SARAH EVANS BARKER, JUDGE.
Plaintiff Karl Trahan ("Trahan") was a shareholder of Interactive Intelligence ("Interactive"),
Now before the Court are motions to dismiss Trahan's Amended Complaint, Dkt. 32, under Rule 12(b)(6), Fed. R. Civ. P., filed by the Directors, Dkt. 39, and by Interactive and Genesys, Dkt. 41, which join the Directors' motion and argument in whole. We therefore consider the two motions together as one. For the reasons below, the motions are granted.
Trahan's Amended Complaint alleges the following, which we take as true for the purposes of the instant motions. Interactive was a technology company that "provide[d] unified business communications solutions for call centers, enterprise IP telephony, and business process automation." Am. Compl. ¶ 34. Interactive cultivated three main business lines: its "Customer Interaction Center (`CIC') business[,]" id. ¶ 35, its "Communications as a Service (`CaaS') business[,]" id. ¶ 36 and a "next generation cloud communication platform" called "PureCloud." Id. ¶ 38. As of 2015, Interactive's CIC and CaaS businesses were "legacy" businesses, id. ¶ 44, for which Interactive did not anticipate substantial future growth, in view of changing technological and market conditions. In view of these same conditions, however, Interactive hoped the PureCloud business would show "explosive," id. ¶¶ 6, 78, "tremendous," id. ¶¶ 7, 43, 93, "huge," id. ¶ 45, "extraordinary," id. ¶ 97, "meteoric" growth. Id.
PureCloud was announced by press release in June 2014. The first PureCloud product was released in January 2015. By January 2016, PureCloud was "the focal point of Interactive's business." Id. ¶ 43. On a February 1, 2016, earnings call,
Id. ¶ 48. Interactive's industry indeed responded favorably to PureCloud, honoring it for excellence and innovation. Id. ¶¶ 51-52, 55. The market's response was favorable as well. In an August 1, 2016, press release, Brown pointed to a 13 percent year-on-year increase in total revenues and accelerating growth in the PureCloud customer base. Interactive "had 24 PureCloud customers at the end of [2015]. Six months later we had well over 300[,]" including 204 new customers in the second quarter of 2016 alone. Id. ¶ 54.
Interactive had occasionally considered "strategic partnership[s]" with other firms since 2011, id. ¶ 58, but for various reasons those plans had not come to fruition. In
The Proxy Statement
Dkt. 40 Ex. 2, at 5-6;
Id. at 55 ("Reasons for [the Directors'] Recommendation to Vote in Favor of the Merger"). The Directors further justified their recommendation by pointing to the 36 percent premium represented by the $60.50 share price relative to "the closing price of $44.49 per share on July 28, 2016, the last full trading day before media reports regarding a potential transaction [appeared]." Id.
The Proxy Statement included a section presenting "Certain [Interactive] Unaudited Prospective Financial Information,"
Calender Year Ending
6 Months Ending December 31,
December 31, 2016 2016 2017 2015
(dollars in millions)
Revenue $ 221.9. $ 430.0 $ 469.6 $ 551.5
Adjusted E&IDA (non-GAAP)(1) $ 23.4 $ 28.0 $ 58.8 $ 111.7
Less: Derpeciation $ 10.6 $ 19.1 $ 16.9 $ 13.8
Less: Amoritization of Capitalized software $ 3.9 $ 7.7 $ 6.9 $ 6.3
Adjusted EBIT (non-GAAP)(2) $ 8.9 $ 1.2 $ 35.0 $ 91.6
Less: Amoritization of Intangibles $ 1.2 $ 3.7 $ 2.5 $ 2.5
Less: Share-based Compensation $ 9.7 $ 18.8 $ 20.3 $ 22.7
Less: Other Adjustments $ 0.0 $ (1.3) $ 0.0 $ 0.0
EBIT (non GAAP)(3) $ 2.0 $ (20.1) $ 12.2 $ 66.4
Unlevered Free Cash Flow(4) $ 8.2 $ 7.7 $ 26.1 $ 72.5.
Id. at 60.
The Proxy Statement also included a section presenting the "Opinion of [Interactive's] Financial Advisor," id., Union Square. Union Square's fairness opinion was stated in brief,
At the November 9, 2016, special meeting, Interactive's shareholders approved the Merger by a majority of outstanding shares. This lawsuit was filed immediately thereafter, on November 18, 2016. The
A motion to dismiss for failure to state a claim under Rule 12(b)(6), Fed. R. Civ. P., tests the legal sufficiency of the complaint. McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 879 n.4 (7th Cir. 2012). We accept all well pleaded facts as true and draw all reasonable inferences in the plaintiff's favor. Yeftich v. Navistar, Inc., 722 F.3d 911, 915 (7th Cir. 2013); Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 705 (7th Cir. 2008). We do not accept legal conclusions as true. Yeftich, 722 F.3d at 915. We will grant the motion if, after striking all conclusory allegations, the factual content of the complaint fails to state a claim to relief that is "plausible on its face." Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). A claim has facial plausibility where its factual allegations permit a reasonable inference of liability; speculative inferences of liability, or allegations merely consistent with liability, will not do. Id.
