United States District Court, S.D. Indiana, Indianapolis Division
KARL TRAHAN Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
INTERACTIVE INTELLIGENCE GROUP, INC., DONALD E. BROWN, MITCHELL E. DANIELS, EDWARD L. HAMBURG, MICHAEL C. HEIM, MARK E. HILL, RICHARD A. RECK, GENESYS TELECOMMUNICATIONS LABORATORIES, INC., GIANT MERGER SUB, INC., GREENEDEN LUX 3 S.aR.L., GREENEDEN U.S. HOLDINGS I, LLC, GREENEDEN U.S. HOLDINGS II, LLC, Defendants.
ORDER ON DEFENDANTS' MOTIONS TO DISMISS (DKTS.
39, 41)
SARAH
EVANS BARKER, JUDGE
Plaintiff
Karl Trahan (“Trahan”) was a shareholder of
Interactive Intelligence (“Interactive”),
[1] an
Indiana corporation, before it was acquired in a cash-out
merger (“the Merger”) by Genesys
(“Genesys”), [2] a California corporation. Trahan has
now filed this putative class action, [3] on behalf of
himself and others similarly situated, against both companies
and Interactive's board of directors (“the
Directors”)[4] under the Securities Exchange Act of 1934
(“the Exchange Act”), 15 U.S.C. § 78a et
seq., for issuing a false and misleading proxy
solicitation statement (“the Proxy Statement”) in
connection with Interactive's shareholders' approval
of the Merger.
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.
Factual
and Procedural Background
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, [5] Brown explained,
[W]e believe we can package all of [PureCloud's features]
at price points that our competitors can't touch, deploy
[them] in timeframes that they can't match, and yet do so
at 70 to 80 point margins that will make us nicely profitable
in the years ahead. . . . We are ready to . . . dominate our
industry.
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 mid-2015, however, merger
discussions with Genesys began in earnest. “Over the
next 15 months, representatives of Interactive and Genesys
held numerous discussions about a potential merger.”
Id. ¶ 63. Interactive retained Union Square
Advisors (“Union Square”) as its financial
advisor on the deal. In August 2016, Interactive and Genesys
concluded an agreement whereunder Genesys would acquire
Interactive in a cash-out merger at the price of $60.50 per
share, subject to the approval of Interactive's
shareholders. Union Square supplied a fairness opinion
finding the price was fair from a financial point of view to
such shareholders. The Merger was announced publicly on
August 31, 2016.
The
Proxy Statement[6] was filed on October 4, 2016, announcing a
special shareholders' meeting on November 9, 2016, for a
vote on the Merger and soliciting the shareholders'
favorable proxies. Chairman Brown's introductory
statement affirmed that,
[a]fter consideration of, and based upon, the unanimous
recommendation of a special committee of the board of
directors consisting entirely of independent and
disinterested directors . . ., the [Directors] ha[ve]
unanimously approved the [M]erger . . ., determined that the
transactions contemplated by the [M]erger agreement are fair
to, advisable and in the best interests of [Interactive] and
its shareholders and resolved to recommend that [Interactive]
shareholders vote in favor of the [Merger].
Dkt. 40 Ex. 2, at 5-6;[7] also Id. at 7 (introductory
statement of Interactive CFO) (“fair to, advisable and
in the best interests of [Interactive] and its
shareholders”), 43 (Directors' recommendation)
(“fair to, advisable and in the best interests of
[Interactive] and its shareholders”). The
Directors' stated reasons for this determination included
consideration 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 with
respect to succession planning and the execution of
[Interactive's] strategic plan (particularly the
difficulties associated with [Interactive's] transition
as an independent public entity to becoming a leading
provider of cloud solutions), and [Interactive's] likely
ability and timeframe to achieve valuations superior to the
proposed transaction[.]
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,
” which the Proxy Statement referred to as “the
Forecasts, ” id. at 59, and which Trahan's
complaint refers to as “the financial
projections.” E.g., Am. Compl. ¶ 6. We
refer to them as “the Management Forecasts.”
These consisted of “certain non-public unaudited
prospective financial information prepared by [Interactive]
management . . . updated in the third quarter of 2016.”
Dkt. 40 Ex. 2, at 59. The Management Forecasts were presented
to the Directors in evaluating the Merger and to Union Square
in preparing its fairness opinion. The Proxy Statement
summarized the Management Forecasts in table form, as
follows:
(Image
Omitted)
Id. at 60.[8]
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, [9] alongside a
summary of the financial analyses Union Square had conducted
in reaching its opinion (“the Union Square
Analysis”), which rested in part on the Management
Forecasts. Among other data, the Union Square Analysis
included a discounted cash flow (DCF) analysis,
[10]
resting entirely on the Management Forecasts, used “to
value [Interactive] as a standalone entity.”
Id. at 67. “This analysis indicated an implied
price per share of $38.52 to $62.68, as compared to the
[M]erger consideration of $60.50 per share of [Interactive]
common stock.” Id. at 68.
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 Merger closed on December 1, 2016. The
now operative Amended Complaint was filed on
February 27, 2017. Defendants' motions to dismiss under
Rule 12(b)(6), Fed. R. Civ. P, have been fully briefed and
are ripe for decision.
Standard
of Decision
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 (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).
Analysis
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).
I.
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 (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.
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, 135 S.Ct. 1318, 1327 (2015) (action for false or
misleading registration statements) (citing TSC
Indus., 426 U.S. at 445).
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
(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, 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 (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.
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);[11] see Beck, 559 F.3d at 681-82
(PLSRA “is applicable” to Section 14(a) claims).
First, no person is liable for a forward-looking statement if
it is “identified as a forward-looking statement”
and “accompanied by meaningful cautionary statements
identifying important factors that could cause actual results
to differ materially from those in the forward-looking
statement[.]” Id. § 78u-5(c)(1)(A)(i). On
a motion to dismiss, a court “shall consider”
forward-looking statements together with any cautionary
statements accompanying them. Id. § 78u-5(e).
Second, no person is liable for a forward-looking statement
if “the plaintiff fails to prove” that it
“was made with actual knowledge . . . that the
statement was false or misleading[.]” Id.
§ 78u-5(c)(1)(B)(i), (ii)(II). Stated thus
disjunctively, “the unambiguous language” of the
statute “immunize[s] [even] deliberate liars from
liability” for “a forward-looking statement . . .
plus an accompanying meaningful cautionary statement.”
Desai v. Gen. Growth Props., 654 F.Supp.2d 836,
843-44 (N.D. Ill. 2009) (citing inter alia Harris v. Ivax
Corp., 182 F.3d 799, 803 (11th Cir. 1999)).
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 for recommending approval
of the Merger was subjectively and objectively false; and the
Directors' statement of reasons for recommending approval
of the Merger was unsupported by such investigation as a
reasonable investor would expect under the circumstances, and
failed to disclose that fact. On each of these theories, the
Amended Complaint fails to state a Section 14(a)
claim.
A.
Omission of Longer-Range Financial Projections from
Management Forecasts
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.
1.
Materiality
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 ...