Knurr v. Orbital ATK Inc. et al

Filing 76

MEMORANDUM OPINION II. Signed by District Judge T. S. Ellis, III on 09/26/2017. (dvanm, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Alexandria Division
STEVEN KNURR, et al.,
Plaintiffs,
v.
ORBITAL ATK INC., et al.,
Defendants.

)
)
)
)
)
)
)
)

Case No. 1:16-cv-1031

MEMORANDUM OPINION II
Plaintiffs in this federal securities class action allege claims under (i) § 10(b) and Rule
10b-5; (ii) § 14(a) and Rule 14a-9; and (iii) § 20(a) of the Securities Exchange Act of 1934
(“Exchange Act”). Defendants seek threshold dismissal of claims under all three provisions, and
this memorandum opinion addresses the questions presented under § 14(a) and the related §
20(a) claims. Specifically, those questions are as follows:
(1) whether the proxy statements alleged to violate § 14(a) of the Exchange Act are (i)
statements of fact; or (ii) merely expressions of opinion; and, if those misrepresentations
are expressions of opinion, whether the Complaint1 alleges facts that warrant an inference
that the defendants did not actually hold those opinions;
(2) whether under § 14(a) of the Exchange Act plaintiffs must allege and prove facts
showing that the defendants’ proxy statement misrepresentations (i) were made with
fraudulent intent or reckless disregard of the truth; or (ii) whether it is sufficient that the

1

On August 12, 2016, named plaintiff Steven Knurr filed this action against Orbital ATK, Thompson, and Pierce
individually and on behalf of other Orbital ATK stockholders. Thereafter, the Construction Laborers Pension Trust
of Greater St. Louis (“St. Louis Laborers”), the Arkansas Teacher Retirement System, and two institutional investors
filed motions for appointment as lead plaintiff and approval of the proposed lead plaintiff’s choice of counsel.
Following briefing and oral argument on these motions, a memorandum opinion and order issued on November 10,
2016 appointing (i) St. Louis Laborers as lead plaintiff, (ii) Robbins Geller Rudman & Dowd LLP as lead counsel,
and (iii) Craig C. Reilly as liaison counsel. See Knurr v. Orbital ATK, Inc., 220 F. Supp. 3d 653 (E.D. Va. 2016).
St. Louis Laborers was then granted leave to file its own complaint, which it did on April 24, 2017. This complaint
names Orbital ATK, Thompson, Pierce, DeYoung, and Larson and is the sole operative complaint in this action
(“Complaint”).

Complaint alleges facts that warrant an inference that the misstatements were made
negligently;
(3) whether under § 14(a) of the Exchange Act, the Complaint alleges a claim against an
authorized agent of the corporate defendant and thus adequately states a claim against the
corporate defendant; and
(4) whether under § 20(a) of the Exchange Act, the Complaint alleges that the defendants
had control over any person liable under § 14(a) of the Exchange Act.
These questions have been fully briefed and argued and are now ripe for resolution.
I.
Before reciting the pertinent facts, it is important to identify the proper source of those
facts. First, as the parties agree and as settled precedent requires, the facts recited here are taken
chiefly from the Complaint’s factual allegations, which must be accepted as true at this stage.
Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 625 (4th Cir. 2008) (noting that at the motion to
dismiss stage, “we must accept plaintiffs’ factual allegations as true”). Defendants have also
sought to have additional facts considered by attaching various exhibits to the motion to
dismiss.2 Only certain of these documents are appropriately considered at this stage.
Settled circuit authority permits courts to consider external documents in a motion to
dismiss when they “are integral to and explicitly relied on in the complaint, and when the
plaintiffs do not challenge the document’s authenticity.” Zak v. Chelsea Therapeutics Int’l, Ltd.,
780 F.3d 597, 606–07 (4th Cir. 2015) (quotation marks and brackets omitted). The SEC filings
attached to defendants’ dismissal motion, the transcripts of the August 10, 2016, November 8,

2

Defendants’ additional documents include: (1) Excerpts from a number of Orbital ATK’s and Alliant’s forms filed
with the U.S. Securities and Exchange Commission (“SEC”), such as forms 10-K and 8-K; (2) Orbital Sciences’
Schedule 14A form and Alliant’s Form 424B3; (3) Form 4s for defendants Thompson and DeYoung for the period
of May 28, 2015 to August 9, 2016 (the class period), which were filed with the SEC; (4) A chart summarizing
Orbital ATK’s historical stock prices; (5) Transcripts from Orbital ATK’s earning conference calls held on (i)
August 10, 2016, (ii) November 8, 2016, and (iii) March 8, 2017; (6) A transcript of Alliant’s earnings conference
call held on August 1, 2013; and (7) Analyst reports from (i) Barclays, dated August 10, 2016, (ii) KeyBanc Capital
Markets, dated August 11, 2016, and (iii) Wells Fargo, dated August 23, 2016.