Further, complaints charging false or misleading statements under the federal securities laws are subject to heightened pleading requirements under the Private Securities Litigation Reform Act (PSLRA). 15 U.S.C. § 78u-4(b)(1); Beck v. Dobrowski, 559 F.3d 680, 681-82 (7th Cir. 2009). Such a complaint "shall specify" (1) "each statement alleged to have been misleading"; (2) "the reason or reasons why the statement is misleading"; and, if an allegation is made on information and belief, (3) "all facts" supporting the belief, "state[d] with particularity...." 15 U.S.C. § 78u-4(b)(1).
Trahan seeks to hold the Directors, Interactive, and Genesys liable under Section 19(a) and Section 20(a) of the Exchange Act. As explained below, the latter claim is derivative of the former, so our focus must be on Section 19(a).
Section 19(a) prohibits solicitation of shareholder proxies in violation of Securities and Exchange Commission (SEC) rules. 15 U.S.C. § 78n(a)(1). SEC Rule 14a-9 prohibits proxy solicitation by means of "any 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...." 17 C.F.R. § 240.14a-9(a). To prevail in a Section 19(a) action, a plaintiff must show that a false or misleading statement of material fact caused him injury. Goldfinger v. Journal Commc'ns Inc., No. 15-C-12, 2015 WL 2189752, at *2 (E.D. Wis. May 8, 2015).
A fact is material "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote[,]" In re Walgreen Co. Stockholder Litig., 832 F.3d 718, 723 (7th Cir. 2016) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)), or, in other words, if there is "a substantial likelihood" that a reasonable investor would view the fact "as having significantly altered the `total mix' of information made available." TSC Indus., 426 U.S. at 449, 96 S.Ct. 2126. Similarly, "whether a statement is `misleading' depends on the perspective of a reasonable investor" viewed objectively. Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, ___ U.S. ___, 135 S.Ct. 1318, 1327, 191 L.Ed.2d 253 (2015) (action for false or misleading registration
Though not pure fact statements, statements of opinion, belief, or reasons for acting "are factual in two senses: as statements that the [speakers] do act for the reasons given or hold the belief stated and as statements about the subject matter of the reason or belief expressed." Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1092, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1994). When such statements both "misstate the speaker's [opinion or belief or reasons] and also mislead about the stated subject matter ...[,]" they are actionable as "knowingly false or misleadingly incomplete[,]" id. at 1095, 111 S.Ct. 2749, or as both "subjectively" and "objectively" false. Vallabhaneni v. Endocyte, Inc., No. 1:14-cv-1048, 2016 WL 51260, at *15 (S.D. Ind. Jan. 4, 2016) (quoting Kleinman v. Elan Corp., plc, 706 F.3d 145, 153 (2d Cir. 2013)). The Seventh Circuit applies the same test of objective and subjective falsity, that is, whether "the statements [were] made in good faith and with a reasonable basis[,]" to forward-looking projections of future conditions or events. Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1333 (7th Cir. 1995) (quoting Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1277 (D.C. Cir. 1994)).
Statements of opinion may also be actionably misleading "because a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion[.] ... [I]f the real facts are otherwise, but not provided, the opinion statement will mislead its audience." Omnicare, 135 S.Ct. at 1328. Thus a statement of opinion, no matter whether sincerely held, may ground false-statement liability if it "omits material facts about the [speaker's] inquiry into or knowledge concerning [the] statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself[.]" Id. at 1329.
The false or misleading statements complained of must have caused plaintiff's injuries. Specifically, plaintiff must show that "the proxy solicitation itself, rather than the particular [alleged] defect in the solicitation materials, was an essential link in the accomplishment of the transaction." Goldfinger, 2015 WL 2189752, at *2 (citing Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384-85, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970)). The "causal sequence" described by Mills is one "in which the solicitation links a directors' [sic] proposal with the votes legally required to authorize the action proposed." Va. Bankshares, 501 U.S. at 1102, 111 S.Ct. 2749. Further, under the PSLRA, a plaintiff must show that the act or omission complained of "caused the loss for which the plaintiff seeks to recover damages[,]" 15 U.S.C. § 78u-4(b)(4), referred to by courts and by the PSLRA as "loss causation."
