Case Information
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE IN RE FOCUS FINANCIAL PARTNERS ) C.A. No. 23-1466 (MN) SECURITIES LITIGATION ) MEMORANDUM OPINION
Sue L. Robinson, Brian E. Farnan, Michael J. Farnan, F ARNAN LLP, Wilmington, DE – Liaison Counsel for Lead Plaintiffs and the Putative Class
Vincent R. Cappucci, Robert N. Cappucci, Jonathan J. Beemer, Jessica A. Margulis, E NTWISTLE & C APPUCCI LLP, New York, NY; David J. Schwartz, David Wales, Marco A. Dueñas, S AXENA W HITE P.A., White Plains, NY; Thomas Curry, S AXENA W HITE P.A., Wilmington, DE Adam Warden, Jonathan Lamet, S AXENA W HITE P.A., Boca Raton, FL – Lead Counsel for Lead Plaintiffs and the Putative Class
Vincent Briganti, Raymond Girnys, Andrea Farah, L OWEY D ANNENBERG P.C., White Plains, NY – Additional Counsel for Lead Plaintiffs and the Putative Class
James M. Yoch, Jr., Alberto E. Chávez, Y OUNG C ONAWAY S TARGATT & T AYLOR , LLP, Wilmington, DE; Craig E. Zieminski, Andrew E. Jackson, V INSON & E LKINS LLP, Dallas, TX – Attorneys for Defendants
March 31, 2025
Wilmington, Delaware
NOREIKA, U.S. DISTRICT JUDGE:
Presently before the Court is Defendants’ motion to dismiss (D.I. 26) Plaintiffs’ Consolidated Class Action Complaint (“the Complaint”) (D.I. 19) for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, the Court GRANTS Defendants’ motion.
I. BACKGROUND
A. The Parties
This case is a putative class action brought by five lead plaintiff investment funds: (i) AltShares Event-Driven ETF, (ii) AltShares Merger Arbitrage ETF, (iii) Kryger Fund Ltd., (iv) Kryger Enhanced Fund Ltd. and (v) ODS Capital LLC (together, “Plaintiffs” or “Named Plaintiffs”). (D.I. 19 ¶¶ 26-30). Plaintiffs allege that they were beneficial owners of Focus common stock as of June 9, 2023, the Record Date for the merger at issue here. ( Id. ). Plaintiffs seek to represent a class consisting of “all sellers of Focus common stock who sold their shares from February 27, 2023 through the closing of the Merger on August 31, 2023 [], including those shareholders who held Focus common stock on the Record Date and were entitled to vote on the Merger.” ( ¶¶ 20, 233).
Defendants are Focus Financial Partners Inc. (“Focus” or “the Company”) and three groups of individuals: (1) the Special Committee Defendants [1] ; (2) the Board Defendants [2] ; and (3) the
Officer Defendants (together, “the Individual Defendants”). [3] Focus is a Delaware-incorporated, New York-headquartered financial services firm that “owns and partners with fiduciary wealth management firms in the Registered Investment Advisor sector.” ( Id. ¶ 31). From 2018 to 2023, Focus traded on the NASDAQ under the ticker symbol “FOCS.” ( Id. ).
B. The Merger
This dispute arises from a merger agreement between Focus and Clayton, Dubilier & Rice, LLC, a private equity firm (“CD&R”). [4] On February 27, 2023, Focus announced it would be acquired by CD&R for approximately $7 billion dollars in a take-private transaction (“the Merger”). ( Id. ¶ 1). The Merger, which closed on August 31, 2023, paid Focus shareholders $53 per share. ( Id. ¶ 113).
In early summer 2022, Focus began canvassing potential bidders on the terms of an acquisition. ( Id. ¶ 11-13). Focus representatives contacted CD&R, among others, and by early September 2022, CD&R had proposed a first bid for Focus at $50 per share and entered into due diligence agreements for further information on the Company. ( Id. ¶ 11; D.I. 28-2 at 26). On November 1, 2022, the Special Committee was formed, and the Special Committee Defendants began managing the work related to Focus’ acquisition efforts. (D.I. 19 ¶ 119).
In later 2022, another bidder emerged: Wealth Enhancement Group (“WEG”). ( Id. ¶ 14). By January 17, 2023, pursuant to continued negotiations with both firms, the Special Committee solicited offers at $51.50 and $51.75 per share from CD&R and WEG, respectively. ( ¶ 95). CD&R’s bid was supported by months of prior diligence, but WEG’s offer required vetting. ( Id. ¶¶ 13, 95-96).