2

2016, and March 8, 2017 Orbital ATK conference calls, and the Wells Fargo and Barclays
analyst reports are integral to or explicitly referenced in the Complaint, and plaintiffs do not
challenge their authenticity. Accordingly, these documents are appropriately considered at this
stage. Similarly, because the Fourth Circuit permits courts to take “judicial notice of published
stock prices without converting a motion to dismiss into a motion for summary judgment,” it is
also appropriate to consider the chart summarizing Orbital ATK’s historical stock prices.
Greenhouse v. MCG Capital Corp., 392 F.3d 650, 655 (4th Cir. 2004). By contrast, Alliant’s
August 1, 2013 conference call is not referenced in the Complaint, nor does the Complaint cite
the KeyBank analyst report, so it is inappropriate to consider these documents at the motion to
dismiss stage.
II.
The corporate defendant, Orbital ATK, is an aerospace and defense company formed
from the 2015 merger of Alliant Techsystems, Inc. (“Alliant”) and Orbital Sciences Corporation
(“Orbital Sciences”). With respect to § 14(a), the Complaint also names the following three
individual defendants:
(1) Defendant David W. Thompson, who served as Chairman of the Orbital Sciences
Board, CEO, and President of Orbital Sciences prior to the merger;
(2) Defendant Garrett E. Pierce, who was Vice Chairman of the Orbital Sciences Board
and CFO of Orbital Sciences prior to the merger; and
(3) Defendant Mark W. DeYoung, who was CEO and President of Alliant prior to the
merger.
Prior to their merger, Orbital Sciences and Alliant were both publicly traded aerospace
and defense companies that sold products such as rockets and satellites to NASA and the United
States military. Of particular importance to this case, Alliant entered into a major ammunition
supply contract (“Lake City Contract”) with the United States Army in 2000. Alliant
3

manufactured billions of rounds of small caliber ammunition under this contract at the Lake City
Plant in Independence, Missouri which accounted for 13% of Alliant’s total revenues in fiscal
year 2010. In fiscal year 2010, Alliant received a four-year renewal on the Lake City Contract.
In August 2012, Alliant submitted a bid to the Army to retain the Lake City Contract beyond
2013. The Complaint alleges that Alliant was under pressure to retain the Lake City Contract
because Alliant had recently lost a bid to renew another major multi-year ammunition Army
contract to Alliant’s competitor, BAE Systems PLC. Accordingly, the Complaint alleges that
Alliant and DeYoung “aggressively bid” on the Lake City Contract renewal with a “low-ball
bid.” (Compl. ¶¶ 47, 38). Alliant and DeYoung’s plan worked, as Alliant won the renewal of
the Lake City Contract on September 28, 2012 for a seven-year term with a three-year extension
option and production to begin on October 1, 2013.
Shortly after production began on the Lake City Contract, Orbital Sciences and Alliant
announced they planned to merge to form Orbital ATK. As a result of the merger, Orbital
Sciences shareholders would receive .449 shares of Alliant stock for each share they held of
Orbital Sciences stock, and Alliant would change its name to Orbital ATK.
On December 17, 2014, Alliant and Orbital Sciences filed a joint proxy statement (“Joint
Proxy Statement”) with the SEC concerning the proposed merger. The Joint Proxy Statement
contained a letter signed by DeYoung to Alliant shareholders, who had to approve the issuance
of Alliant common stock to Orbital Sciences shareholders, and a second letter signed by
Thompson to Orbital Sciences shareholders, who had to approve the merger agreement. Each
company held a special shareholders meeting in January 2015, and in February, the shareholders
of each company voted to approve the merger.

4

A little more than one year after the merger, Orbital ATK announced (i) that the company
would not be able to file its quarterly report for second quarter 2016 on time; (ii) that the
company’s previously issued quarterly and annual financial statements in fiscal year 2015,
transition period 2015, and first quarter 2016 were no longer reliable; (iii) that the company
would have to restate its financial statements because of material misstatements related to the
Lake City Contract; and (iv) that the company’s internal financial controls were ineffective and
weak. Orbital ATK ultimately filed two restatements with the SEC. These restatements
confirmed that Alliant had submitted a significantly low bid for the Lake City Contract and that
although Orbital ATK had achieved some cost reductions, those reductions were not sufficient to
achieve profitability over the life of the Lake City Contract. Moreover, once misstatements in
the Lake City Contract were corrected, it became clear that the costs of the Lake City Contract
would exceed its revenues over the life of the contract, which meant that the entire anticipated
forward loss should have been recorded when the loss became evident. Orbital ATK determined
that $32 million of the loss should have been evident when the contract was signed in the second
quarter of fiscal 2013, and $342 million should have been evident in the second quarter of fiscal
2014.
After these restatements were issued, plaintiffs filed this action alleging, among other
claims, that defendants made a series of misleading or false statements in the Joint Proxy
Statement filed with the SEC and disseminated to shareholders of Orbital Sciences and Alliant.
Specifically, the Complaint identifies four categories of misrepresentations: (i) statements
regarding Alliant’s financial results; (ii) statements regarding the Lake City Contract; (iii)
statements regarding Alliant’s internal controls; and (iv) statements regarding the fairness of the
Exchange Ratio and the merger (“Fairness Statement”). These misrepresentations, plaintiffs

5

contend, led to the overvaluing of Alliant and affected the Exchange Ratio to the detriment of
Orbital Sciences shareholders. Plaintiffs request damages to recover for losses suffered by
Orbital Sciences shareholders. The following is a brief summary of each of the four categories
of proxy statement misrepresentations and the ways in which the Complaint alleges they are
misleading.
Statements Regarding Alliant’s Financial Results
The Joint Proxy Statement included historical financial information for Alliant—namely,
the financial results from fiscal years 2013, 2014 and the first half of 2015. The results from
2013 and 2014 were derived from audited consolidated financial statements, while the 2015
results were derived from Alliant’s quarterly report on Form 10-Q.
The Complaint alleges that these statements were false and misleading because, as a
result of the Lake City Contract losses, Alliant’s Gross Profit, Operating Income and Earnings
Per Share were substantially overstated. For example, the financial statements incorporated in
the Joint Proxy Statement stated Gross Profit for the first half of fiscal year 2015 as $611 million.
That value, however, was overstated by approximately $9 million.
Statements Regarding the Lake City Contract
The Joint Proxy Statement also incorporated by reference Alliant’s 2014 Form 10-K.
This 10-K Form described the size of Lake City’s operations and the contributions of the Lake
City Contract to Alliant’s overall financial results. Specifically, the Form 10-K stated that the
Lake City Contract contributed 14% to the total fiscal 2013 sales and 15% of the total fiscal 2012
sales. The Joint Proxy Statement stated that Alliant had experienced lower profit rates in that
division, owing to the competitive bid on the contract

