937 F.3d 297
4th Cir.2019Background
- Towers and Willis merged in 2015 to form Willis Towers Watson (WTW); Towers shareholders got 49.9% and a $4.87 dividend (later increased to $10), while Willis shareholders got 50.1%.
- John Haley (Towers CEO) was slated to be CEO of the combined company; ValueAct (investor) and its CEO Jeffrey Ubben were deeply involved in negotiations and Ubben was to join WTW’s compensation committee.
- Plaintiffs allege Haley met Ubben in September 2015 and secretly negotiated a compensation plan (up to $165M) that conflicted with Haley’s duties as Towers’ lead negotiator; that was not disclosed in the proxy prior to the shareholder vote.
- After a proxy update and a shareholder vote in December 2015, the merger was approved; plaintiffs later obtained documents in a Delaware appraisal action (2017) and filed this federal securities class action in November 2017.
- The district court dismissed the Section 14(a) claim as time-barred and alternatively for failure to allege materiality; it dismissed Section 20(a) as derivative. Fourth Circuit vacated and remanded, rejecting the district court’s grounds for dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Statute of limitations: when does one-year discovery period start? | Merck discovery rule: accrual when plaintiff discovered or reasonably should have discovered facts constituting violation; plaintiffs discovered key facts in 2017 discovery, so timely. | Inquiry-notice or earlier public signals (e.g., Haley would be CEO and get higher pay) should have started the clock earlier. | Merck discovery standard applies; on pleadings plaintiffs adequately allege they discovered the facts in 2017, so dismissal as time-barred was error. |
| Materiality of omitted compensation negotiations | Undisclosed secret negotiations and resulting conflict could reasonably be material because disclosure could have altered the total mix available to investors. | Public disclosures already showed Haley would be CEO and likely earn more; the alleged talks/proposal were not material as a matter of law. | Materiality is fact-specific; plaintiffs pleaded facts such that a reasonable jury could find the omissions material; district court erred to dismiss on immateriality. |
| Whether Rule 14a-9 requires omission to render an affirmative statement false or misleading | Omission of a material fact is actionable where it is necessary to make statements not false or misleading; plaintiffs allege proxy said board considered all conflicts though it did not know of the negotiations. | Rule 14a-9 requires omitted fact to make affirmative statements false/misleading; here affirmative statements were not rendered misleading. | Court found plaintiffs adequately alleged that the proxy’s statement (board considered all conflicts) could be misleading given the alleged undisclosed negotiations. |
| Scienter / pleading state of mind for §14(a) claims | Plaintiffs characterize claim as negligence-based, not fraud, so particularized scienter pleading is unnecessary. | Because complaint sounds in fraud, defendants say PSLRA requires particularized scienter allegations. | Court declined to decide on appeal; directed district court on remand to address whether §14(a) claims sounding in fraud require PSLRA scienter pleading or can be negligent. |
Key Cases Cited
- Merck & Co. v. Reynolds, 559 U.S. 633 (2010) (adopts discovery rule for accrual of securities statutes-of-limitations)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard: whether omitted fact would have significantly altered the total mix of information)
- TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality is fact-specific and often for the trier of fact)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading plausibility standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (courts need not accept conclusory allegations)
- Greenhouse v. MCG Capital Corp., 392 F.3d 650 (4th Cir. 2004) (materiality and dismissal standard under Rule 12(b)(6))
- Caviness v. Derand Res. Corp., 983 F.2d 1295 (4th Cir. 1993) (discusses inquiry notice standard)
- Nolte v. Capital One Fin. Corp., 390 F.3d 311 (4th Cir. 2004) (omission actionable if it renders statements misleading)
- Singer v. Reali, 883 F.3d 425 (4th Cir. 2018) (materiality and pleading context)
- Wag More Dogs, Ltd. Liab. Corp. v. Cozart, 680 F.3d 359 (4th Cir. 2012) (de novo review of Rule 12(b)(6) dismissal)