By January 30, 2023, after running the bids up to $53 and $55 per share, the Special Committee entered into an exclusivity agreement with CD&R on its offer. ( Id. ¶ 97). On February 26, 2023, the Special Committee accepted CD&R’s offer, and, after announcing the Merger on CD&R’s $53 per share proposal, Focus filed a Definitive Proxy on June 12, 2023 (“the Proxy”). ( Id. ¶ 123). On July 6, 2023, Focus filed a Supplemental Proxy, and, on July 14, 2023, Focus’ shareholders held a proxy vote approving the Merger. ( Id. ¶¶ 114-17; D.I. 28-4 at 8). The Merger closed on August 31, 2023, effecting the $53 per share payout and delisting the Company’s stock consistent with the go-private part of the deal. (D.I. 119 ¶ 117).
The Proxy and other pre-close public filings represented that the Merger was the product of a thorough diligence process, negotiated by an independent and disinterested Special Committee, and priced at the best value reasonably obtainable for Focus’ shareholders. ( Id. ¶ 5). Plaintiffs claim these disclosures were false and misleading. ( Id. ¶¶ 5-6). Specifically, Plaintiffs allege, Defendants orchestrated an insider-preferential acquisition to benefit Defendants and Stone Point Capital (“Stone Point”) – a private equity firm and Focus’ single largest shareholder prior to the Merger. ( ¶¶ 7-8).
Contrary to their public representations, Plaintiffs allege, Defendants took various steps to steer the Merger process towards CD&R, closing the door to other opportunities which could have garnered the Focus shareholders better value for their investment. ( Id . ¶¶ 9, 11-13). To that end, Focus management supposedly “homed in” on CD&R as a partner, keeping other buyers at “arm’s- length.” ( Id . ¶¶ 13-14). These efforts later allegedly included enlisting the aid of financial advisors Goldman Sachs Group, Inc. (“Goldman” or “Goldman Sachs”) and Jefferies, LLC (“Jefferies”), to restrict how many interested buyers would be canvassed and to furnish a positive fairness opinion of the Merger, respectively. ( Id . ¶ 17). The ultimate effect, allege Plaintiffs, was to craft an “utterly deficient process” that would ensure CD&R succeeded on its $53 per share proposal, enriching the Defendants at the expense of the rest of Focus’ shareholders. ( Id . ¶ 18).
C. Procedural History
On June 6, 2024, Plaintiffs filed the Consolidated Class Action Complaint. ( ). The Complaint alleges that Defendants’ conduct in sourcing, negotiating, and executing the Merger violated three provisions of the Securities Exchange Act of 1934, 15 U.S.C. § 78(a) et seq . (“Exchange Act”), and attendant regulations: (i) Section 10(b) and Rule 10b-5 thereunder; (ii) Section 14(a) and Rule 14a-9 thereunder; and (iii) Section 20(a). On July 30, 2024, Defendants moved to dismiss the Complaint. (D.I. 26). Briefing on the motion was completed on October 29, 2024. (D.I. 27, 30, 32). The Court heard argument on the motion on February 10, 2025. (D.I. 41).
II. LEGAL STANDARD
A. Rule 12(b)(6) Motion to Dismiss
In ruling on a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, the Court must accept all well-pleaded factual allegations in the complaint as true and
view them in the light most favorable to the plaintiff.
See Lutz v. Portfolio Recovery Assocs., LLC
,
B. The Private Securities Litigation Reform Act
“As a check against abusive litigation by private parties, Congress enacted the Private
Securities Litigation Reform Act of 1995” (“PSLRA”).
Tellabs, Inc. v. Makor Issues & Rts., Ltd.
,
551 U.S. 308, 313 (2007). The PSLRA requires a plaintiff “in any private action under [the
Exchange Act] . . . [to] specify [in the complaint] each statement alleged to have been misleading,
the reason or reasons why the statement is misleading, and, if an allegation regarding the statement
or omission is made on information and belief, . . . state with particularity all facts on which that
belief is formed.” 15 U.S.C. § 78u-4(b)(1). Scienter must similarly be alleged with specificity.