6

The Complaint alleges that these statements were false and misleading because Alliant
was not deriving profits from the Lake City Contract but instead was incurring substantial losses
on sales; bullets were sold at negative margins and a significant loss, not simply at a lower profit.
Statements Regarding Alliant’s Internal Controls
The Joint Proxy Statement also incorporated various representations and warranties made
by Alliant. Specifically, those warranties stated that Alliant maintained the disclosure
procedures required by Rule 13a-15 or 15d-15 under the Exchange Act and that the company had
not identified any material weaknesses in its internal controls. The Complaint alleges that the
forms incorporated by reference in the Joint Proxy Statement contained similar misstatements
about the nature of Alliant’s internal controls.
The Complaint alleges that these statements were false and misleading because Alliant
had failed to record forward loss on the Lake City Contract in violation of Generally Accepted
Accounting Principles (“GAAP”) and Alliant’s accounting policy. As such, contrary to the
representations in the Joint Proxy Statement, Alliant was suffering from material weaknesses in
its accounting procedures.
Fairness Statement
Finally, the Joint Proxy Statement included a statement from the Orbital Sciences Board
which noted that “[a]fter careful consideration . . . [the directors] determined that the transaction
agreement and the merger transactions . . . are advisable, fair to and in the best interests of
Orbital [Sciences] and its stockholders.” (Compl. ¶ 261). The Complaint alleges that these
statements concerning Orbital ATK’s merger synergies were false and misleading. In particular,
plaintiffs contend that because Alliant’s financial results were based on accounting errors, the
merger was not, in fact, advisable, fair to, or in the best interests of Orbital Sciences.

7

With respect to the Fairness Statement, defendants contend that this misrepresentation is
not an actionable statement of fact under § 14(a) and is, instead, an expression of opinion. As to
the other three categories of statements—regarding Alliant’s financial results, the Lake City
Contract, and Alliant’s internal controls—defendants do not dispute at this stage that those
misrepresentations are materially false and misleading statements of fact. With respect to these
misrepresentations, defendants dispute whether the Complaint has alleged facts sufficient to
show that defendants acted with the requisite state of mind in including the statements in the
Joint Proxy Statement. These arguments are addressed in turn.
III.
Section 14(a) of the Exchange Act makes it unlawful for any person “to solicit or to
permit the use of his name to solicit any proxy or consent or authorization in respect of any
security” in violation of the rules and regulations prescribed by the Commission. 15 U.S.C.
§ 78n(a)(1). Pursuant to this prohibition, Rule 14a-9 provides that “no solicitation . . . shall be
made by means of any proxy statement . . . containing any statement which, . . . 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 . . . .” 17 C.F.R. § 240.14a-9(a).
Thus, to establish a § 14(a) claim, plaintiffs must allege and prove: “(1) the proxy
statement contained a material misrepresentation or omission (2) that caused the plaintiff injury
and that (3) the proxy solicitation was an essential link in the accomplishment of the
transaction.” Hayes v. Crown Centr. Petrol. Corp., 78 F. App’x 857, 861 (4th Cir. 2003) (per
curiam) (unpublished) (citing Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932 (3rd Cir. 1992)
(citing Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 385 (1970))).

8

Neither § 14(a) nor the applicable regulations specify the culpable state of mind required
for liability under § 14(a)—intentional fraud or negligence. And interestingly, both the Supreme
Court and the Fourth Circuit have expressly declined to determine the state of mind of a
defendant required to establish § 14(a) liability. See TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438, 444 n.7 (1976) (“Our cases have not considered, and we have no occasion in this case to
consider, what showing of culpability is required to establish the liability under § 14(a) . . . .”);
Hayes, 78 F. App’x at 864 n.1 (“We note, however, that the Supreme Court has not determined
whether it is necessary to demonstrate scienter to satisfy the “knowing” element of a Section
14(a) claim.”).
A.
The first question to address is whether the alleged misstatements are statements of fact
or merely expressions of opinion. To establish liability under § 14(a), plaintiffs must allege and
prove that a proxy statement contains “material misrepresentations or omissions,” which arise
from statements of fact or expressions of opinion. Hayes, 78 F. App’x at 86. Where the
misrepresentations are statements of fact, the plaintiff need only plead that those facts are
objectively false. By contrast, where the misrepresentations are expressions of opinion, plaintiffs
must show those opinions are both objectively and subjectively false.
Defendants in this case do not contest at this stage that three categories of
misrepresentations—(i) the statements about Alliant’s financial results; (ii) the statements about
the Lake City Contract performance; and (iii) the statements about Alliant’s internal controls—
are statements of fact, which the Complaint adequately alleges are false. By contrast, defendants
contend that the fourth category of misrepresentation—the Fairness Statement—is an expression
of opinion and that plaintiffs have failed to allege that the opinion is both objectively and

