308 F. Supp. 3d 977
S.D. Ind.2018Background
- Interactive Intelligence (Interactive), a public Indiana tech company, developed PureCloud (a cloud product) and had legacy CIC and CaaS lines; PureCloud was the growth focus by 2016.
- In August 2016 Genesys agreed to acquire Interactive in a cash-out merger for $60.50 per share; Union Square provided a fairness opinion relying on management projections and a DCF analysis.
- A Proxy Statement filed October 4, 2016 included management forecasts through 2018, Union Square’s analyses (including a DCF using perpetuity growth rates), and the Board’s unanimous recommendation that shareholders approve the merger.
- Shareholders approved the Merger on November 9, 2016; the merger closed December 1, 2016. Plaintiff Trahan filed a putative class action alleging the Proxy Statement was false or misleading under §14(a)/Rule 14a-9 and sought to hold directors, Interactive, and Genesys liable under §19(a) and §20(a).
- The court considered Rule 12(b)(6) motions to dismiss and treated the Proxy Statement and appended Union Square materials as central documents referenced by the complaint.
Issues
| Issue | Trahan's Argument | Defendants' Argument | Held |
|---|---|---|---|
| Omission of longer-range projections beyond 2018 | Trahan: Board omitted projections showing explosive PureCloud growth, misleading shareholders about long-term value | Board: Forecasts were forward-looking, cautioned, and no longer-range projections existed; omission not plausibly material or knowingly false | Dismissed — forecasts are forward-looking with tailored cautions and protected by PSLRA safe harbor; no plausible allegation of subjective or objective falsity or materiality |
| Omission of per-business-line projections | Trahan: Aggregate forecasts hid markedly different prospects across CIC, CaaS, PureCloud; per-line projections were material | Board: Shareholders valued the whole enterprise; no allegation that omission concealed adverse facts or changed the vote calculus; forecasts were forward-looking and cautioned | Dismissed — no plausible materiality or falsity; PSLRA safe harbor applies |
| Union Square’s DCF terminal value method (perpetuity growth vs. terminal multiple) | Trahan: Using perpetuity growth understated terminal value given PureCloud’s non-steady growth; Union Square should have used exit multiples | Defendants: Inputs and assumptions were disclosed; choice of valuation methodology is professional judgment and subject to reasonable disagreement; analysis was forward-looking and cautioned | Dismissed — disclosed inputs let shareholders judge for themselves; no plausible inference of bad faith; safe harbor applies |
| Board’s opinion/recommendation that the merger was fair and in shareholders’ best interests | Trahan: Board’s expressed optimism and investigatory failures made its recommendation misleading or incomplete under Omnicare (opinion omissions) | Board: The Proxy disclosed the bases for its recommendation and the process; no facts show the Board lacked a reasonable basis or concealed contrary facts | Dismissed — plaintiff failed to plead that opinions were subjectively or objectively false or that omission of opinion-formation facts was material |
| Loss causation and §20(a) control liability | Trahan: Misleading proxy caused shareholders to accept cash-out and suffer economic loss (difference between merger price and true value) | Defendants: Plaintiff must plausibly allege that but for the proxy defect shareholders would have obtained a concrete, available superior alternative or that misrepresentation proximately caused the loss | Dismissed — plaintiff failed to plead loss causation; §20(a) derivative claim fails if underlying §14(a) claim fails |
Key Cases Cited
- McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873 (7th Cir. 2012) (Rule 12(b)(6) pleading standard and class-cert timing)
- Yeftich v. Navistar, Inc., 722 F.3d 911 (7th Cir. 2013) (court must accept well-pleaded facts and draw inferences for plaintiff on Rule 12(b)(6))
- Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702 (7th Cir. 2008) (pleading standards for securities claims)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for complaints)
- Beck v. Dobrowski, 559 F.3d 680 (7th Cir. 2009) (PSLRA applies to §14(a) claims)
- TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality standard for securities disclosures)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015) (opinions actionable if omission about how opinion was formed would mislead a reasonable investor)
- Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (opinions are factual in two senses; causal link in proxy solicitations)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation requirement in securities cases)
- Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329 (7th Cir. 1995) (test for good-faith basis of forward-looking projections)