with
SS&C Technologies, Inc. ("SS&C"). (D.I. 20 at 1-3). 2 The DST Board initiated the transaction
on January 11 , 2018 when it entered into an agreement and plan of merger with SS&C. (Id. at
1). SS&C was to acquire DST for $84.00 per share of common stock. (Id.). The merger was
valued at $5.4 billion. (D.I. 1 at ,r 25). Defendants issued a preliminary proxy statement
describing the details of the transaction on February 7, 2018. (D.I. 25 at 1). Three lawsuits, two
in this court and another in Missouri, were filed within weeks. 3 (Id.). The lawsuits alleged that
the preliminary proxy statement omitted material information in violation of Sections 14(a) and
20(a) of the Securities Exchange Act of 1934. (Id.; see also D.I. 1). DST filed its definitive
proxy statement ("Proxy") with the SEC on February 27, 2018 . (D.I. 25 at 5). Two weeks later

1

Dennis Pratt, Plaintiff to a Missouri lawsuit filed against Defendants, originally joined Mr.
Scott's fee application. (C.A. 18-286, D.I. 20 at 1 n.1). His request has since been withdrawn.
(C.A. 18-286, D.I. 33 at 4).
2
Unless otherwise noted, citations to the docket are to C.A. 18-286.
3
The Scott case was filed on February 20, 2018. Based on billing records, Scott' s attorneys
spent eleven hours of attorney time on the case on or before February 20th. (D.I. 22-2 at 2 &
Exh. B). The Williams case was filed on February 27, 2018. Based on billing records,
Williams' attorneys spent 14.75 hours of attorney time (two partner hours and 12.75 associate
hours) on the case on or before February 27th. (C.A. 18-322, D.I. 9, Exhs. 1, 10, 11).
2

DST voluntarily issued a supplemental disclosure ("Supplement") to moot the pending lawsuits.

(Id.). The Plaintiffs agreed that the supplemental disclosures mooted their lawsuits and began
pursuit of attorneys ' fees. (Id. at 6). These motions followed.

II.

LEGAL STANDARD

A. Claims Under Section 14(a)
Section 14(a) of the Securities Exchange Act of 1934 renders it unlawful to seek proxies
in violation of "such rules and regulations as the [SEC] may prescribe as necessary or
appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78n(a)(l). Rule
14-a9, promulgated by the SEC pursuant to Section 14(a), provides:
No solicitation subject to this regulation shall be made by means of any proxy
statement ... which, at the time and in the 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. There is a private cause of action under Section 14(a). JI. Case Co. v.

Borak, 377 U.S. 426, 431 (1964). In the Third Circuit, to prevail in such an action a plaintiff
must prove:
(1) a proxy statement contained a material misrepresentation or omission which (2)
caused the plaintiff 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.

Gen. Elec. Co. by Levit v. Cathcart, 980 F.2d 927, 932 (3d Cir. 1992) (quotation marks omitted).
An omitted fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote. This standard is
fully consistent with Mills general description of materiality as a requirement that
"the defect have a significant propensity to affect the voting process." It does not
require proof of a substantial likelihood that disclosure of the omitted fact would
have caused the reasonable investor to change his vote. What the standard does
contemplate is a showing of a substantial likelihood that, under all the
circumstances, the omitted fact would have assumed actual significance in the
3

deliberations of the reasonable shareholder. Put another way, there must be a
substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the "total mix" of
information made available.

TSC Indus., Inc. v. Northway, Inc. , 426 U. S. 438, 449 (1976) (emphasis in original).
A "determination of materiality concerns a mixed question of law and fact, involving as it
does the application of a legal standard to a particular set of facts. " Gen. Elec. Co. , 980 F .2d at
932 (internal quotation marks omitted). " [M]ateriality depends on the significance the
reasonable investor would place on the withheld or misrepresented information." Basic Inc. v.

Levinson, 485 U.S. 224, 240 (1988). Thus, whether information is material in "any particular
case ... depends on the facts. " Id. at 239. "Only if the established omissions are so obviously
important to an investor, that reasonable minds cannot differ on the question of materiality is the
ultimate issue of materiality appropriately resolved as a matter of law . . .. " TSC Indus., Inc. , 426
U.S. at 450 (quotation marks omitted).