9

subjectively false as required to state a claim under § 14(a). Plaintiffs argue that the Fairness
Statement expresses fact, not an opinion. Moreover, plaintiffs also contend that even if the
statement is one of opinion, it meets the standards required to plead a material misrepresentation.
To address these arguments, it is necessary first to resolve the question whether the Fairness
Statement is a fact or an opinion.
The Supreme Court recently opined on the difference between fact and opinion pursuant
to § 11 of the Securities Act of 1933 (“Securities Act”), which contains language similar to that
of Rule 14a-9.3 A fact “is a thing done or existing or an actual happening,” whereas an opinion
is “a belief, a view, or a sentiment which the mind forms of persons or things.” Omnicare Inc. v.
Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1325 (2015) (internal
citations and quotation marks omitted). The most important distinction between fact and opinion
is that a statement of fact “expresses certainty about a thing, whereas a statement of opinion . . .
does not.” Id.
As plaintiffs rightly recognize, the Fairness Statement does express a degree of certainty
about a thing. Instead of using words like “believe” or “think,” the statement about the fairness
of the merger says the directors “determined” that the transaction was fair and advisable “after
careful consideration.” (Compl. ¶ 261). By saying the directors “determined” that the merger
was advisable, fair and in the best interest of stockholders, the directors expressed these notions
as “things done or existing,” not “beliefs or views.” See Kiken v. Lumber Liquidators Holdings,
Inc., 155 F. Supp. 3d 593, 605 n.4 (E.D. Va. 2015) (finding statements are not statements of

3

Section 11 of the Securities Act provides: “In case any part of the registration statement, when such part became
effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, any person acquiring such security . . . [may]
sue.” 15 U.S.C. § 77k(a).

10

opinion because they “do not contain the words ‘believe’ or ‘think’ but instead suggest a greater
sense of certainty”).4
Importantly though, the subject concerning which the directors express certainty in the
Fairness Statement is decidedly within the realm of opinion. Specifically, the directors
determined that the merger was “fair,” “advisable,” and in the “best interest of shareholders.”
The fairness or advisability of a course of action is a matter of business judgment, not objective
fact. See Henry v. Champlain Enters., Inc., 445 F.3d 610, 619 (2d Cir. 2006) (“There is no
universally infallible index of fair market value. There may be a range of prices with reasonable
claims to being fair market value.”). Plaintiffs argue that the accurate Lake City Contract
financial results would have revealed that the merger was unfair. Yet, plaintiffs fail to identify
an objective standard that defendants could have used in assessing the fairness or advisability of
a merger. See Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011). Thus, even had the
Orbital Sciences Board known about and considered the Lake City Contract accounting errors,
there is no guarantee the Board would have delivered a different opinion as to fairness.
In short, the Fairness Statement is plainly an expression of opinion and thus is not
actionable unless facts are alleged that show the opinion is both (i) objectively false; and (ii)
subjectively false—that is, the directors did not actually believe the statement they were making.
The starting point in assessing whether the Fairness Statement—an opinion—can still
amount to a material § 14(a) misrepresentation is the standard the Supreme Court provided in
Virginia Bankshares v. Sandberg. In Virginia Bankshares, minority shareholders brought §
14(a) claims against bank executives based on proxy solicitations in which the executives
recommended a merger because the merger would give minority shareholders a “high” value for

4

See also In re Genworth Fin. Inc. Sec. Litig., 103 F. Supp. 3d 759, 775-76 (E.D. Va. 2015).

11

their stock. 501 U.S. 1083, 1083 (1991). The Supreme Court in that case addressed the standard
courts should apply in determining whether a statement of opinion is false and thus actionable
under § 14(a). Specifically, an opinion can be false in two ways. An opinion can be objectively
false—i.e., the opinion is “misleading about the stated subject matter”—and subjectively false—
i.e., the opinion is a “misstatement of the psychological fact of the speaker’s belief in what he
says.” Id. at 1095; see Ridler v. Hutchinson Tech. Inc., 216 F. Supp. 3d 982, 990 (D. Minn.
2016) (“A fairness opinion . . . is subjectively false if the speaker does not, in fact, believe the
subject matter of the opinion to be fair.”) (citations omitted). In Virginia Bankshares, the Court
considered whether an opinion that is simply subjectively false is actionable and determined that
“disbelief or undisclosed motivation, standing alone, [is] insufficient to satisfy the element of
fact that must be established under § 14(a).” Virginia Bankshares, 501 U.S. at 1096.
Although the Supreme Court did not directly address opinions that are objectively false
but subjectively true under § 14(a), other courts have found that those opinions are similarly not
actionable.5 Importantly, the Fourth Circuit has required plaintiffs pleading opinions as false
factual statements to “allege that the opinion expressed was different from the opinion actually
held by the speaker.” Nolte v. Capital One Fin. Corp., 390 F.3d 311, 315 (4th Cir. 2004).
Moreover, the Supreme Court has recently suggested that an opinion under § 11 of the Securities
Act is only “an untrue statement of fact—namely, the fact of [the speaker’s] own belief—if [the
speaker] kn[ows]” the statement is untrue. Omnicare, 135 S. Ct. at 1326.
In sum, to survive a motion to dismiss, the Complaint must allege facts that warrant an
inference that the opinions in a proxy statement are both objectively false and subjectively
false—that is, the individuals making those statements did not actually believe them.
5

See also In re Neustar Sec., 83 F. Supp. 3d 671, 683 (E.D. Va. 2015); In re Reliance Sec. Litig., 135 F. Supp. 2d
480, 515 (D. Del. 2001); In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1265 (N.D. Cal. 2000);
Freedman v. Value Health, Inc., 958 F. Supp. 745, 752-53 (D. Conn. 1997).