Section 14(a) liability is subject to the safe harbor established by the PSLRA for forward-looking statements when accompanied by meaningful cautions or when not made with actual knowledge of their false or misleading nature. 15 U.S.C. § 78u-5(c)(1)(A)(i); id. § 78u-5(c)(1)(B)(i), (ii)(II);
A forward-looking statement, generally speaking, is "one whose truth or falsity cannot be determined until after the statement has been made." Selbst v. McDonald's Corp., 432 F.Supp.2d 777, 783 (N.D. Ill. 2006) (citing Harris, 182 F.3d at 805). Specifically, the statutory safe-harbor provision defines forward-looking statements to include "a statement containing a projection of revenues" or of similar financial data; "a statement of future economic performance"; "any statement of the assumptions underlying or relating to" either of the above type of statements; and "any report issued by an outside reviewer ... to the extent that report assesses a forward-looking statement" of the entity retaining the outside reviewer. 15 U.S.C. §§ 78u-5(i)(1)(A), (C) through (E). See Police Ret. Sys. v. Intuitive Surgical, Inc., 759 F.3d 1051, 1058 (9th Cir. 2014) ("any statement regarding (1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions underlying or related to any of these issues").
We turn to the case at bar in light of the above principles. The Directors aptly characterize Trahan's Section 14(a) claim as something of a "moving target...." Reply Br. Supp. Mot. Dismiss (Dkt. 43) 1. Nevertheless, the heart of Trahan's objection to the Proxy Statement is this: Trahan faults the Directors for failing to provide the shareholders with quantitative and qualitative predictions for Interactive's future success commensurate, in Trahan's estimation, with the Directors' public puffing about PureCloud. Trahan's complaint attempts to convert the Directors' public expressions of optimism about PureCloud into the Directors' knowledge of the inherently unknowable — PureCloud's, and Interactive's, future success — which the Directors concealed from Interactive shareholders in service of "their own selfish liquidity interests." Am. Compl. ¶ 107. This does not, either in outline or in detail, state an actionable violation of federal securities law.
In conjunction with his brief, Trahan's complaint may be fairly read to sustain the following theories of false-statement liability: the Management Forecasts were made misleading by the omission of longer-range financial projections; the Management Forecasts were made misleading by the omission of separate financial projections for each of Interactive's three business lines; the Union Square Analysis was subjectively and objectively false in its derivation of the terminal value for its DCF model; the Directors' statement of reasons
Trahan faults the Directors for using the Management Forecasts to "deceive[] stockholders as to [Interactive's] true prospects[,]" Am. Compl. ¶ 72, "[b]y disclosing projections only through 2018 — regardless of whether any longer-range projections existed[,]" id. ¶ 78, thereby "conceal[ing] the fact that Interactive expect[ed] explosive growth to occur well beyond 2018.... The truncated disclosure implie[d] that Interactive's business was expected to level off after 2018[.]" Id. We find these allegations sufficient to satisfy the PSLRA's pleading standards. However, they fail to plausibly allege a misleading omission of material fact. And, in any event, they are sheltered by the PSLRA safe harbor.
Trahan stands on firm ground insofar as the Seventh Circuit has rejected the contention that financial projections are always immaterial as a matter of law. Stransky, 51 F.3d at 1333. And in the context of a cash-out merger, "information regarding the financial attractiveness of the deal is of particular importance. This is because the stockholders must measure the relative attractiveness of retaining their shares versus receiving a cash payment, a calculus heavily dependent on the stockholders' assessment of the company's future cash flows." Gottlieb v. Willis, No. 12-CV-2637, 2012 WL 5439274, at *5 (D. Minn. Nov. 7, 2012) (quoting In re Netsmart Techs., Inc. S'holders Litig., 924 A.2d 171, 199 (Del. Ch. 2007)); also Goldfinger, 2015 WL 2189752, at *4. Accord Maric Capital Master Fund, Ltd. v. Plato Learning, Inc., 11 A.3d 1175, 1178 (Del. Ch. 2010) ("[M]anagement's best estimate of the future cash flow of a corporation that is proposed to be sold in a cash merger is clearly material information.").
While financial projections may be material to cash-out merger decisions in general, however, Trahan's complaint in this case furnishes no basis to plausibly conclude that more financial projections than were already supplied by the Management Forecasts (two and one-half years' worth, from the second half of calendar year 2016 through calendar year 2018) were substantially likely to have been viewed by a reasonable investor as having significantly altered the total mix of information available. The Proxy Statement itself cautions against any such reliance, notifying shareholders that the Management Forecasts were "subjective in many respects" and denying that their inclusion signaled either their materiality to Interactive or an "induce[ment to] any shareholder to vote in favor" of the Merger. Dkt. 40 Ex. 2, at 59.
To begin with, there is no allegation that a reasonable investor would expect a longer projection horizon than the two and one-half years projected by the Management Forecasts. In general, of course, the longer the projection period, the more speculative (and, therefore, the less useful) the projection, suggesting that the materiality of a projection must vary inversely with the length of the projection period. See Himmel v. Bucyrus Int'l, Inc., No. 10-C-1104, 2014 WL 1406279, at *16 (E.D. Wis. Apr. 11, 2014) ("[T]he information the Complaint contends should have been disclosed in the Proxy was a ten-year projection,
But Trahan insists that only projections beyond 2018 (how far beyond, he does not tell us) would have "capture[d] the value of the PureCloud business[.]" Br. Opp. Mot. Dismiss (Dkt. 42) 19. No factual allegation supports this contention. Trahan points to an August 1, 2016, earnings call, the transcript of which was and is publicly available,
Even assuming the materiality of the omitted information, however, Trahan's complaint does not permit the plausible inference that the Management Forecasts misstated the Directors' true opinion or misled about their subject matter. See Va. Bankshares, 501 U.S. at 1095, 111 S.Ct. 2749. Accordingly, they were not made in bad faith and without a reasonable basis, see Stransky, 51 F.3d at 1333, were neither subjectively nor objectively false, see Vallabhaneni, 2016 WL 51260, at *15, and therefore not actionably "misleadingly incomplete." Va. Bankshares, 501 U.S. at 1095, 111 S.Ct. 2749.
