889 F.3d 1153
10th Cir.2018Background
- Williams Companies (Williams), Williams Partners GP, and Williams Partners L.P. (WPZ) announced on May 13, 2015 a planned merger in which Williams would absorb WPZ; Williams owned 60% of WPZ.
- At an Analysts Presentation immediately after the announcement, Williams executives described the transaction, cautioned about forward-looking uncertainties, and said the WPZ unitholder vote posed “no risk” because Williams controlled the vote.
- Plaintiff (Employees’ Retirement System of Rhode Island) sues in a putative class action for purchasers of WPZ units from May 13–June 19, 2015, alleging defendants failed to disclose prior merger discussions between Williams and Energy Transfer Equity (ETE).
- ETE had informally approached Williams in 2014 and again in 2015; no offer was made at early meetings. After the WPZ announcement, ETE made a written proposal (conditioning a deal on termination of the WPZ merger), which became public June 22 and precipitated a drop in WPZ unit value.
- Plaintiff alleges violations of §10(b), Rule 10b-5, and §20(a) based on (1) an allegedly misleading “no risk” statement about the WPZ vote and (2) omission of material merger discussions with ETE; the district court dismissed, and the Tenth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether analysts’ presentation statements ("no risk" remark) were misleading | Williams presented the WPZ merger as effectively done and risk-free, misleading investors | Statements described agreed transaction steps and expressly identified remaining conditions and risks; the “no risk” remark referred only to the WPZ vote | Not misleading; no plausible allegation that defendants said the merger was guaranteed |
| Whether defendants had a duty to disclose prior talks with ETE at time of WPZ announcement | Duty existed because merger discussions were material and omission made statements misleading | No duty: defendants did not speak about other potential transactions, so nondisclosure did not make their statements misleading | No duty to disclose; statements were consistent with private preliminary discussions |
| Whether the ETE–Williams discussions were material (probability/magnitude) | Discussions made a Williams–ETE merger sufficiently likely and would materially affect WPZ unitholders | Discussions were preliminary, informal, involved no offers/confidentiality, and did not make an ETE deal likely enough to be material | Not material: allegations do not plausibly show a high probability of an ETE merger or substantial effect on WPZ value |
| Whether plaintiffs adequately pleaded scienter (intent or recklessness) | Defendants knowingly or recklessly omitted material merger talks to mislead investors | No strong inference of scienter: discussions were unlikely to produce a deal; no pleaded motive; actions (pursuing WPZ merger) refute intent to deceive | Scienter not adequately pleaded; inference of nonfraudulent intent is at least as compelling |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard: plausibility)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (scienter inference must be cogent and at least as compelling as opposing inferences)
- Basic Inc. v. Levinson, 485 U.S. 224 (probability/magnitude test for materiality of merger discussions)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (no freestanding duty to disclose; omission actionable only if necessary to make other statements not misleading)
- Brody v. Transitional Hospitals Corp., 280 F.3d 997 (no duty to disclose exploratory merger interest where press release made no assertions about exclusivity)
- Glazer v. Formica Corp., 964 F.2d 149 (no duty to disclose preliminary acquisition discussions absent inconsistency with public statements)
- Jackvony v. RIHT Financial Corp., 873 F.2d 411 (preliminary, vague merger discussions not material)
- Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (more advanced, purposeful negotiations can be material)
- Fleming v. City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (definition of recklessness and scienter analysis in 10th Cir.)
- Grossman v. Novell, Inc., 120 F.3d 1112 (omission liability requires a duty to disclose)