408 F.Supp.3d 70
D. Conn.2019Background
- Harman agreed to be acquired by Samsung for $112/share; the board approved after J.P. Morgan and Lazard presented DCF analyses based on two projection sets: Management Projections (midpoint ≈ $116.25) and Sensitized Projections (midpoint ≈ $100.25).
- Management Projections were prepared by Harman management (reflecting organic growth) and were provided to Samsung; Sensitized Projections (25% lower growth) were prepared for the board and advisors and used in fairness analyses.
- CEO/chairman Dinesh Paliwal negotiated directly with Samsung, entered an exclusivity agreement, and secured a substantial retention/compensation package contingent on closing.
- The proxy (filed Jan. 20, 2017) described management’s view that the Management Projections reflected more downside risk than upside, stated the company does not as a matter of course make long-term projections public, and disclosed certain J.P. Morgan engagements with Harman and Samsung but did not disclose that J.P. Morgan Asset Management served as investment manager for a Samsung affiliate.
- Plaintiff (a Harman shareholder) brought a putative class action under §14(a), Rule 14a-9, and §20(a), alleging the proxy was false/misleading in four respects (acquisitions omission; mischaracterized management belief about projections; statements about public disclosure; omission of J.P. Morgan Asset Management relationship). Defendants moved to dismiss; court granted in part and denied in part.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Failure to disclose that Management Projections excluded future acquisitions | Projections omitted that they did not account for acquisitions, misleading shareholders given Harman’s acquisition-driven strategy | Projections were forward-looking, cautioned, and proxy did not suggest they assumed future acquisitions; safe-harbor and not materially misleading | Dismissed: no adequate particularized allegation that omission was material or that defendants knew projections were false for that reason |
| 2) Proxy statement that management determined projections had more downside risk than upside | Statement was a false opinion used to justify Sensitized Projections and lower sale price; defendants did not actually hold that belief | Claims attempt to invoke safe-harbor/assumption protections and lack scienter | Sustained (may proceed): Court finds sufficient allegations of subjective and objective falsity and plausible scienter inference |
| 3) Statements that projections were not prepared for public disclosure / not routinely made public | False because Harman publicly released similar August 2016 projections, so proxy discouraged shareholders from consulting them | Single prior public release does not render the proxy’s statements false or misleading | Dismissed: plaintiff failed to plead particularized facts showing these disclosure statements were false or materially misleading |
| 4) Omission of J.P. Morgan Asset Management’s investment-management relationship with a Samsung affiliate | Omitted potential conflict of interest that would be material to shareholders evaluating the fairness opinion | Proxy disclosed many J.P. Morgan engagements and used “included” to signal non-exhaustive list; no duty to list every potential tie | Sustained (may proceed): omission plausibly material and defendants acted negligently in failing to disclose |
Key Cases Cited
- Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015) (issuer must disclose material facts about its inquiry/knowledge when stating opinions)
- Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (statements of corporate belief or reasoning can be actionable)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for inferring scienter from pleaded facts)
- Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010) (PSLRA safe-harbor; meaningful cautionary language requirement)
- Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011) (opinion-statement falsity requires showing subjective and objective falsehood)
- Koppel v. 4987 Corp., 167 F.3d 125 (2d Cir. 1999) (materiality assessed by whether omitted fact would have altered the total mix)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (definition of materiality in securities law)
- Montanio v. Keurig Green Mountain, Inc., 237 F. Supp. 3d 163 (D. Vt. 2017) (proxy-dismissal standards; consideration of proxy in ruling on motion)
- Wilson v. Great Am. Indus. Inc., 855 F.2d 987 (2d Cir. 1988) (negligence in drafting a proxy can trigger §14(a) liability)
- Fresno Cty. Emps.’ Ret. Ass’n v. comScore, Inc., 268 F. Supp. 3d 526 (S.D.N.Y. 2017) (applying PSLRA/safe-harbor principles in proxy litigation)