Robert Carlyle v. Akorn, Inc., et al
Filing
43
MEMORANDUM Opinion and Order: Plaintiffs' cases should have been "dismissed out of hand." See id. at 724. Since the Court failed to take that action, the Court exercises its inherent authority to rectify the injustice that occurred as a result. See Dale M., ex rel. Alice M. v. Bd. of Educ. of Bradley-Bourbonnais High Sch. Dist. No. 307, 282 F.3d 984, 986 (7th Cir. 2002). The settlement agreements are abrogated and the Court orders Plaintiffs' counsel to return to Akorn the a ttorney's fees provided by the settlement agreements. Plaintiffs' counsel should file a status report by July 8, 2019 certifying that the fees have been returned.Dated: June 24, 2019 Signed by the Honorable Thomas M. Durkin on 6/24/2019:Mailed notice(srn, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SHAUN A. HOUSE, individually and on
behalf of all other similarly situated,
Plaintiff,
No. 17 C 5018
ROBERT CARLYLE,
Plaintiff,
No. 17 C 5022
DEMETRIOS PULLOS, individually and
on behalf of all other similarly
situated,
No. 17 C 5026
Plaintiff,
Judge Thomas M. Durkin
v.
AKORN, INC.; JOHN N. KAPOOR;
KENNETH S. ABRAMOWITZ; ADRIENNE L.
GRAVES; RONALD M. JOHNSON; STEVEN
J. MEYER; TERRY A. RAPPUHN; BRIAN
TAMBI; and ALAN WEINSTEIN,
Defendants.
MEMORANDUM OPINION AND ORDER
As the Court has recounted in greater detail in previous opinions, Plaintiffs in
these cases sued Akorn and members of its board of directors seeking certain
disclosures regarding a proposed acquisition by Frensenius Kabi AG. See 17 C 5018,
R. 53 (House v. Akorn, Inc., 2018 WL 4579781 (N.D. Ill. Sept. 25, 2018)); 17 C 5016,
R. 81 (Berg v. Akorn, Inc., 2017 WL 5593349 (N.D. Ill. Nov. 21, 2017)). After Akorn
revised its proxy statement and issued a Form 8-K, Plaintiffs dismissed their lawsuits
and settled for attorney’s fees. Shortly thereafter, Theodore Frank, an owner of 1,000
Akorn shares, sought to intervene to object to the attorneys’ fee settlement. The Court
eventually denied Frank’s motion to intervene, but in light of Frank’s arguments,
ordered Defendants to file a brief addressing whether the Court should exercise its
inherent authority to abrogate the settlement agreements under the standard set
forth In re Walgreen Co. Stockholder Litigation, 832 F.3d 718, 725 (7th Cir. 2016).
The Court also invited Frank to file an opposition brief as an amicus curiae, which he
did. The parties then filed reply briefs, and briefs on supplemental authority. The
Court now addresses whether the settlements should be abrogated.
SEC Rule 14a-9 requires disclosure in proxy statements of all “material fact[s]
necessary in order to make the statements therein not false or misleading.” See 17
C.F.R. § 240.14a-9(a). The Supreme Court has held that “[a]n omitted fact is material
if there is a substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
449 (1976). In other words, omitted information is material if there is
a substantial likelihood that, under all the circumstances,
the omitted fact would have assumed actual significance in
the 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.
Id. Accordingly, “[o]mitted facts are not material simply because they might be
helpful.” Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000); see also TSC
Indus., 426 U.S. at 449 n.10 (noting “the SEC’s view of the proper balance between
the need to insure adequate disclosure and the need to avoid the adverse
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consequences of setting too low a threshold for civil liability”); Wieglos v. Com. Ed.
Co., 892 F.2d 509, 517 (7th Cir. 1989) (“Reasonable investors do not want to know
everything that could go wrong, without regard to probabilities; that would clutter
registration documents and obscure important information. Issuers must winnow
things to produce manageable, informative filings.”).
The Seventh Circuit heightened this standard in the context of reviewing
approval of a class settlement of claims for disclosures under Rule 14a-9. See
Walgreen, 832 F.3d at 723-24. Adopting a standard set by the Delaware Court of
Chancery in similar cases, the court held that disclosures must be “plainly material .
. . . mean[ing] that it should not be a close call that the . . . information is material.”
Id. at 725 (quoting In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 894 (Del. Ch.
Ct. 2016)).