Trahan has pleaded no facts as would plausibly suggest the Directors did not actually believe the Management Forecasts reflected a reasonable picture of Interactive's prospects absent longer-range projections, mindful that they "reflect[ed] numerous assumptions and estimates as to future events ... that [Interactive] management believed were reasonable at the time the [Management Forecasts] were prepared[.]" Dkt. 40 Ex. 2, at 59. Trahan has pleaded no conspiracy or collusion between Interactive management and the Directors in the preparation of the Management Forecasts. Trahan's sole ground for suspicion is his feeling that the figures presented in the Management Forecasts were not commensurate with the Directors' hopeful, optimistic puffery about PureCloud. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425, 1427-28 (3d Cir. 1997) (Alito, J.) (puffery in context of securities law); City of Sterling Heights Gen. Employees' Ret. Sys. v. Hospira, Inc., No. 11 C 8332, 2013 WL 566805, at *23 (N.D. Ill. Feb. 13, 2013) (same). Trahan attempts to imply that, because the Directors were hopeful, and because Trahan feels the Directors were qualitatively more hopeful than the quantitative
Further, omission of longer-range projections cannot have rendered the Management Forecasts misleading to a reasonable investor. To be sure, the Directors are wrong to dismiss Trahan's demand for longer-range projections as a "tell me more" pleading to be rejected out of hand. Compare Orlando v. CFS Bancorp, Inc., No. 2:13-cv-261, 2013 WL 5797624, at *4 (N.D. Ind. Oct. 28, 2013) ("[N]owhere does plaintiff specify which statements in the proxy statement are made misleading.... Rather, the plaintiff relies on various truthful statements ... and argues that defendants must tell him more...."). Though the Directors correctly point out that "there is no duty to disclose internal valuations under the federal securities laws[,]" Kademian v. Ladish Co., 792 F.2d 614, 625 (7th Cir. 1986), and no duty to disclose all material information in general, Stransky, 51 F.3d at 1331, once the Directors chose to speak on the matter, they assumed an obligation to "speak the whole truth." Id.
But Trahan's complaint contains no support for his bald assertion that "truncated disclosure implies that Interactive's business was expected to level off after 2018[.]" Am. Compl. ¶ 78. First, as a matter of ordinary common sense, this is an absurd contention. The end of a projection period is no more or less than that. Per se it implies nothing at all about what is believed to follow, since such a prediction is precisely what is disclaimed by ending the projection period. Second, industry practice or custom, by contrast, may have led the reasonable investor to draw the inference drawn by the Amended Complaint, but the complaint alleges no such practice or custom. Third, Trahan faults the "truncated disclosure" for concealing the Directors' expect[ation of] explosive growth" for PureCloud, id., but the Management Forecasts in fact reveal that very expectation. According to Trahan's own calculations, the Management Forecasts "forecast... a 239% increase [in unlevered free cash flow] from 2016 to 2017 and a 178% increase from 201[7] to 201[8]." Br. Opp. 19 n.10.
Trahan points to Selbst v. McDonald's Corporation, where defendant corporation was charged with a knowing omission "of facts which seriously undermined the accuracy" of its optimistic sales-growth and earnings projections. No. 04 C 2422, 2005 WL 2319936, at *9 (N.D. Ill. Sept. 21, 2005). That is precisely not this case. The Directors are not charged with knowledge of any fact that would undermine the accuracy of the Management Forecasts; rather, Trahan charges the Directors with knowledge that the Management Forecasts would have been rosier if extended farther out and if PureCloud's "explosive" success were assumed as an input in the projection model. That is not a misleading omission of a material fact, it is a failure to state a tautology, and not a basis for false-statement liability under federal securities law.
In any event, under the PSLRA, false-statement liability cannot be predicated on the Management Forecasts. The Management Forecasts are clearly forward-looking statements within the meaning of the PSLRA. They are projections of revenues and other financial data, see 15 U.S.C.