This is an “exacting,” “heightened” standard that “requires plaintiffs to plead the who, what,
when, where and how” of their claims in all Section 10(b) and 14(a) cases.
Inst. Invs. Group v.
Avaya, Inc.
,
III. DISCUSSION
As noted, Plaintiffs challenge the Merger under three sections of the Exchange Act. First, they allege that Defendants knowingly made material misstatements and omissions about the process and value of the Merger, in violation of Section 10(b). (D.I. 19 ¶¶ 243-50). Second, Plaintiffs assert that the Proxy made material misstatements and omissions that duped Focus shareholders into approving the Merger, in violation of Section 14(a). ( ¶¶ 251-59). And third, Plaintiffs contend that the Individual Defendants are liable as control personnel under Section 20(a) by virtue of their positions within the Company. The Court will address each claim in turn.
A. Exchange Act Section 10(b)
Section 10(b) of the Exchange Act makes it unlawful to use “any manipulative or deceptive device or contrivance” in violation of the securities law. 15 U.S.C. § 78j. This includes “employ[ing] any device, scheme, or artifice to defraud,” and making “any untrue statement of a material fact or [] omit[ting] to state a material fact.” 17 CFR § 240.10b–5.
To state a claim under Section 10(b), “a plaintiff must prove (1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation.”
Stoneridge Inv.
Partners, LLC v. Sci.-Atlanta, Inc.
,
1. The Alleged Misrepresentations and Omissions
Plaintiffs claim that, to secure the Merger, Defendants “made [several] materially false or
misleading statement[s] or omitted to state a material fact necessary to make [the] statement[s] not
misleading.”
In re Merck & Co., Inc. Sec. Litig
.,
The Complaint details various categories of alleged misrepresentations and omissions, which the Court distills into four: (1) the “fairness” of the Merger and “adequacy” of the sales process; (2) the “independence” of the Special Committee and purported “conflicts of interest”; (3) CD&R’s supposed “incentives” to Focus management and Stone Point; and (4) the alleged “conflicts” of interest of Focus’ third-party financial advisors. (D.I. 19 ¶ 48). Defendants respond that the challenged statements were opinions that were not false or misleading, and, in any event, were otherwise disclosed in the Company’s publicly-circulated Merger filings. [5] (D.I. 27 at 8-9).
The Court finds that none of the foregoing sufficiently alleges a material misstatement or omission.
a. The Fairness of the Merger and Adequacy of the Sales Process First, Plaintiffs allege that certain representations about the fairness of the Merger process were false and misleading. They take issue with statements that the Special Committee “determined that this transaction is fair to and in the best interests of Focus,” “believed that . . . [it] obtained the best terms and the highest price that CD&R was willing to pay for the Company, pursuant to a thorough process,” and appropriately considered “procedural fairness” in approving the Merger. (D.I. 28-2 at 55, 59; D.I. 19 ¶¶ 113, 159, 175-77, 207-10). Plaintiffs contend that these statements were false and misleading because “the Merger was not ‘fair’ nor was it the result of a ‘robust process.’” (D.I. 19 ¶ 160). Instead, Plaintiffs allege that (i) Defendants discouraged the Company from pursuing any buyer but CD&R, and, (ii) the Proxy misled shareholders by omitting information about a competing bid from strategic acquirer WEG. ( ¶¶ 175-78, 187). i. The Company’s Opinion Statements Plaintiffs claim that the Merger was neither “fair” nor the result of a “robust process.” ( Id. ¶¶ 160, 176-91). To that end, Plaintiffs assert the Proxy’s opinion statements misled or omitted from shareholders that “the playing field” was geared “toward CD&R from the very outset,” and that, even in the final stages of the sale negotiation, the Proxy “further concealed [] their favoritism towards CD&R.” ( ¶¶ 178, 188).
An opinion statement may constitute a material misrepresentation when a complaint
(a) alleges “that an opinion was wrong” and (b) “call[s] into question the issuer’s basis for offering
the opinion.”
Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund
,
As a potential merger develops, “one bidder may stand out amongst the rest, and a company
may find that a merger with, or acquisition by, that company is most desirable.”
In re Columbia
Pipeline, Inc.
,
Instead, Plaintiffs claim the Proxy was “untrue” or insufficiently “qualified,”
i.e.
, it
purposefully omitted information that would have demonstrated the Special Committee’s
preference for CD&R.
