Bumgarner v. Williams Companies, Inc., The et al

Filing 82

OPINION AND ORDER by Chief Judge Gregory K Frizzell ; setting/resetting deadline(s)/hearing(s): ( Miscellaneous Deadline set for 5/27/2016); granting in part and denying in part 68 Motion to Dismiss for Failure to State a Claim; granting in part and denying in part 69 Motion to Dismiss for Failure to State a Claim (kjp, Dpty Clk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

JOHN BUMGARNER,

)
)
Plaintiff,
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)
v.
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)
THE WILLIAMS COMPANIES, INC., and )
ENERGY TRANSFER EQUITY, L.P.,
)
)
Defendants.
)

Case No. 16-CV-26-GKF-FHM

OPINION AND ORDER
Before the court are the motions, filed by defendants The Williams Companies, Inc.
(“Williams”) and Energy Transfer Equity, L.P. (“ETE”), to dismiss the Second Amended Class
Action Complaint pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which
relief can be granted. [Dkt. ##68-69]. Plaintiff John Bumgarner (“Bumgarner”) brings this
action to enjoin the defendants from further proceeding with a proposed merger. In his Second
Amended Complaint, brought for himself and for members of a proposed class of Williams
shareholders, Bumgarner alleges defendants and their representatives made false or misleading
representations or omissions when soliciting proxies for the shareholder vote on the proposed
merger, in violation of § 14 of the 1934 Securities Exchange Act, 15 U.S.C. § 78n. Defendants
move to dismiss, arguing that the statements fall under a safe harbor for forward-looking
statements in 15 U.S.C. § 78u-5(c) and that Bumgarner has not alleged sufficient facts to support
a claim that the alleged omissions amount to a securities violation.
In considering a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a court must determine
whether the plaintiff has stated a claim upon which relief can be granted. A complaint must
contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v.

Twombly, 550 U.S. 544, 570 (2007). The plausibility requirement “does not impose a
probability requirement at the pleading stage; it simply calls for enough facts to raise a
reasonable expectation that discovery will reveal evidence” of the conduct necessary to make out
the claim. Id. at 556. “[A] plaintiff’s obligation to provide the grounds of his entitlement to
relief requires more than labels and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.” Id. at 555 (quotations omitted). The court “must determine whether
the complaint sufficiently alleges facts supporting all the elements necessary to establish an
entitlement to relief under the legal theory proposed.” Lane v. Simon, 495 F.3d 1182, 1186 (10th
Cir. 2007).
Section 14(a) of the Securities and Exchange Act forbids proxy solicitations that
contravene the rules and regulations of the Securities and Exchange Commission (“SEC”). 15
U.S.C. § 78n(a)(1). One of those rules, Rule 14a-91, prohibits proxy solicitations by means of
any communication containing false or misleading statements or omissions that are material to
the proxy solicitation. 17 C.F.R. § 240.14a-9. A plaintiff claiming a violation of § 14(a) by way
of Rule 14a-9 must establish three elements: (1) the proxy statement contained a material
misrepresentation or omission; (2) the defendant acted with the requisite state of mind; and (3)
the proxy statement was the essential link in completing the transaction at issue. See In re Zagg
Securities Litigation, 2014 WL 505152, *7 (D. Utah 2014) (“Zagg I”); see also Lane v. Page,
581 F.Supp.2d 1094, 1111 (D.N.M. 2008).
In the Second Amended Complaint, Bumgarner alleges the defendants initially
communicated to shareholders that the proposed merger would result in an estimated $2 billion

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Bumgarner does not explicitly invoke Rule 14a-9 in the Second Amended Complaint. Defendants have
characterized the Second Amended Complaint as alleging a violation of § 14(a) by way of violating Rule 14a-9.
Bumgarner has not objected to this characterization.