First, the Management Forecasts were clearly identified as forward-looking statements. A "Cautionary Statement Concerning Forward-Looking Statements" prefaced the Proxy Statement as a whole, Dkt. 40 Ex. 2, at 35, explaining that forward-looking statements "relate[] to future plans, events, or financial condition or performance" and "can generally be identified by the use of words such as ... `forecast' [and] ... `project'...." Id. The Management Forecasts were referred to as "the Forecasts" in the Proxy Statement, id. at 59, and were characterized as "projections of ... future financial performance...." Id. at 58. Dispelling any room for doubt, the Proxy Statement was explicit: "The [Management] Forecasts are forward-looking statements." Id. at 59 (referring reader to "Cautionary Statement," id. at 35).
Second, the Management Forecasts were accompanied by meaningful cautionary statements. The "Cautionary Statement Concerning Forward-Looking Statements" explained that forward-looking statements "involve a number of risks and uncertainties that could cause actual results and events to vary materially" from those predicted by the forward-looking statement, including "[t]he risk of not fully realizing expected benefits and synergies" from the Merger, "[w]orldwide economic conditions and their impact on customer purchasing decisions[,]" "[r]apid technological changes and competitive [industry] pressures ...[,]" and "[t]he fact that [Interactive's] shareholders would forgo the opportunity to realize the potential long-term value of the successful execution of [Interactive's] current strategy as an independent public company[.]" Id. at 36.
Still, "`boilerplate' warnings won't do; cautions must be tailored to the risks that accompany the particular projections." Asher v. Baxter Int'l, Inc., 377 F.3d 727, 732 (7th Cir. 2004). Obligingly, the Proxy Statement prefaces the Management Forecasts by noting "[i]mportant factors that may affect actual results and cause the [Management] Forecasts not to be achieved ...[,]" to wit: "the mix of actual premise [i.e., CIC] and cloud [i.e., CaaS and PureCloud] orders, volume and timing of cloud orders, margins on cloud orders, general economic conditions, accuracy of certain accounting assumptions, changes in actual or projected cash flows, competitive pressures, and changes in tax laws." Id. at 59. Notably, the Proxy Statement provides cautions relating directly to Trahan's case concerning the unpredictable nature of the success or failure of Interactive's cloud-based business and the shareholders' forfeiture of a stake in the future success (if any) of Interactive's long-term business strategy should the Merger be approved.
Moreover, Trahan has not pleaded facts as would permit a plausible inference that the Management Forecasts were presented with actual knowledge of their false or misleading nature. See Part I.A.2 supra. Specifically, Trahan has not alleged that any longer range projections actually existed.
Trahan next faults the Management Forecasts for failing to "disclose[] [Interactive's] financial projections by product line. By not doing so, [the Directors] misled stockholders about the true nature of Interactive's prospects for growth." Am. Compl. ¶ 95. That is, Interactive's "three businesses feature[d] markedly different financial attributes and radically different growth profiles. Presentation of Interactive's business as a singular, monolithic entity conceals the markedly different prospects for each of [Interactive's] business lines." Id. ¶ 92. Again we find these allegations sufficient to satisfy the PSLRA's pleading standards, but insufficient to plausibly allege a misleading omission of material fact for which the Directors are not sheltered by the PSLRA safe harbor.
While financial projections, as noted above, may be material to cash-out merger decisions in general, Trahan's complaint does not permit the plausible inference that per-business-line projections were substantially likely to have been viewed by a reasonable Interactive shareholder as having significantly altered the total mix of information available with respect to the Merger.
First, Interactive's shareholders, of course, held stock in the entire enterprise, and were faced only with the decision whether to divest from the entire enterprise. There is no allegation that there was talk of selling off the legacy businesses only while keeping Interactive as a going concern focused on PureCloud. Second, unlike the case to which Trahan points, here, there is no allegation that the enterprise-level number was concealing losses in the legacy businesses under cover of PureCloud's greater success,
Even assuming the materiality of the omitted information, Trahan's complaint does not permit the plausible inference that the Management Forecasts were either subjectively or objectively false. See Vallabhaneni, 2016 WL 51260, at *15. They therefore were not actionably "misleadingly incomplete." Va. Bankshares, 501 U.S. at 1095, 111 S.Ct. 2749.
Trahan has pleaded no facts as would plausibly suggest the Directors did not actually believe the Management Forecasts reflected a reasonable picture of Interactive's prospects absent per-business-line projections. Again, Trahan's sole ground for suspicion is his feeling that the figures presented in the Management Forecasts were not commensurate with the Directors' hopeful, optimistic puffery about PureCloud.
Further, omission of per-business-line projections cannot have rendered the Management Forecasts misleading to a reasonable investor. "Whether a fact is material and whether a statement omitting the fact is misleading are closely intertwined. The more important a fact would be to investors, the more likely its omission will mislead them." Vallabheni, 2016 WL 51260, at *11 (citing Sterling Heights, 2013 WL 566805, at *17; Anderson v. Abbott Labs., 140 F.Supp.2d 894, 903 (N.D. Ill. 2001)). Here, the omission complained of fails to have been plausibly misleading for the same reason it fails to have been plausibly material: there is no allegation that the omission concealed any fact, disclosure of which would have changed the calculus for Interactive shareholders.