Id
. at 686; (D.I. ¶¶ 176-77). But the Proxy was rife with thoughtful business
explanations for the Special Committee’s recommendation. (
See
D.I. 28-2). Indeed, over the
course of a five-page section called “Reasons for the Merger,” the Proxy listed more than a dozen
considerations, including that the Merger would be executed at a “Premium to Market Price” of
between 36% and 48% per share, provided “Certainty of Value” that was “the Best Value
Reasonably Obtainable” for shareholders, and was the optimal choice among the “Potential
Strategic Alternatives.” (
Id.
at 55-56). It then weighed those pro-Merger factors against another
ten “uncertainties, risks and potentially negative factors,” as well as a half-dozen more “procedural
safeguards.” (
Id.
at 58). That calculus led to the ultimate “Recommendation of the Board . . . that
the Merger Agreement . . . [is] fair to, and in the best interests of, the Company and its
stockholders.” ( at 61). Plaintiffs do not meaningfully take issue with those statements as
“untrue factual assertion[s].”
City of Warren
,
Further to that point, the Special Committee disclosed that it determined there was not a
better deal at hand: “only one other third party bidder submitted a proposal . . . [which] was
preliminary and nonbinding and was subject to the completion of due diligence, debt and equity
financing contingencies and regulatory approvals, and the Special Committee risked losing the
certainty of value offered by CD&R if it permitted the other bidder to move forward at that time
on uncertain terms.” (D.I. 28-2 at 55). That passage further justified the Special Committee’s
recommendation to merge with CD&R over WEG. Plaintiffs do not allege this disclosure
“omit[ted] appropriate qualifying information,” given that the Proxy provided the meaningful
business calculations already discussed.
City of Warren
,
Thus, even accepting Plaintiffs’ allegations that the Special Committee preferred a sale to CD&R, the Proxy disclosed a genuine basis for such treatment and is not materially false or misleading. See Bartesch v. Cook , 941 F. Supp. 2d 501, 508 (D. Del. 2013) (“The alleged omissions are contradicted by the company’s public disclosures and, therefore, there can be no Section 10(b) claim.”).
ii. The WEG Bid Plaintiffs next claim that there were material failures of the Proxy to disclose communications with WEG, who Plaintiffs allege would have tendered a better Merger offer but- for the Defendants’ alleged misconduct. (D.I. 19 ¶¶ 190-91). Specifically, Plaintiffs claim that the Proxy omitted three things about WEG: (i) a dinner meeting between Focus’ CEO and the CEO of WEG on September 20, 2022, at which WEG’s CEO expressed interest in a “transformative” merger; (ii) Defendants’ rationale for granting CD&R exclusivity over WEG; and (iii) that Defendants imposed an “informational and financing disadvantage” on WEG because Defendants “preferred a transaction with CD&R.” ( ¶¶ 184-191, 211).
Accepting them as true, the Court fails to see how these alleged omissions are actionable.
The Proxy clearly disclosed the WEG negotiation process, culminating with its $55 per share offer.
(
Id
. 19 ¶ 190; D.I. 28-2 at 45). The alleged dinner meeting took place prior to the offer, meaning
that shareholders were, in fact, informed about WEG’s merger interest. The Proxy did not disclose
the CEO’s comment about seeking a “transformative transaction” (D.I. 19 ¶¶ 76, 191), but
Plaintiffs fail to explain how that remark (or the dinner at which it was uttered) constitutes
“qualifying information” that would have improved a reasonable investor’s understanding of the
WEG offer.
City of Warren
,
Plaintiffs’ other WEG allegations also fail to rise to the level of actionability. The Complaint alleges that the Proxy “gave the false impression that WEG was somehow responsible for its position behind CD&R in the sale process when it was actually the result of Defendants’ own recalcitrance.” (D.I. 19 ¶ 191). Yet the Proxy disclosed that the Special Committee was “prepared to have the Company provide additional due diligence and to entertain further discussions on a potential acquisition of the Company by” WEG, so long as WEG definitively submitted its $55 per share proposal; WEG countered with a “preliminary and non-binding” $55 per share offer that was “subject to continued due diligence, and [WEG’s] receipt of the requisite financing” for the deal. (D.I. 28-2 at 44). Perhaps most importantly, WEG’s submission of a hard offer was “contingent” on an exclusivity agreement – meaning that Focus would have had to terminate its ongoing, advanced negotiations with CD&R. ( Id .). In the absence of exclusivity, the Proxy disclosed, WEG had communicated it “would [only] be willing to continue evaluating a potential acquisition of the Company at a price of $51.75 per share in cash.” ( Id . at 45). That led the Special Committee to opine that the WEG negotiations were “unlikely to result in a definitive transaction.” ( Id . at 43); see also Wayne Cnty. Emps. Ret. Sys. v. Mavenir, Inc. , No. 18-1229 (SB), 2022 WL 958463, at *3 (D. Del. Mar. 30, 2022) (“That was misleading, the shareholders say, because one shopper did show interest. But mere interest is not an offer.”).