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in synergies, but later reduced that estimate twice—to $170 million and then to $126 million.
The court previously determined that such projections are “forward-looking statements” that fall
under 15 U.S.C. § 78u-5, a statutory “safe harbor.” [Dkt. #58, pp. 4-9]. In response to the
motions to dismiss, Bumgarner concedes the estimates themselves are not actionable under the
court’s prior ruling, but argues the § 14(a) claim in the Second Amended Complaint is based on a
different statement explaining the reduced estimates. The Second Amended Complaint alleges
defendants explained the reductions in this way in an amended S-4 on January 12, 2016:
HOWEVER, [Williams] BELIEVES THAT THE ABOVE PROSPECTIVE
FINANCIAL INFORMATION IS NO LONGER VALID BECAUSE IT WAS
PREPARED SEVERAL MONTHS PRIOR TO THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS, AND SINCE SUCH TIME THE INDUSTRY IN
WHICH [Williams] AND ETE OPERATE HAS BEEN UNDER PRESSURE AS
A RESULT OF LOWER COMMODITY PRICES AND HIGHER COSTS OF
CAPITAL. SEE THE SECTION TITLED “SUMMARY – RECENT
DEVELOPMENTS.
Bumgarner alleges this statement is a negligent misrepresentation in violation of § 14(a).
He alleges the reduction in estimated synergies was necessary—not because of “lower
commodity prices and higher costs of capital”—but because Williams and ETE were negligent in
their $2 billion projection because of specific “physical limitations” that made the $2 billion
projection unattainable.2 [See Dkt. #61, ¶¶ 19-22, pp. 9-12]. In addition, Bumgarner alleges
commodity prices had already declined significantly by the time Williams and ETE made their
representations of $2 billion in synergies. Thus, Bumgarner contends defendants’ explanation—
that the reduced estimates were based on commodity pricing and cost of capital—is false and

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For example, Bumgarner alleges that the projection of $2 billion in annual synergies was based in part on
anticipated synergies of $160 million to be obtained by connecting ETE’s Transwestern pipeline system with
Williams’s Northwest pipeline system. [Id. at pp. 11-12]. Bumgarner alleges the two systems are already
connected. [Id.].

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misleading in itself because a reasonable investor would be led to believe that if commodity
pricing and the cost of capital improve, the $2 billion in synergies may return.
Defendants argue the explanation for the reduced synergies estimates is subject to the
same safe harbor as the estimates themselves because the safe harbor applies, not only to
forward-looking statements, but to statements supplying the basis for forward-looking
statements. However, defendants’ explanation does not fit in this category. Defendants cite
commodity pricing and higher costs of capital not as the basis for a forward-looking projection,
but as justification for a revision that has already occurred. Defendants’ explanation for reducing
the projected synergies is a statement of existing fact and may be verified based on information
now available. This is no less true because defendants’ statement attempts to explain changes
made to other statements that are themselves forward-looking. Thus, the rationale behind the
safe harbor for forward-looking statements does not apply here.
Defendants also argue the explanation for the reductions in estimated synergies is
immaterial. Information is material if it “significantly alter[s] the total mix of information
available” to shareholders. Grossman v. Novell, Inc., 120 F.3d 1112, 1119 (10th Cir. 1997). As
noted above, the court previously determined the synergies estimates were forward-looking
statements under § 78u-5, and were accompanied by “meaningful cautionary statements.” [Dkt.
#58, p. 9]. Under the Tenth Circuit’s “bespeaks caution” doctrine, “[f]orward-looking statements
are . . . considered immaterial when the defendant has provided the investing public with
sufficiently specific risk disclosures or other cautionary statements concerning the subject matter
of the statements at issue to nullify any potentially misleading effect.” Grossman, 120 F.3d at
1120. Defendants argue the explanation for the reductions in the synergies estimates is related to
forward-looking statements that are, by law, immaterial, and thus cannot be material itself.

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Defendants’ argument is appealing, but ultimately unpersuasive. Under the facts as
alleged in the Second Amended Complaint, defendants have issued three synergies projections.
Those projections are immaterial—because they are forward-looking statements accompanied by
adequate cautionary language—but their immateriality is not fatal to Bumgarner’s claim. The
explanation may be material even if the projections are not. Defendants’ arguments do not
support a contrary view.
First, the Second Amended Complaint states a claim based, not on the projections
themselves, but rather on defendants’ explanation for the revisions to the projections. As noted
above, the alleged misrepresentation in defendants’ explanation—attribution of the synergies
reduction from $2 billion to $126 million to “lower commodity prices and higher costs of
capital”—was not a forward-looking statement, but was rather a statement of then-current fact to
explain the reduction. Thus, the “bespeaks caution” doctrine, which renders certain forwardlooking statements immaterial, does not apply.
Second, the alleged misrepresentation significantly alters the total mix of information
available to shareholders. Bumgarner alleges the explanation was misleading because, when
considered along with the prior and current synergies projections, the clear implication for the
shareholder audience and public is that an additional $1.874 billion in synergies will obtain—all
else being equal—if commodity prices and the cost of capital return to the levels prevailing prior
to the approval of the merger agreement. The only qualifications on that additional $1.874
billion in projected synergies are commodity prices and the cost of capital. As alleged,
defendants’ explanation contains no other cautionary language. As noted above, Bumgarner
alleges defendants know there are—but omitted from their explanation—other reasons the higher
synergies estimate is unattainable. Accepting the well-pleaded allegations in the Second