12

These standards, applied here, compel the conclusion that plaintiffs have failed to
demonstrate the Fairness Statement is a material misrepresentation as required under § 14(a).
The Complaint alleges that the statement is objectively false—i.e., the merger was not fair—but
fails to allege that the directors did not sincerely believe the merger was fair to Orbital Sciences
shareholders. Indeed, plaintiffs expressly cabin their § 14(a) claims, asserting that Thompson
and Pierce “lacked a reasonable basis” to conclude the merger was fair, not that those directors
did not truly believe it was so. (Compl. ¶ 262(g)). To establish a claim under § 14(a) on the
basis of this statement, plaintiffs would have to allege that the directors knew about the Lake
City Contract accounting errors and as a result, did not truly believe the merger was fair or
advisable. Plaintiffs have not alleged as much, and as such, this statement cannot support a §
14(a) claim.
As an alternative, plaintiffs maintain they have adequately alleged that the directors
omitted facts necessary to ensure the Fairness Statement was not misleading. In Omnicare v.
Laborers District Council Construction Industry Pension Fund, the Supreme Court described the
ways an opinion could be misleading under § 11 of the Securities Act.6 Beyond being
subjectively and objectively false, an opinion can create liability under § 11 if the opinion “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 . .
. .” Omnicare, 135 S.Ct. at 1329. For example, an opinion stating that a company’s actions are
legally compliant is misleading if: (i) there was no “meaningful legal inquiry” to support that
opinion; (ii) the opinion was stated “in the face of [a] lawyer’s contrary advice;” or (iii) the
opinion was stated “with knowledge that the Government was taking the opposite view.” Id. at

6

As mentioned above, § 11 contains language similar to Rule 14a-9. See supra note 3.

13

1328-29. Importantly, these examples require either a total lack of inquiry or actual knowledge
of contrary facts, neither of which exists in this case. Indeed, plaintiffs recognize that the
directors conducted a nine-month inquiry into Alliant, and the Complaint expressly states that the
Joint Proxy Statement claims “are based solely on negligence, and not on knowing or reckless
conduct.” (Compl. ¶¶ 61, 240).
In sum, the Fairness Statement in the Joint Proxy Statement is an opinion because the
subject of the statement is not a matter of objective fact. To avoid threshold dismissal with
respect to the Fairness Statement, plaintiffs must therefore plead facts which warrant an
inference that the Fairness Statement was both objectively and subjectively false—that is, the
directors did not sincerely hold the belief that the merger was fair. Because plaintiffs have not
alleged facts that the directors did not sincerely believe the merger was fair, plaintiffs have not
alleged the statement was subjectively false and thus, the Fairness Statement cannot support a
claim under § 14(a). Accordingly, the motion to dismiss on this ground must be granted without
prejudice and with leave to amend pursuant to Rule 11, Fed. R. Civ. P., if plaintiffs can allege
facts that support an inference that the directors did not believe the merger was fair when the
directors included the Fairness Statement in the Joint Proxy Statement.
B.
The next question is whether the Complaint alleges facts sufficient to show that
defendants acted with the requisite state of mind in making the remaining three categories of
misrepresentations in the Joint Proxy Statement. Specifically, plaintiffs claim the Joint Proxy
Statement contained three additional sets of misrepresentations of material fact: (i) statements
about Alliant’s financial results; (ii) statements regarding the Lake City Contract; and (iii)
statements about Alliant’s internal controls and compliance with accounting procedures.

14

Defendants move to dismiss the claims based on these statements, arguing that plaintiffs
have failed to allege that defendants acted with the required state of mind when they signed the
Joint Proxy Statement containing the misrepresentations. Specifically, defendants assert that §
14(a) and the PSLRA require that plaintiffs plead facts that raise a strong inference of scienter
and that plaintiffs here have failed to do so. In contrast, plaintiffs contend that the proper
standard is negligence and that the PSLRA does not apply to § 14(a). As a result, plaintiffs argue
that the allegations in the Complaint adequately plead a § 14(a) claim.
The threshold question to address before assessing the adequacy of plaintiffs’ allegations
is whether § 14(a) requires scienter or merely negligence. The Supreme Court has made clear
that when interpreting a statute, “the starting point . . . is the language itself.” Consumer Prod.
Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). In this regard, “[i]f the
statutory language is plain,” a court “must enforce it according to its terms.” King v. Burwell,
135 S. Ct. 2480, 2489 (2015). At the same time, the Supreme Court has recently explained that
statutory interpretation properly proceeds “with reference to the statutory context, ‘structure,
history, and purpose,’” as well as “common sense.” Abramski v. United States, 134 S. Ct. 2259,
2267 (2014) (quoting Maracich v. Spears, 133 S. Ct. 2191, 2209 (2013)).
A plain text reading of § 14(a) with reference to the statutory context suggests the
provision contemplates a negligence, not a scienter requirement. To begin with, neither the text
of § 14(a) nor Rule 14a-9 refers to a specific state of mind. See 15 U.S.C. § 78(n); 17 C.F.R. §
240.14a-9. Importantly, where Congress has intended a scienter requirement, it has used words
like “manipulative,” “deceptive,” “device,” or “contrivance” to describe the state of mind
required to establish liability, and the rules promulgated pursuant to those statutory provisions
have used terms like “scheme” or “artifice to defraud.” See, e.g., 15 U.S.C. § 78(j)(b); 17 C.F.R.