Plaintiffs claim that their complaints caused Akorn to make additional
disclosures in the revised proxy and Form 8-K, which in turn precipitated their
settlement. The parties’ briefs focus on whether these additional disclosures are
plainly material justifying the settlement. This would be the appropriate perspective
if the Court was reviewing a class settlement. See Walgreen, 832 F.3d at 724 (“No
class action settlement that yields zero benefits for the class should be approved . . .
.”) (emphasis added). But no class was certified here, nor were any class claims
released in the settlement. Thus, as the Court explained in its previous order, the
case is in the procedural posture suggested by the second half of the sentence from
Walgreen just quoted: “. . . a class action that seeks only worthless benefits for the
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class should be dismissed out of hand.” Id. (emphasis added). To determine whether
Plaintiffs’ cases should have been “dismissed out of hand”—in which case the
settlement agreements should be abrogated—the Court must assess whether the
disclosures Plaintiffs’ sought in their complaints—not the disclosures Akorn made
after the complaints were filed in the revised proxy and Form 8-K—are plainly
material. 1
1.
GAAP Reconciliation
All three plaintiffs sought GAAP reconciliation of the proxy’s projections. 2
Plaintiffs argue that such reconciliation was necessary because GAAP is the format
in which “Akorn traditionally disclosed its financial results.” R. 65 at 10. But while
such reconciliation might be helpful, the applicable SEC regulation requiring GAAP
reconciliation does “not apply to . . . a disclosure relating to a proposed business
combination.” 17 C.F.R. § 244.100(d); see also Securities Exchange Commission Discl.
5620589,
Question
101.01
(Oct.
17,
2017),
available
https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.
online
at:
Although this
regulation does not directly address materiality, the Court finds it highly persuasive
Frank questions whether Plaintiffs could have caused the disclosures because
plaintiffs Carlyle and Pullos filed their complaints after the revised proxy was issued,
and plaintiff House’s complaint was filed only days before. The parties dispute
whether the disclosures contained in the Form 8-K, which was filed after all three
complaints, were necessary to make settlement possible. But since the Court holds
that analysis of the materiality of the disclosures sought is the relevant issue, and
not the materiality of the disclosures actually made, these causation questions are
irrelevant.
1
See 17 C 5018 (House), R. 1 ¶¶ 36, 41; 17 C 5022 (Carlyle), R. 1 ¶ 51; 17 C 5026
(Pullos), R. 1 ¶ 36.
2
4
in that regard. Other district courts have reached a similar conclusion. See Assad v.
DigitalGlobe, Inc., 2017 WL 3129700, at *6 (D. Colo. Jul. 21, 2017); Bushansky v.
Remy Intl., Inc., 262 F. Supp. 3d 742, 748 (S.D. Ind. 2017).
Plaintiffs argue that GAAP reconciliation “revealed that the November 2016
Projections assumed steady increases in [Akorn’s] net income consistent with Akorn’s
past performance, while the lowered March 2017 Projections assumed a sudden drop
in Akorn’s near term performance, which was inconsistent with Akorn’s recent
financial performance.” R. 65 at 11. But it is obvious that a lower projection implies
lower net income. Disclosure of a lower projection already constitutes disclosure of
the company’s opinion that the company will earn lower net income. Plaintiffs do not
explain why the specific net income numbers were material to shareholders’ ability
to evaluate the merger. Therefore, the Court finds GAAP reconciliation is not plainly
material.
2.
Components of J.P. Morgan’s Analysis
Plaintiffs House and Pullos also sought certain “components” of J.P. Morgan’s
analysis (J.P. Morgan was Akorn’s merger advisor): “(i) the inputs and assumptions
underlying the calculation of the discount rate range of 8.0% to 10.0%; (ii) the range
of terminal values to which the growth rate range was applied; and (iii) the inputs
and assumptions underlying the calculation of the terminal value growth rates.” 3
Similarly, Plaintiff Carlyle sought “the basis” for the growth rate J.P. Morgan chose. 4
3
See 17 C 5018 (House), R. 1 ¶ 43; 17 C 5026 (Pullos), R. 1 ¶ 43.
4
See 17 C 5022 (Carlyle), R. 1 ¶¶ 49.
5
But this information was already in the original proxy. As to (i), the proxy states that
the range of 8.0% to 10.0% “was chosen by J.P. Morgan based upon an analysis of the
weighted average costs of capital of the Company.” R. 65-1 at 54 (p. 44). As to (ii), the
proxy states that the range of terminal values was calculated by “applying terminal
value growth rates ranging from 0.0% to 2.0% to the unlevered free cash flows for the
Company during the final year of the ten-year period of the March 2017 Management
Case.” Id. As to (iii), growth rates are simply a choice. Shareholders can evaluate
Akorn’s valuation and merger price by making their own determination of whether a
growth rate range of 0-2% is reasonable in light of the company’s prior performance.