As above, the Management Forecasts are clearly forward-looking statements within the meaning of the PSLRA. See 15 U.S.C. § 78u-5(i)(1)(A). They were identified as such and accompanied by meaningful cautions; the Directors therefore cannot be liable for them. See id. § 78u-5(c)(1)(A)(i). Moreover, insofar as there is no plausible allegation the Management Forecasts were not made in good faith, see Parts I.A.2, I.B.2 supra, and no allegation that per-business-line projections were actually developed, such that the Directors' consciousness of wrongdoing might be inferred from their concealment, see Dkt. 40 Ex. 2, at 58,
Trahan next faults Union Square's DCF analysis. For the inputs of that analysis, Union Square estimated net cash flows using the Management Forecasts; selected a cost-of-capital discount "ranging from 9.0% to 11.0%"; and derived a terminal value upon "appl[ication of] illustrative perpetuity growth rates, selected [on the basis of] Union Square's professional judgment experience, ranging from 3.5% to 4.5%...." Dkt. 40 Ex. 2, at 67-68.
Am. Compl. ¶¶ 96-98. As above, we find these allegations sufficient to satisfy the PSLRA's pleading standards, but insufficient to plausibly allege a material and knowingly false or misleadingly incomplete statement of opinion for which the Directors are not sheltered by the PSLRA safe harbor.
In Virginia Bankshares, petitioners, defendants below, argued that Section 14(a) liability should not result where the proxy statement disclosed the factual basis on which an allegedly false or misleading statement rested. 501 U.S. at 1097, 111 S.Ct. 2749. The Court found that "[t]he answer to this argument rests on the difference between a merely misleading statement and one that is materially so.... [P]ublishing accurate facts in a proxy statement can render a misleading proposition too unimportant to ground liability." Id.
As noted above, valuation of a company may be material in the cash-out merger context. But, following the reasoning of Virginia Bankshares, courts have held immaterial individual inputs into financial projection models where the model and its assumptions are accurately stated. Compare Ridler v. Hutchinson Tech. Inc., 216 F.Supp.3d 982, 988 (D. Minn. 2016) ("Plaintiffs argue that the proxy should have disclosed the omitted multiples because it would have informed the investor of the flaws in the fairness opinion, specifically, that [financial advisor] did not apply a higher multiple to [defendant corporation's] financials.... [T]his is not a flaw — it is only a disagreement over the subjective methodology in valuing a company."), and Malon v. Franklin Fin. Corp., No. 3:14-cv-671, 2014 WL 6791611, *7 (E.D. Va. Dec. 2, 2014) ("[Plaintiff complains]
Here, the allegedly offensive model input, perpetuity growth rates "ranging from 3.5% to 4.5% ... [,]" Dkt. 40 Ex. 2, at 68, was clearly stated in the Proxy Statement, together with the other inputs and assumptions of Union Square's DCF analysis. Trahan does not attack Union Square's weighted-average-cost-of-capital calculation, and his attack on the Management Forecasts fails for the reasons stated above. Accordingly, with the DCF-analysis inputs clearly and accurately stated, Trahan was free to judge for himself whether application of perpetuity growth rates was appropriate. Trahan has not shown that a different method for deriving the terminal value was substantially likely to have influenced the vote of a reasonable investor.
Even assuming the materiality of a single input of Union Square's DCF analysis, the Amended Complaint permits no plausible inference that Union Square's selection of perpetuity growth rates was not in good faith and with a reasonable basis.
Union Square asserted that its selection of "illustrative perpetuity growth rates" was based "upon the application of [its] professional judgment and experience[.]" Dkt. 40 Ex. 2, at 67. Trahan has pleaded no facts as plausibly controvert that assertion and permit an inference of bad faith on the part of Union Square in selecting the perpetuity growth rates or on the part of the Directors in including Union Square's analysis into the Proxy Statement. Again, Trahan's only support for his conclusion of bad faith is his sense that Union Square failed to infer and project
Further, no factual allegations support Trahan's conclusion that Union Square's selection of perpetuity growth rates was "objectively wrong[.]" Am. Compl. ¶ 96. Trahan does allege that Union Square "should have" used exit multiples because they are "more suitable" for companies without "a steady-state level of growth[,]" id. ¶ 98 (by which Trahan presumably means "a steady rate of growth"). Again, the only basis for the implied and speculative minor premise Trahan smuggles into the syllogism here (that, by 2018, Interactive's rate of growth would not have steadied) is his inference from the Directors' hopes for PureCloud's "explosive," and, Trahan must imagine, exponential, growth.
In any event, Trahan's allegations, so far from permitting a plausible inference that selection of perpetuity growth rates was made without a reasonable basis, are in fact entirely consistent with Union Square's own statements in the Proxy Statement to the effect that the derivation of terminal values is a matter of "professional judgment and experience" with room for reasonable disagreement. Dkt. 40 Ex. 2, at 67. "The point is that both exit multiples and stable growth approaches are commonly employed to arrive at a terminal value for the DCF method, and both can be misused." In re Bachrach Clothing, Inc., 480 B.R. 820, 872-73 (Bankr. N.D. Ill. 2012) (discussing valuation literature, noting conditions under which either method susceptible of abuse). If Trahan had performed his own DCF analysis, it appears that he would have preferred the use of exit multiples to derive the terminal value. But that is very far from a plausible allegation that the contrary approach was objectively unreasonable.