B. Attorneys' Fees
" [T]he traditional American rule disfavors the award of attorney' s fees in the absence of
statutory or contractual authorization." Polanski v. Trump Taj Mahal Assocs., 137 F.3d 139, 145
(3d Cir. 1998). A court may, however, exercise its equitable powers to award attorneys ' fees to a
litigant who "successfully maintained a suit, usually on behalf of a class, that benefits a group of
others in the same manner as himself. " Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 392 (1970).
"This well recognized exception, known as the ' common benefit' or ' common fund ' equitable
doctrine, is premised upon the rationale that it would be unfair to require one party to bear the
entire expense which results in the benefit to a large class of persons." Cooper stock v. Pennwalt

Corp., 820 F. Supp. 921 , 923 (E.D. Pa. 1993). This doctrine applies when three elements are
satisfied: "(1) the plaintiff must confer a substantial benefit; (2) to members of an ascertainable

4

class; and (3) the court must ensure that the costs are proportionally spread among that class."

Polanski, 137 F.3d at 145. Moreover, when a suit is mooted prior to final judgment, it is
necessary to determine that the suit was meritorious when filed and caused the benefit. Kahan v.

Rosenstiel, 424 F .2d 161 , 167 (3d Cir. 1970). A suit is "meritorious" if it could have survived a
motion to dismiss. Id.
The plaintiff bears the burden of demonstrating merit and substantial benefit.

Cooperstock, 820 F. Supp. at 923 . If the plaintiff is successful, the burden shifts to the defendant
"to prove that the lawsuit did not in any way cause their action which ultimately rendered the suit
moot." Id. ; see also Koppel v. Wien , 743 F.2d 129, 135 (2d Cir. 1984).
" [T]he award of attorney' s fees is not limited to circumstances in which there is a
monetary fund from which fees may be paid, but extends to any situation in which the litigation
has conferred a substantial benefit on the members of an ascertainable class." Kahan, 424 F.2d
at 166 (quotation marks omitted).

III.

ANALYSIS

I do not decide the first issue that Plaintiffs have to show, that is, that the lawsuit could
have survived a motion to dismiss. I do note, however, notwithstanding the complaints'
boilerplate allegations of falsity and misrepresentations, the complaints only allege facts related
to purported material omissions.
I tum to the issue of "substantial benefit." Plaintiffs ' argument for receiving attorneys'
fees under the common benefit doctrine is, essentially, that they caused4 Defendants to disclose
previously withheld material information, thus providing DST stockholders with a substantial
benefit. (See D.I. 20 at 4-12; C.A. 18-322, D.I. 8 at 8-18). Accordingly, in order to establish a

4

Causation is not at issue in these motions as the Supplement expressly states its purpose was to
moot these lawsuits. (D.I. 22-1 at 3).

5

substantial benefit, Plaintiffs must establish, as a factual predicate, that the supplemental
information was material. Cf In re Walgreen Co. Stockholder Litig. , 832 F.3d 718, 725 (7th Cir.
2016) (discussing, in the context of a class action disclosure case, that a benefit to class members
from a disclosure may be established if an omission is material (citing In re Trulia, Inc.

Stockholder Litig. , 129 A.3d 884, 898-99 (Del. Ch. 2016))). Defendants' supplemental
disclosures fall into three categories: (1) projections of unlevered free cash flow; (2) Bank of
America Merrill Lynch's discounted cash flow analysis; and (3) multiples used for Bank of
America Merrill Lynch' s comparable companies and selected precedent transaction analyses. A
review of the record as to each of the disclosures reveals that Plaintiffs have failed to carry their
burden on the materiality of the information. Thus, Plaintiffs have not established that they
provided the stockholders with a substantial benefit so as to warrant an award of attorneys ' fees.
I address each category of disclosure in tum.