Generally, with respect to data underlying a financial advisor’s opinion, courts find
that only a “fair summary” must be disclosed, meaning that the company “does not
need to provide sufficient data to allow the stockholders to perform their own
independent valuation.” Trulia, 129 A.3d at 901. The data sought by House and
Pullos was not material to evaluating the merger proposal. Carlyle’s more general
demand for “certain internal financial analyses and forecasts prepared by the
management of the Company relating to its business,” is even less material.
3.
J.P. Morgan’s Compensation from Akorn
All three plaintiffs sought disclosures regarding J.P. Morgan’s compensation
from Akorn and Fresenius. As to J.P. Morgan’s “specific compensation figures,” 5
Akorn disclosed that information in the original proxy:
17 C 5018 (House), R. 1 ¶ 45; 17 C 5022 (Carlyle), R. 1 ¶ 56; 17 C 5026 (Pullos), R.
¶ 44; see also 17 C 5022 (Carlyle), R. 1 ¶ 54.
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6
J.P. Morgan received a fee from the Company of $3 million,
paid upon the public announcement of the merger, which
will be credited against any Services Fee (as defined
below). For services rendered in connection with the
merger, the Company has agreed to pay J.P. Morgan an
additional fee equal to 1.0% of the total amount of cash paid
to the Company’s common stockholders . . . immediately
prior to the consummation of the merger (the “Service
Fee”), which in this case amounts to approximately $47
million.
R. 65-1 at 55 (p. 45). Plaintiffs argue that this quote is taken out of context and does
not specifically indicate whether the fee is contingent on the consummation of the
merger. See R. 65 at 14 & n. 13. The Court has reviewed the context of this quote and
finds that it does not change its meaning. The amount of potential compensation ($47
million) is abundantly clear.
The revised proxy added language expressly stating that J.P. Morgan’s fee was
“contingent and payable upon the closing of the merger.” R. 85-2 (17 C 5016) at 22 (p.
45). But Plaintiffs did not seek this information in their complaint. And in any case,
although the fact that J.P. Morgan’s fee is contingent on consummation was not
expressly stated in the original proxy, such an arrangement is certainly customary,
and can be inferred from the fact that the amount of the fee will ultimately be
measured only “immediately prior to consummation” and is defined as a percentage
of the amount to be paid in the transaction. Even if Plaintiff had sought this
information in their complaint, it is not plainly material.
4.
J.P. Morgan’s Compensation from Fresenius
Although Plaintiffs do not address it in their current briefing, they also sought
disclosure of “the exact amount of money J.P. Morgan received and may continue to
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receive from [Fresenius] while acting as Akorn’s financial advisor.” 6 The Court finds
the exact historical payments are not material. See Bushansky, 262 F. Supp. 3d at
753 (“Additionally, Plaintiffs have not presented any evidence or case law
establishing that the inclusion of historical fees in similar situations is material.”).
And the proxy does not indicate that J.P. Morgan was “continuing” to receive
payments from Fresenius in any event.
5.
“Upside” of the “Stand-Alone Strategic Plan”
Plaintiff Carlyle sought four additional disclosures not sought by Plaintiffs
House or Pullos. First, Carlyle sought the following disclosure:
The Proxy also refers to “the potential upside in the
Company’s stand-alone strategic plan,” which the Board
purportedly considered in determining to recommend
approval of the Proposed Transaction. Proxy at 39. Yet, the
Proxy fails to disclose any further information concerning
that “stand-alone strategic plan” or its “potential upside”
or exactly why the Board determined it would be in the best
interest of the Company and its shareholders to pursue
potential strategic alternatives rather than a stand-alone
strategic plan.
17 C 5022, R. 1 ¶ 46; see also id. ¶ 45. It is apparent from context that “stand-alone”
means Akorn not merging with another company. The “upside” of that scenario is also
readily apparent, in that avoiding merger means avoiding the costs and the
relinquishment of control inherent to the merger. The proxy explains that the Board
believed “that the Company’s stand-alone strategic plan involved significant risks in
light of the industry and competitive pressures the Company was facing and the
See 17 C 5018 (House), R. 1 ¶ 46; 17 C 5022 (Carlyle), R. 1 ¶ 55; 17 C 5026 (Pullos),
R. 1 ¶ 46.
6
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Board’s concerns with respect to the risks relating to the Company’s ability to execute
on its strategic plan including the possibility that the strategic plan may not produce
the intended results on the targeted timing or at all.” R. 65-1 at 47 (p. 37). Although
the proxy does not detail what “industry risks” and “competitive pressures” the
company faced, it is sufficient for the Board to express such concerns generally.