In any event, under the PSLRA, false-statement liability cannot be predicated on the Union Square Analysis. The Union Square Analysis is clearly a forward-looking statement within the meaning the PSLRA. In respect of the DCF analysis, the Union Square Analysis is a projection of value or future economic performance, see 15 U.S.C. § 78u-5(i)(1)(A), (C), the accuracy of which could not be determined until after the projection period (assuming the Merger had not closed and Interactive were still an independent entity). The individual inputs of the DCF analysis are "assumptions underlying or relating to" the DCF analysis, and are themselves therefore forward-looking within the meaning of the PSLRA. Id. § 78u-5(i)(1)(D) Moreover, the Union Square Analysis is a report assessing the forward-looking statements embodied in the Management Forecasts, and is to that extent forward-looking as well. See id. § 78u-5(i)(1)(D). The Union Square Analysis is therefore sheltered if identified as forward-looking and accompanied by cautions, or if communicated without actual knowledge of its false or misleading nature.
The Union Square Analysis was clearly, though less succinctly than were the Management Forecasts, identified as a forward-looking statement. The "Cautionary Statement Concerning Forward-Looking Statements" explained that forward-looking statements "relate[] to future ... financial condition or performance" and "can generally be identified by the use of words such as ... `estimate,' ... `forecast,' ... `opinion,' [and] `project'...." Dkt. 40 Ex. 2, at 35. The Union Square Analysis was prefaced by a declaration that, "[i]n performing [its] financial analysis and arriving
Id. at 62 (emphasis added). In context, we find the above sufficient to identify the Union Square Analysis, specifically in respect of the DCF analysis, as forward-looking.
Further, the Union Square Analysis was accompanied by meaningful cautionary statements. As already noted, the "Cautionary Statement Concerning Forward-Looking Statements" explained that forward-looking statements "involve a number of risks and uncertainties that could cause actual results and events to vary materially" from those predicted by the forward-looking statement, including "[t]he risk of not fully realizing expected benefits and synergies" from the Merger, "[w]orldwide economic conditions and their impact on customer purchasing decisions[,]" "[r]apid technological changes and competitive [industry] pressures ...[,]" and "[t]he fact that [Interactive's] shareholders would forgo the opportunity to realize the potential long-term value of the successful execution of [Interactive's] current strategy as an independent public company[.]" Id. at 36. Moreover, the Union Square Analysis explained that, in performing its DCF analysis, it "made numerous assumptions with respect to industry performance, general business and economic conditions and other matters.... Any estimates ... are not necessarily indicative of future results..., which may be significantly more or less favorable than those suggested by such estimates." Id. at 68.
Just as Trahan failed to allege facts suggesting Union Square's DCF analysis was performed in bad faith, Trahan has failed to allege facts suggesting that it was presented with actual knowledge of its false or misleading nature. As Union Square explained, the derivation of terminal values is a matter of "professional judgment and experience" with room for reasonable disagreement, Dkt. 40 Ex. 2, at 67; see Bachrach Clothing, Inc., 480 B.R. at 872-73, and Trahan has alleged no plausible factual support for the conclusion that Union Square or the Directors knew that perpetuity growth rates would present a false or misleading picture of Interactive's prospects. Again, Trahan relies entirely on his supposition that the Directors' publicly expressed hopes for PureCloud demanded more optimistic figures and, Trahan must presume, whatever inputs are necessary to generate those figures.
In the Proxy Statement, the Directors communicated their opinion that the Merger was "fair to, advisable and in the best interests of [Interactive] and its shareholders ... [,]" Dkt. 40 Ex. 2, at 43, because, among other considerations, the Directors professed a favorable view of "[t]he value represented by the [M]erger relative to other alternatives [Interactive] might pursue, taking into account ... the risks and uncertainties associated with continuing to operate as an independent public company, including ... the execution
But because Trahan has pleaded no facts permitting a plausible inference that this opinion and its supporting reason were not given in good faith and with a reasonable basis, this theory must fail. Trahan advances no grounds for the subjective and objective falsity of these statements other than the three respects above considered and rejected on multiple grounds, including, in each case, lack of materiality and lack of subjective and objective falsity. At the risk of repetition ad nauseam, Trahan is persuaded that the Directors knew that Interactive would be more valuable as a going concern than the value embodied in the Merger because the Directors expressed public hopes that PureCloud would be successful. And, because the Proxy Statement failed to express the same optimism, in Trahan's view, the Directors must have concealed that knowledge from the shareholders. Trahan's speculation on these points is unfounded by any plausible factual allegation in the Amended Complaint.
