Trahan v. Interactive Intelligence Group, Inc.

          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 ...