15

§ 240.10b-5. As the Supreme Court has noted, terms like “‘device,’ ‘scheme,’ and ‘artifice,’ all
connote knowing and intentional practices.” Aaron v. SEC, 446 U.S. 680, 696 (1980). By
contrast, the plain text in § 14(a) and Rule 14a-9 conspicuously excludes these words. And
significantly, where Congress has omitted such fraud-like words in other areas of securities law,
courts have uniformly applied negligence standards. For example, § 11 of the Securities Act,
like § 14(a), “proscribes a type of disclosure or lack of it, i.e., false or misleading statements or
omissions of material facts, . . . [and] enumerates specific classes of individuals who bear
liability for failure to meet the required standard of disclosure.” Gould v. Am.-Hawaiian S.S.
Co., 535 F.2d 761, 777 (3d Cir. 1976). It is well-established that § 11 claims do not require the
buyer to prove that the defendant acted with any intent to deceive or defraud. Omnicare, 135 S.
Ct. at 1323 (citing Herman & Maclean v. Huddleston, 459 U.S. 375, 381-82 (1983)). Similarly,
§ 17(a)(2) of the Securities Act prohibits any person from obtaining money or property “by
means of any untrue statement of a material fact or any omission to state a material fact.” 15
U.S.C. § 77q(a)(2). And because that section is “devoid of any suggestion whatsoever of a
scienter requirement,” scienter is not required under § 17(a)(2). Aaron, 446 U.S. at 696-97.
Finally, the majority of circuits to address the question whether § 14(a) requires
negligence or fraud have found that § 14(a) requires only negligence as the requisite standard of
culpability.7

7

See, e.g., Beck v. Dobrowski, 559 F.3d 680, 682 (7th Cir. 2009) (applying negligence standard); Wilson v. Great
Am. Indus., Inc., 855 F.2d 987, 995 (2d Cir. 1988) (same); Herskowitz v. Nutri/System, 857 F.2d 179, 190 (3d Cir.
1988) (same); Gerstle v. Gamble–Skogmo, Inc., 478 F.2d 1281, 1300–01 (2d Cir. 1973) (same). But cf. SEC v.
Shanahan, 646 F.3d 536, 547 (8th Cir. 2011) (applying scienter standard); Adams v. Standard Knitting Mills, Inc.,
623 F.2d 422, 428 (6th Cir. 1980) (same). The Sixth Circuit in Adams v. Standard Knitting Mills, Inc., implied a
scienter requirement from § 14(a), but the court itself cabined that conclusion, noting that “scienter should be an
element of liability in private suits under the proxy provisions as they apply to outside accountants.” 623 F.2d at 428
(emphasis added).

16

Seeking to avoid this result, defendants rely on the legislative history of the Exchange
Act, pointing to one Senate Report that said Congress was focused on protecting investors from
“unscrupulous corporate officials seeking to retain control of management by concealing and
distorting facts.” Senate Committee on Banking & Currency, S. Rep. No. 1455, 73d Cong., 2d
Sess. 77 (1934). Legislative history, however, cannot trump plain text. As Justice Scalia has
acknowledged, “[t]he Constitution gives legal effect to the ‘Laws’ Congress enacts [] not the
objectives its Members aimed to achieve in voting for them.” Graham Cty. Soil & Water
Conservation Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 302 (2010) (Scalia, J., concurring). Put
simply, if Congress wanted § 14(a) to require a showing of scienter, it would have included those
fraud-related words not just in the legislative history, but in the text of the statute itself.
In sum, the plain text of § 14(a) of the Exchange Act interpreted, as it must be, with
reference to the statutory context requires that a plaintiff show negligence to establish a claim
under § 14(a).
Given that a negligence standard governs § 14(a) claims, the questions remain (i) whether
the heightened pleading requirements of the PSLRA apply; and (ii) whether plaintiffs have pled
facts adequate to state a claim. The PSLRA requires that “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.” 15 U.S.C. § 78u4(b)(2)(a). Determining whether an inference is strong requires “weigh[ing] [the inference]
against the opposing inferences that may be drawn from the facts in their entirety.” Cozzarelli v.
Inspire Pharm. Inc., 549 F.3d 618, 624 (4th Cir. 2008). The inferences of a particular state of
mind must be “at least as compelling as any opposing innocent inference.” Yates v. Mun. Morg.
& Equity LLC, 744 F.3d 874, 885 (4th Cir. 2014).