Trahan's Omnicare claim too necessarily fails. First, a priori no reasonable investor would view as material an inquiry into facts he did not consider material. Because Trahan has failed to show that the omissions from the Management Forecasts he complains of were material, he has necessarily failed to show that the omission of those omissions (that is, the Proxy Statement's failure to disclose those omissions) was material. Second, and more to the point, the Proxy Statement did not fail to disclose the Directors' investigation into the value represented by the Merger, but in fact discloses it — as Trahan's own pleading bears out in relying entirely on the Proxy Statement. Put differently, all of Trahan's supposed investigative defects were patent on the face of the Proxy Statement. It cannot, therefore, be said that facts as to how the Directors formed their opinions were contrary to what a reasonable investor would expect, but not stated.
Finally, Trahan has failed to plead a plausible claim of loss causation. In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), a pre-Twombly/Iqbal decision in an SEC Rule 10b-5 securities fraud case,
Dura Pharmaceuticals teaches that Trahan's complaint fails to allege loss causation simply by pleading that the share price of $60.50 per share of Interactive stock on the date of sale was depressed because of an actionable misrepresentation, that is, by pleading that Interactive shareholders were induced to approve the Merger at that price by an actionable misrepresentation, causing damages in the amount of "the difference between the price Interactive shareholders received and Interactive's true value at the time of [the Merger]...." Am. Compl. ¶ 115. Trahan speculates that, absent the misleadingly pessimistic Proxy Statement, the shareholders would not have approved the Merger in hope that Interactive would prove more valuable as a going concern than the Merger consideration implied. But approval of the Merger can only have proximately caused economic loss if the shareholders' hope would have been realized, and Trahan has not plausibly alleged that it would have been. Absent an allegation of a definite, immediately available, superior alternative to the Merger consideration (a higher competing offer, for example), Trahan's allegation depends on the marketplace eventually valuing Interactive at higher than $60.50 per share
For all the above reasons, the Amended Complaint fails to state a Section 19(a) claim. Accordingly, the motions to dismiss are GRANTED as to the Section 19(a) claim.
Section 20(a) imposes liability on "[e]very person who, directly or indirectly, controls any person liable under any provision" of the Exchange Act, jointly and severally with the person controlled, subject to a good-faith defense. 15 U.S.C. § 78t(a). Section 20(a) liability is derivative and necessarily fails if the underlying claim fails. Dixon v. Ladish Co., Inc., 785 F.Supp.2d 746, 748 n.2 (E.D. Wis. 2011) (citing Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir. 1992)).
Because we have determined that Trahan's complaint fails to state a claim under Section 19(a), it necessarily fails to state a claim under Section 20(a). Accordingly, the motions to dismiss are GRANTED as to the Section 20(a) claim.
When deciding whether to dismiss a securities case subject to the PSLRA with prejudice, "each case must be evaluated on its own merit, in light of its own procedural history." Fannon v. Guidant Corp., 583 F.3d 995, 1002 (7th Cir. 2009). "[G]iven the demanding nature of PSLRA pleading standards[,]" id., courts have sometimes found dismissal without prejudice to be the better course. Id. (citing cases). But where "it is clear ... that the complaint could not be saved by amendment[,]" id. (quoting Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003)), and where "plaintiff[] had, as a practical matter, a number of opportunities to craft a complaint that complied with the standards of the PSLRA[,]" dismissal with prejudice is within this Court's sound discretion. Id. (affirming dismissal with prejudice where nine individual earlier-filed complaints on same facts, later consolidated with one-year period to investigate consolidated claim).
First, as adverted to repeatedly throughout this Order, Trahan's basic theory of his case is not legally colorable or factually plausible. The failure of Trahan's complaint to state a claim is not owed to the heightened pleading standards of the PSLRA; rather, the complaint runs aground on immateriality, lack of falsity, and the Directors' safe-harbor immunity as a matter of law.
Second, while the instant complaint is only Trahan's first amendment, the Directors point to Fischer v. Interactive Intelligence Group, Inc., No. 1:16-cv-2666 (S.D. Ind. Oct. 6, 2016) (Pratt, J.),
Under the PSLRA, "upon final adjudication of the action, the court shall include in the record specific findings regarding compliance... with each requirement of Rule 11(b)[, Fed. R. Civ. P.,] ... as to any complaint, responsive pleading, or dispositive motion." 15 U.S.C. § 78u-4(c)(1). Before making any finding of a Rule 11(b) violation, the court "shall give" the violator "notice and an opportunity to respond." Id. § (2). The parties are therefore invited to submit briefing on any Rule 11(b) issues as may have arisen during the prosecution of this case. Final judgment shall be entered in favor of the Directors, Interactive, and Genesys once such briefing, if any, has been received and considered. The parties shall have 21 days from the date of this Order to submit such briefing.
For the above reasons, the Amended Complaint is DISMISSED WITH PREJUDICE.
IT IS SO ORDERED.