A. Unlevered Free Cash Flow Projections
Defendants supplemented the "Financial Forecasts" portion of the Proxy. As originally
filed, the Proxy did not mention Bank of America Merrill Lynch' s reliance on unlevered free
cash flow, 5 a non-GAAP 6 financial measure, in forming its fairness opinion. (See D.I. 26, Exh. 1
at 52-54). The Supplement included the following additional disclosure: 7

5

"Unlevered free cash flow shows how much cash is available to the firm before taking financial
obligations into account. " Unlevered Free Cash Flow-UFCF, INVESTOPEDIA,
https://www.investopedia.com/terms/u/unlevered-free-cash-flow-ufcf.asp (last visited July 29,
2019). The formula for calculating unlevered fee cash flow is
UFCF=EBITDA-CAPEX-Working Capital-Taxes. Id. ("EBITDA" stands for "earnings before
interest, taxes, depreciation and amortization" and "CAPEX" refers to capital expenditures).
6
"Non-GAAP earnings are an alternative accounting method used to measure the earnings of a
company, and many companies report non-GAAP earnings in addition to their earnings based on
Generally Accepted Accounting Principles (GAAP)." Non-GAAP Earnings, INVESTOPEDIA,
https://www.investopedia.com/terms/n/non-gaap-earnings.asp (last visited Aug. 1, 2019).
7
Supplemental disclosures are indicated by underlining or strikethroughs.
6

finaodaJ f Ol'eti'IS(

n,

disclosu in th s ctio11 caption d "Proposa l J: A.drJplio11 of th • ferger . ~ m 11- Th Mi 'Tg rFtmmcial Forecast " is supplemented ,l providing th fo llowi11 additional disc/os11ro at ti
mi o/the tenth

paragraph there.of 011 pag 53 oft ie De.finitiVe Pro.\)' Statement.

n1e disclosmie in h s tior1 captioned "'Proposal J: ..!doption oft I Jerger .Agreemem- The Merger Financial Fo cast" is supplemented b,r providing th fo llowing addmonal disdosur, ajte rh rable and
/ oomores wllleh o,· rl IJ)S page5 53-5 o tll Definllr. Pro'X) Star
it.
The follov.ing table presen~a ummary of the unle 'ered after-tax fttt c tlolvsfor the fi, cal m
-asb
~ g December .31. _018 through _o_ and tht t,gmioal year u.scd in the discounttd casb tlo, apalysi, for the
o
ComJ!any on astand-alone ba · .

Unleyered Free Cash FJow
_ ote: Dollars in mtllio

of TCJA. with the appro,y;Jl of PSI manunnmt> and bnrdgled for stock-baud sonJWJNtion but not bJwkued
fur QDe4ime. QQl\;RCµrring.ikm§.
(DJ. 22-1 at 7-8).
Plaintiffs argue that this information was material and that its disclosure benefitted the
DST stockholders. (DJ. 20 at 5-7; C.A. 18-322, DJ. 8 at 10-13). They cite several cases. (Id.) .
None of those cases, however, establish the factual predicate necessary to find materiality in this
case. See, e.g., In re Hot Topic, Inc. Sec. Litig., 2014 WL 7499375, at *8-10 (C.D. Cal. May 2,
2014) (holding that omitted unlevered free cash flow projections, standing alone, were not
7

material as a matter of law and leaving for the factfinder the question of whether the omission
was misleading considering all the facts of the case); Brown v. Brewer, 2010 WL 2472182, at
*21 (C.D. Cal. June 17, 2010) (denying summary judgment of no material omission where the
"total mix" of information provided to stockholders included no projected growth rates); In re

Netsmart Techs., Inc. Shareholders Litig. , 924 A.2d 171 , 201-03 (Del. Ch. 2007) (holding, based
on a well-developed factual record, that omitted financial projections were material where the
company did not disclose any projections for certain years and disclosed projections that were
different than those used by financial advisors). None of the cited cases stand for the proposition
that unlevered free cash flow projections are per se material. Moreover, caselaw is not evidence
of what information is material in this case.
Similarly, attorney argument is not evidence. Plaintiffs argue that, absent the
Supplement, DST "stockholders would be misled as to the fair value of their stock." (C.A. 18322, D.I. 8 at 11). They do not, however, explain how the stockholders would have been misled.
Nor do they cite evidence or expert opinion on the issue. They merely conclude, without
examination of the particular facts of this case, that the additional information "allowed DST' s
stockholders to assess the financial analyses performed by the Financial Advisor and properly
understand whether the consideration represented fair value." (Id. at 13). And this, they
conclude, was a "substantial benefit." (Id.). I do not find this sufficient.
Plaintiffs have failed to carry their burden of establishing that they provided a substantial
benefit to DST stockholders by causing the disclosure of unlevered free cash flow projections. It
may be true that the disclosure of material information necessarily provides a substantial benefit
to stockholders. In order to establish a substantial benefit under that theory, however, Plaintiffs
must establish the factual predicate that the disclosed information was material under the facts of