17

Courts, however, are split on whether negligence is a state of mind and thus whether the
PSLRA requires plaintiffs to allege facts that create a strong inference of negligence under §
14(a).8 Ultimately, resolving that question here is unnecessary because plaintiffs have
successfully alleged defendants’ negligence in making the three final categories of
misstatements, even assuming the PSLRA heightened pleading standard were to apply.
Defendants Pierce and Thompson are addressed first followed by defendants DeYoung and
Orbital ATK.
The Complaint alleges sufficient facts to support a strong inference that former Orbital
Sciences directors, Pierce and Thompson, were negligent in issuing the Joint Proxy Statement
containing the misrepresentations about Alliant’s financial results, internal controls, and the Lake
City Contract. Specifically, plaintiffs demonstrate (i) that Pierce and Thompson, as Orbital
Sciences directors, had a duty to investigate Alliant; (ii) that red flags existed signaling that
Pierce and Thompson should look particularly at the Lake City Contract; and (iii) that had
Pierce and Thompson inquired into the Lake City Contract, they would have discovered the
accounting errors. Accordingly, plaintiffs have alleged a strong inference of negligence.
Plaintiffs have adequately alleged that Pierce and Thompson, as directors of Orbital
Sciences, had a duty to investigate Alliant leading up to the merger. The parties in this case do
not dispute that the Orbital Sciences directors should have conducted due diligence with respect
to Alliant and ensured the accuracy of the proxy statements they signed in contemplation of the

8

Compare Beck v. Dobrowski, 559 F.3d 680, 682 (7th Cir. 2009), and Wilson v. Great Am. Indus. Inc., 855 F.2d
987, 995 (2d Cir. 1988) (“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 Gerstle negligence
standard.”), with Little Gem Life Sciences LLC v. Orphan Medical, Inc., 537 F.3d 913, 917 (8th Cir. 2008);
Knollenberg v. Harmonic, Inc., 152 F. App’x 674, 682 (9th Cir. 2005), and Cal. Pub. Emps.’ Ret. Sys. v Chubb
Corp., 394 F.3d 126, 144-45 (3d Cir. 2004). In an unpublished opinion, the Fourth Circuit has also suggested that
the PSLRA applies to § 14(a) claims. See Hayes v. Crown Cent. Petrol. Corp., 78 F. App’x 857, 861 (4th Cir.
2003).

18

upcoming merger. See In re JP Morgan Chase & Co. Sec. Litig., 2007 WL 4531794, at *8 (N.D.
Ill. Dec. 18, 2007) (finding defendants, “as directors, had the opportunity and obligation to
monitor and inquire into the details of [merger] negotiations”). Perhaps more importantly, the
directors themselves, acknowledged that duty prior to the merger, touting their nine-month due
diligence and the depth of their investigation into the merger. Where, as here, defendants owe
duties to the corporation, failing to accomplish those duties can give rise to a strong inference of
negligence.9
Plaintiffs strengthen the inference of negligence by pointing to several red flags that
should have caused Pierce and Thompson to look more closely at the Lake City Contract,
including the fact that the Lake City Contract was Alliant’s largest source of revenue, was
obtained through highly competitive bidding, was touted as a critical win, and was expected to
see pricing declines with each delivery. These red flags concerning the Lake City Contract stand
in stark contrast to cases where courts have dismissed § 14(a) complaints for failure to plead
negligence because there is nothing to suggest the defendants should have examined a particular
source more closely. Compare Paskowitz v. Pac. Cap. Bancorp., 2009 WL 4911850, at *6 (C.D.
Cal. Nov. 6, 2009) (“Given the relative obscurity of these studies—it would be difficult to
conceive of any non-conclusory set of facts capable of plausibly suggesting that Pacific
negligently failed to uncover and report these journals’ findings.”).

9

See, e.g., City of Westland Police & Fire Ret. Sys. v. Sonic Sols., 2009 WL 942182, at *10 (N.D. Cal. Apr. 6, 2009)
(finding a strong inference of negligence where a proxy statement failed to account for backdated options because
“[d]efendants, as senior executives, Board members and Audit Committee members, had duties associated with
administering and accounting the stock option plans, granting the stock options and approving Sonic’s financial
reports and proxy statements”); In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 1015-16 (N.D. Cal. 2007)
(holding plaintiffs alleged a strong inference of negligence with respect to stock backdating where defendants were
“charged with ensuring compliance with accounting standards and making certain that financial statements and
proxy statements were accurate”).

19

Not only does the Complaint allege that defendants should have looked more closely at
the Lake City Contract, but the Complaint also alleges that had the defendants done so, they
would have discovered the massive losses associated with the contract. Defendants’ reliance on
McKesson here is misplaced. That case stands for the proposition that if there is no way
corporate officials could have known the information in question, those officials cannot be
negligent in failing to include it in a proxy statement. See In re McKesson HBOC, Inc. Sec.
Litig., 126 F. Supp. 2d 1248, 1267 (N.D. Cal. 2000) (dismissing plaintiff’s claims because there
was no suggestion the directors “could have known, even with reasonable diligence,” about the
fraud (emphasis added)). That is sharply at contrast with what is alleged here. In this case,
ample evidence suggests defendants could have discovered the losses associated with the Lake
City Contract. To begin with, Thompson acknowledged that he had clear visibility into Alliant’s
finances “due to the fact that the Companies had known and worked closely together for many
years prior to the merger.” (Compl. ¶ 61). Further, the contract’s losses were evident10 and
analysts discussing Orbital ATK’s restatements suggested the problem “was not digging into [the
Lake City Contract] enough in the due diligence process.” (Compl. ¶ 139).
Defendants’ arguments do not compel the opposite conclusion. Specifically, defendants
argue that because neither Thompson nor Pierce was a member of the Alliant management team
at the time of the Joint Proxy Statement, they had no direct knowledge about the Lake City
Contract. But to plead and establish negligence does not require plaintiffs to demonstrate the
defendants knew the proxy was false but rather that defendants failed to exercise reasonable care
in assessing the accuracy of the proxy statement. See Shanahan, 646 F.3d at 547 (noting that
finding negligence required considering whether “director exercised reasonable care in

10

Specifically, Orbital ATK determined that the $31.5 million loss was evident from contract signing and that the
$342 million loss became evidence at time of initial production in the second quarter of fiscal 2014.