Moreover, the Board translated those concerns into financial projections that were
provided in the proxy. While it may have been helpful or interesting for shareholders
to learn greater detail about how management perceived the industry landscape, such
information was not necessary for shareholders to evaluate the merger. Furthermore,
Carlyle settled the case without receiving this information. That fact casts significant
doubt on whether this information was truly material.
6.
“Substance” of the March 2017 Projections
Carlyle also sought disclosure of “complete information concerning the
substance of the March 2017 [projections] or the assumptions, analysis, projections,
or conclusions reflected therein,” 17 C 5022, R. 1 ¶ 48, and the “financial analyses
and forecasts” J.P. Morgan reviewed, id. ¶ 50. But “completeness” is not the standard.
See Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002)
(“incomplete” statements are not necessarily “misleading”). Further, there is
presumably a great deal of information underlying the March 2017 projection on
which the proxies rely. Carlyle does not identify what information in particular was
necessary for shareholders to be able to evaluate the merger. And again, Carlyle
settled without receiving this information, casting doubt on its materiality.
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7.
Other Potential Buyers
Carlyle contends that the proxy should have detailed the other potential
buyers the Board considered and why the Board determined that “it was highly
unlikely that any of those counterparties would be interested in an acquisition of the
Company at that time due to competing strategic priorities and recent acquisitions
in the industry.” 17 C 5022, R. 1 ¶¶ 58-59. But this statement speaks for itself
regarding why the Board rejected other companies in the industry as potential
buyers. And as Carlyle notes, the proxy gives much greater detail regarding the one
other company (“Company E”) Akorn actually considered. Detailed information about
potential buyers Akorn did not actually consider is not material.
8.
Pending Litigation
Finally, Plaintiff Pullos alleges that “the Board may be using the Proposed
Merger as a vehicle to salvage their professional reputations and potentially absolve
themselves of liability arising from federal securities and related derivative litigation
currently pending in the Northern District of Illinois.” 17 C 5026, R. 1 ¶ 47. Pullos
claims that the proxy improperly “fails to disclose whether these lawsuits were
discussed by the Board and whether the Board took them into account when deciding
to undertake the sales process and enter into the Merger Agreement.” Id. But the
lawsuits were public record prior to issuance of the original proxy, and Pullos’s
allegation that the Board had ulterior motives for the merger related to the lawsuits
is unfounded and does not seek “information” relevant to the merger. To the extent
the Board might have had ulterior motives, that is not information that is
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“disclosable” in the sense required here. The proxy in its entirety is a refutation of
Pullos’s allegation in that the proxy gives reasons unrelated to the lawsuits for
supporting the merger. Pullos’s unfounded speculation about the Board’s motives
does not constitute an information request. And similar to Carlyle’s claims, the fact
that Pullos settled without provision of information related to this claim indicates
that it was not material.
Conclusion
Therefore, the Court finds that the disclosures sought in the three complaints
at issue were not “plainly material” and were worthless to the shareholders. Yet,
Plaintiffs’ attorneys were rewarded for suggesting immaterial changes to the proxy
statement. Akorn paid Plaintiffs’ attorney’s fees to avoid the nuisance of ultimately
frivolous lawsuits disrupting the transaction with Frensenius. The settlements
provided Akorn’s shareholders nothing of value, and instead caused the company in
which they hold an interest to lose money. The quick settlements obviously took place
in an effort to avoid the judicial review this decision imposes. This is the “racket”
described in Walgreen, which stands the purpose of Rule 23’s class mechanism on its
head; this sharp practice “must end.” 832 F.3d at 724.
Plaintiffs’ cases should have been “dismissed out of hand.” See id. at 724. Since
the Court failed to take that action, the Court exercises its inherent authority to
rectify the injustice that occurred as a result. See Dale M., ex rel. Alice M. v. Bd. of
Educ. of Bradley-Bourbonnais High Sch. Dist. No. 307, 282 F.3d 984, 986 (7th Cir.
2002). The settlement agreements are abrogated and the Court orders Plaintiffs’
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counsel to return to Akorn the attorney’s fees provided by the settlement agreements.
Plaintiffs’ counsel should file a status report by July 8, 2019 certifying that the fees
have been returned.
ENTERED:
______________________________
Honorable Thomas M. Durkin
United States District Judge
Dated: June 24, 2019
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