8

this specific case. They have failed to carry their burden on that point. Absent a showing of
materiality, Plaintiffs have no basis to claim they provided DST stockholders with a benefit,
substantial or otherwise. Thus, I will not award attorneys ' fees based on Defendants' disclosure
of unlevered free cash flow projections.

B. Additional Disclosures Related to Discounted Cash Flow Analysis
Defendants supplemented the Discounted Cash Flow Analysis portion of the Proxy. The
Proxy as originally filed provided:
Discounted Cash Flo w Analysis. BofA Merrill Lynch perfonned a discounted cash flow analysis of DST to
calculate the estimated present value of the standalone unlevered, after-tax free cash flows that DST was forecasted
to generate during DST's fiscal years 2018 through 2020 based on the DST management forecasts. BofA Merrill
Lynch calculated terminal values for DST by applying terminal multiples of 9.0x to I 1.5x, which range was selected
based on BofA Merrill Lynch's professional judgment and experience, to DST's fiscal year 2020 estimated
EBITDA and perpetuity growth rates of 3.25% to 3.50%, which range was selected based on BofA Merrill Lynch 's
professional judgment and experience. The cash flows and terminal values in each case were then discounted to
present value as of December 31 , 2017 using discount rates ranging from 9.00% to 11 .25%, which were based on an
estimate of DST's weighted average cost of capital, and adjusted to exclude DST s net debt as of December 31 ,
2017 and to include the value of certain interests in joint ventures and certain non-core assets of DST. This analysis
indicated the following approximate implied per share equity value reference ranges for DST as compared to the
merger consideration:
Implied Per Share Equity Value Reference Range for DST
Terminal Multiple

Perpetuity Growth Rate

$67.75 - $89.00

$62.75 - $91 .50

Merger Consideration

(D.I. 26, Exh. 1 at 50).

9

$84.00

The Supplement replaced that section with this amended language:
The disclosure in the sub-section captioned "Discounted Cash Flow Ana(vsis " is amended and supplememed by
deleting the first paragraph thereofon page 50 in its entir-ety and replacing it with the fol/01-1,ing disclosure:
BofA Merrill LYJ!ch performed a discounted cash flow anal}'J!is of DST to calculate the estimated present
value of the standalone unlevercd. after-tax free cash flows that DST was forccasted to generate duringDSTh
m.w.ycars 2018 through 2020 based on the DST management forcca5ts (as dcscribcd under "Pmposal, 1:

AdQption of the Merger Agrcgpso1=The Mcqr::::fjoaw;i,l Forecast''). BofA Merrill Lynch calculated tenninal
values for DST by.JlppJY.iDg terminal multiples of 9.0x to 11.Sx to DST's fiscal year 2020 estimated EBIIDA and
pctpctuity_g!:owth rates of 3.25% to 3.500/o, which were selected in each case based on BofA Merrill LYl!!,h's
professional jud~nent and experience and after~ into coosidemtion. among other thin~ the observed data
for DST and the selected publicly traded cong>aoics. the historical ~ multiples of DST and the selected

~ . and certain diffcrcnccs in the mpcctive fiomel profiles of DST and the selected
tmblidY traded companies as described under "Sum of the Parts----Selcct Publicly Traded Companies
Aoalysis"'. The cash flows and teouioal values in each case were then discounted to present value as of
December 31, 2017 using discount rates ranging from 9.00% to 11.25%. which were based on an esiwnte of
DST's we~ted average cost of capital derived usmg the capital asset pricing model which took into account the
risk-fu:c rat~ the levered beta of DST,~0p1iatc equity market risk prcmit.an. the size prcmimn of DST and
DST's estimated cost of debt and adju~ted to exclude DST s net debt as of December 31, 2017 and to include the

value of certain interests in joint ventures and certain non-core assets of DST. This analysis indicated the
following..approximate in1pliN per share equity value reference ranges for DST as compared to the merger
consideration:
Implitd Per Share l:quity Yalu• Reftrtnce Range for DST
Tuminal l\lulriple

