2 F. Supp. 3d 519
S.D.N.Y.2014Background
- Plaintiff Ronald Burkle, a former Morgans Hotel Group director, lost his board seat after OTK Associates’ seven nominees were elected in a June 14, 2013 shareholder election.
- Burkle sued under Section 14(a) and SEC Rule 14a-9, alleging OTK’s June 5, 2013 press release falsely and materially misrepresented recommendations from proxy advisers ISS and Glass Lewis to induce shareholders to vote for OTK’s full seven-person slate.
- The press release headlined that ISS and Glass Lewis “reject[ed] the entirety” of Morgans’ slate and “decisively advised” shareholders to vote OTK’s gold card, while selectively quoting the advisers’ reports.
- The actual ISS and Glass Lewis reports recommended electing only three of OTK’s seven nominees and endorsed a board composed of four company nominees and three dissident nominees; both reports cautioned against wholesale replacement.
- Major media outlets (e.g., Dow Jones, Reuters, Bloomberg, Hotel Business News) contemporaneously reported the advisers’ true recommendations, publicizing that each recommended only three OTK nominees.
- The court found the press release, read in its ordinary meaning, misrepresented and omitted significant portions of the adviser reports but raised the question whether those inaccuracies were material given the contemporaneous public reporting; because the court relied on extra-pleading materials it converted the Rule 12(b)(6) motion into a Rule 56 summary-judgment motion and gave the parties 30 days to submit additional pertinent material.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OTK’s press release materially misrepresented ISS and Glass Lewis recommendations | Burkle: press release falsely implied advisers recommended voting out entire incumbent board and endorsed all seven OTK nominees; OTK omitted advisers’ conclusions that only three dissident nominees should be elected | OTK: press release is technically accurate and should be read in context; alleged inaccuracies would not have affected the contest outcome | Court: Press release, in ordinary meaning, misrepresented and omitted significant adviser conclusions (i.e., plausible misstatements) |
| Materiality of the alleged misrepresentations | Burkle: omissions and selective quotations were material because reasonable shareholders rely on proxy-adviser recommendations when voting | OTK: Misstatements were immaterial because contemporaneous media and other publications accurately reported the advisers’ recommendations, dissipating any misleading effect | Court: The misrepresentations appear immaterial on the present record given widespread, corrective reporting; dispositive determination requires summary-judgment record (court converted motion) |
| Appropriate pleading standard at motion to dismiss | Burkle: complaint alleges specific omissions and quotations sufficient to plausibly plead a Rule 14a-9 violation | OTK: seeks dismissal under Rule 12(b)(6) | Court: Applied Iqbal/Twombly plausibility standards and found factual assertions sufficient to raise materiality question but because of extra-pleading materials converted to summary judgment |
| Use of public-domain reporting to assess the “total mix” of information | Burkle: emphasis on the press release’s effect on shareholders | OTK: public reporting provided constructive notice so omitted facts would not alter the total mix available to voters | Court: Public-domain reports can be considered in materiality analysis; contemporaneous press coverage here undermines the alleged misleading effect but factual resolution deferred to summary-judgment record |
Key Cases Cited
- TSC Indus., Inc. v. Northway, 426 U.S. 438 (1976) (formulates Rule 14a-9 materiality as whether omitted fact would significantly alter the “total mix” of information available to a reasonable shareholder)
- Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) (materiality requires a defect have a significant propensity to affect the voting process)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must plead facts sufficient to state a plausible claim)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (established plausibility standard for complaints)
- Goldman v. Belden, 754 F.2d 1059 (2d Cir. 1985) (materiality is a mixed question of law and fact; dismissal inappropriate when reasonable minds could differ)
- Rodman v. Grant Foundation, 608 F.2d 64 (2d Cir. 1979) (the “total mix” may include publicly available information)
- Seibert v. Sperry Rand Corp., 586 F.2d 949 (2d Cir. 1978) (shareholders may be deemed to have constructive notice from widely reported matters)
- United Paperworkers Int’l Union v. Int’l Paper Co., 985 F.2d 1190 (2d Cir. 1993) (courts may consider public-domain reporting in assessing whether proxy disclosures are materially misleading)