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Amended Complaint as true, the total mix of information—including the synergies projections
and defendants’ explanation for the reductions therein —could materially mislead shareholders.
Bumgarner has adequately alleged a violation of § 14(a).
Bumgarner also alleges the amended S-4 contains a material omission because it fails to
disclose a conflict of interest for a Williams shareholder who may also hold an interest in ETE.
Bumgarner alleges such an individual exists based on “information and belief,” but the Second
Amended Complaint alleges no facts in support. Under 15 U.S.C. § 78u-4(b)(1)(B), “if an
allegation regarding [a] statement or omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief is formed.” Accordingly, the Second
Amended Complaint does not state a claim based on a failure to disclose a conflict of interest.
In his response to the motions to dismiss, Bumgarner alternatively seeks leave to amend
the Second Amended Complaint to include allegations regarding the holdings of Keith Meister—
a Williams board member—and Corvex Management LP (“Corvex”)—a hedge fund managed by
Meister, which Bumgarner alleges held an interest in ETE. In reply, defendants argue
Bumgarner has had three opportunities to state this claim. Furthermore, defendants argue
Corvex’s SEC filings show that it did not hold an interest in ETE at the time the Williams board
voted to approve the merger agreement. Defendants’ latter argument is not appropriate at the
motion-to-dismiss stage, as it relies upon a description of unproduced documentation that is
neither referenced in nor central to the allegations in the Second Amended Complaint. Because
the court denies defendants’ motion to dismiss Bumgarner’s claim based on defendants’
explanation for the reductions in the synergies estimate, there is little inconvenience in allowing
Bumgarner to amend his claim based on the alleged failure to disclose a conflict of interest.
Moreover, Bumgarner has made only one attempt to state his claim regarding Meister’s alleged

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conflict of interest, and that was in the recent Second Amended Complaint. Bumgarner’s request
to amend that specific claim is granted.
Finally, Bumgarner alleges another material omission. The 5th Amendment to the S-4
states that some Williams board members voted against the merger, but they nonetheless support
the board’s commitment to consummate the transaction as required by the terms of the merger
agreement. Bumgarner alleges defendants failed to disclose “how it was ascertained that the
directors who voted against the transaction” nevertheless support the board’s commitment to
consummate the transaction. Defendants argue Bumgarner does not dispute the truth of that
disclosure. Furthermore, defendants contend that Bumgarner’s allegation falls short because he
relies on truthful information contained in the proxy statement and argues that defendants must
tell him more about the subject of those statements. Defendants’ argument is persuasive. The
alleged omission—the precise manner in which it was determined that the directors who voted
against the transaction expressed their support for the board’s commitment to the merger
agreement—is insufficient to state a claim under § 14(a). See Erickson v. Hutchinson Tech. Inc.,
2016 WL 310729, at *6 (D. Minn. Jan. 26, 2016); Himmel v. Bucyrus Int’l, Inc., 2014 WL
1406279, at **16-17 (E.D. Wis. Apr. 11, 2014).

WHEREFORE, defendants’ motions to dismiss the Second Amended Complaint for

failure to state a claim [Dkt. ##68-69] are granted in part and denied in part. Defendants’
motions are denied as to Bumgarner’s claim based on an alleged negligent misrepresentation or
omissions in defendants’ explanation for the reductions in the synergies estimate. Defendants’
motions are granted as to Bumgarner’s claim based on an alleged failure to disclose a conflict of
interest by a Williams board member holding an interest in ETE. However, Bumgarner’s request
for leave to amend that claim is granted. Bumgarner shall file his amendment to that claim only

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no later than Friday, May 27, 2016. Defendants’ motions are granted as to Bumgarner’s claim
based on an alleged failure to disclose how it was ascertained that the Williams directors who
voted against the transaction fully support the board’s commitment to consummate the
transaction as required by the terms of the merger agreement.
IT IS SO ORDERED this 26th day of May, 2016.

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