20

overseeing the solicitation of proxies”). Thus, plaintiffs need only allege facts, as they have done
here, that a prudent director would have looked more closely into the Lake City Contract and
discovered the accounting errors, not that these directors knew of the errors.
Defendants also argue that even with due diligence, defendants could not have identified
the losses because the data on production costs for the Lake City Contract only became available
after the merger. This argument fails; it is essentially a disagreement with the allegations of the
Complaint and thus a factual question not one related to the adequacy of pleading. Moreover,
simply because defendants might not have been able to identify the extent of losses before the
merger, does not mean defendants could not have identified the problem leading to and the
potential for losses. Indeed, the red flags described above should have alerted the directors to
the importance of the Lake City Contract projections, and the twelve-years’ worth of historical
cost data for the contract would have suggested the projections included in the proxy statement
were flawed.
Finally, defendants contend that the Orbital Sciences directors were entitled to rely on
Alliant’s audited financial statements and were not negligent in failing to investigate those
statements further. To support this argument, defendants rely exclusively on McKesson. Yet
that decision is neither controlling nor apposite. In McKesson, there was “no suggestion in the
complaint that Bear Stearns or McKesson could have known, even with reasonable diligence,
that HBOC was engaged in massive accounting fraud” because the HBOC directors were
affirmatively hiding the evidence the auditors sought. 126 F. Supp. 2d at 1267.11 Here, by
contrast, there are no allegations that the Small Caliber Division affirmatively hid information
when the directors investigated the Lake City Contract—only that members of that division
11

See also Bond Opportunity Fund v. Unilab Corp., 2003 WL 21058251, at *10 (S.D.N.Y. May 9, 2003) (finding
no inference of negligence because “Plaintiffs allege that due to BT Alex Brown’s overreaching, the directors were
affirmatively misled by BT Alex.Brown”).

21

failed to report negative information. Moreover, plaintiffs allege that the errors would have been
discovered with greater diligence; indeed, the Complaint alleges that the potential losses from the
Lake City Contract were “evident” at the time of contract signing. (Compl. ¶ 61). Defendants’
arguments to the contrary present a factual dispute not a pleading flaw.
In sum, Thompson and Pierce had a duty to investigate the finances of the company they
planned to merge with, and red flags like the size of the Lake City Contract and the aggressive
bid suggested Thompson and Pierce should look closely at that contract in conducting their due
diligence. Had the directors done so, the Complaint alleges that the directors would have
discovered the errors in the Lake City Contract projections and in turn, the flaws in Alliant’s
financial results and internal controls. Accordingly, plaintiffs have successfully alleged a strong
inference of negligence with respect to Defendants Thompson and Pierce.
The Complaint has also presented sufficient evidence to establish a strong inference of
negligence on the part of former Alliant director, DeYoung. As described above, the Complaint
alleges that several red flags suggested the Lake City projections were not accurate. DeYoung
had more than a decade of experience in the ammunitions industry and with this contract in
particular, and perhaps more importantly, he played an active role in the bidding process. As
such, the Complaint alleges that DeYoung knew the costs of production on the Lake City
Contract exceeded the bid by hundreds of millions of dollars. DeYoung accordingly should have
looked more closely into the Lake City accounting prior to the merger, and had he done so, he
would have discovered that the projections were erroneous.
Defendants attempt to argue DeYoung is not liable because he solicited proxies only
from Alliant shareholders, who were not harmed by the merger. This argument, however, carries
no weight. To begin with, the plain text of § 14(a) simply prohibits the solicitation of proxies in

22

contravention of rules and regulations established by the Commission; in doing so, the statute
does not distinguish between shareholders in defining liability. See 15 U.S.C. § 78n. Rather
than suggesting a limitation, this broad language suggests § 14(a) contemplated liability to all
affected shareholders. Furthermore, courts have repeatedly found that even accountants or
investment bankers, who seek no proxies at all, can be liable under § 14(a). See, e.g., In re AOL
Time Warner, Inc. Sec. & “ERISA” Litig., 381 F. Supp. 2d 192, 232 (S.D.N.Y. 2004);
McKesson, 126 F. Supp. 2d at 1266. As such, the fact that DeYoung did not solicit Orbital
Sciences shareholders is immaterial under § 14(a), and for the reasons already noted, plaintiffs
have adequately alleged a strong inference of negligence on DeYoung’s part.
The final contested issue with respect to § 14(a) is whether plaintiffs have stated a claim
for relief against the corporate defendant, Orbital ATK. It is undisputed that a complaint against
a corporate defendant satisfies the PSLRA as long as the complaint “alleges facts giving rise to a
strong inference that at least one corporate agent acted with the required state of mind.” Matrix
Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 189 (4th Cir. 2009). As the
foregoing analysis demonstrates, the Complaint here has adequately alleged facts giving rise to a
strong inference of negligence on the part of three agents of Orbital ATK, Thompson, Pierce, and
DeYoung. Accordingly, the Complaint successfully states a claim against Orbital ATK under
§14(a) of Exchange Act.
IV.
Plaintiffs also bring claims under § 20(a) of the Exchange Act against Thompson, Pierce,
and DeYoung. Section 20(a) provides that “[e]very person who, directly or indirectly, controls
any person liable under any provision of this chapter or of any rule or regulation thereunder shall
also be liable.” 15 U.S.C. § 78t(a). A claim for controlling person liability under § 20(a) must

23