Pupetuil)· Grnmh Rate

$67.75-$89.00

$62.75 -$91.50

lltr&tr Considuarion

$84.00

(D.I. 22-1 at 7 (language added by Supplement highlighted)).
This supplemental disclosure refers back to the unlevered free cash flow projections I
discuss above. I will not readdress that issue here.
The disclosure also adds information on the discount rate, terminal multiple, and
perpetuity growth rate inputs. Defendants argue that these additional data points did not alter the
total mix of information previously available to DST stockholders. (D.I. 25 at 14). Plaintiffs'
argument to the contrary is unpersuasive. They cite no authority to support a conclusion that the
information disclosed by the Supplement is per se material. (DJ. 20 at 7-8; C.A. 18-322, DJ. 8
at 13-16). Rather, they once again cite to cases where courts found, on better developed records,
that certain omissions were material given the particular factual circumstances. (Id.). They also
point to a law review article that discusses how various inputs can impact a banker' s final
10

valuation. (Id. (citing Steven M. Davidoff, Fairness Opinions, 55 Am. U.L. Rev. 1557, 1576-77
(2006)). Neither caselaw nor law review articles are evidence of materiality in this case.
Plaintiffs have not carried their burden to show that the additional disclosures related to
the discounted cash flow analysis were material. 8 As factual support for their argument,
Plaintiffs merely point to the additional information, point to the fact that the information was
not previously disclosed, and conclude that the information was material. (Id.). This type of
conclusory argument, divorced from the facts of this case, is not sufficient to establish that the
supplemental discounted cash flow analysis information was material. As Plaintiffs have failed
to establish materiality, they have also failed to establish that they provided a substantial benefit
to DST stockholders. Accordingly, I will not award Plaintiffs attorneys' fees based on this
additional disclosure.
C. Additional Disclosures Related to Selected Comparable Companies Analysis and
Selected Precedent Transaction Analysis

Defendants supplemented the Proxy with additional financial data relevant to the
comparable companies analysis and selected precedent transaction analysis. (See D.I. 22-1 at 37). Plaintiffs argue that these disclosures were material, but cite no authority for concluding that
individual variables, such as those disclosed by Defendants, are per se material. (See D.I. 20 at
8-12; C.A. 18-322, D.I. 8 at 16-18). Plaintiffs also fail to connect the supplemental information
to the facts of this case such that I could conclude that the omissions were material to DST
stockholders given the total mix of information available to them. Thus, as with the other
supplemental disclosure, Plaintiffs have failed to establish materiality and have failed to

8

Indeed, the additional disclosures seem to be obviously non-material, consisting of extra
verbiage to amplify the statement that BofA Merrill Lynch was using "professional judgment
and expertise" to do its analysis.
11

establish that they provided a substantial benefit to DST stockholders. Accordingly, I will not
award Plaintiffs attorneys ' fees based on this additional disclosure.
IV.

CONCLUSION

Plaintiffs' did not develop a factual record or proffer expert opinions in support of their
motions. Rather, they rely on the bald fact of Defendants' supplemental disclosures. (Se e
generally D.I. 20; C.A. 18-322, D.I. 8). Essentially, they argue throughout their briefing that the

missing information was so plainly material that its disclosure was a substantial benefit to the
stockholders as a matter of law. (Id.). I do not find Plaintiffs' position persuasive. It is far from
clear, as a factual matter in this case, that the information disclosed by Defendants was material.
Plaintiffs' attorneys' arguments, opinions from judges in other cases, and law review articles do
not carry the weight Plaintiffs put on them. Moreover, absent evidence that the information was
material, there is no basis in the record to find that Plaintiffs conferred any benefit on DST
stockholders. Simply put, Plaintiffs have failed to carry their evidentiary burden. Thus, I will
deny Plaintiffs' motions for attorneys' fees.

12