Once again, because that statement expressed the Special Committee’s “belief” about the
likelihood of a transaction – rather than “an actual happening” – it is an
Omnicare
opinion
statement.
Thus, where the statements at issue are reflective of opinions, they are not actionable under Omnicare . And where they are not, they reflect sufficient disclosure on behalf of the Proxy to arm the shareholder with the necessary decision-making information.
b. Special Committee Independence & Disinterestedness Next, Plaintiffs assert that, contrary to the Proxy’s representations, the four board members of the Special Committee were not “independent and disinterested directors” who held no “material interest in any potential acquisition.” (D.I. 19 ¶¶ 163-71; D.I. 28-2 at 59). They make three main points in support of that position. First, they argue that the Proxy failed to disclose a material conflict of interest: the Special Committee received compensation increases just before its approval of the Merger, which raised the Committee members’ project-based salaries by $200,000 each. (D.I. 19 ¶¶ 167, 169). Second, Plaintiffs contend that the Proxy’s statement that the Special Committee did “not have an interest in the Merger different from or in addition to, that of the Unaffiliated Stockholders” misled shareholders by intentionally obscuring Tax Receivable Agreement (“TRA”) payouts owed to the Special Committee directors should the Merger receive approval. ( Id. ¶¶ 170-72). Lastly, Plaintiffs argue the Proxy duped shareholders by “wholly omit[ting] any information demonstrating the Special Committee’s business and personal ties” to the Board and Officer Defendants, another putative conflict of interest. ( Id. ¶ 173).
i. Special Committee Compensation The Proxy provided information about the Special Committee’s financial incentives. First, in a section called “Special Committee Fees,” the Proxy detailed that each member had already been paid “a flat fee of $40,000 for service on the Special Committee,” with the Chairman receiving $80,000 for his leadership role. (D.I. 28-2 at 99). Those “flat fees” were to be paid for the Committee’s work regardless of which bidder ended up purchasing Focus, or whether a transaction was consummated at all. ( Id. ). The Proxy also disclosed that each member would receive a monthly fee of $35,000 for the duration of the Go-Shop period, subject to certain caveats. ( Id. ). Finally, the Proxy informed shareholders that “[t]he fees received by the Special Committee members are subject to change based on a good faith determination by the Board.” ( Id. ).
As for the TRA payments, the Proxy set out that “a Change of Control” of the Company “will result in an obligation of the Company to make a lump-sum payment to the TRA Holders,” including the “members of the Board.” ( Id. at 100). Each of the four Special Committee members had been Board members since before the Special Committee’s formation. ( See D.I. 19 ¶¶ 32-36). Thus, the Proxy disclosed, “members of the Board may have certain interests in the Mergers, by virtue of their right to receive the applicable Holder TRA Payoff Amount in cash in connection with closing of the Mergers, that are different from, or in addition to, the interests of the Company’s stockholders generally.” ( ). These interests were further detailed in the Supplemental Proxy. ( See D.I. 28-8 at 8-9).
Therefore, despite Plaintiffs’ allegations to the contrary, the Proxy disclosed both the
project-based amount initially awarded to the Special Committee as well as the monthly raise for
work that “exceeded the Company’s expectations.” (
Id.
at 53, 99). In any event, this compensation
did not create a conflict of interest, because, to do so, “[t]he benefits to defendants must go beyond
the payments of fees for professional services to include some connection to the securities
transaction[] at issue.”
Gilmore v. Berg
,
ii. Personal Relationships Much the same logic applies to the Proxy’s alleged omission of the Special Committee Defendants’ “strong personal and business ties” to the other key players involved here, such as Focus’ CEO, CD&R, and Stone Point. (D.I. 19 ¶¶ 132-37). For example, the Complaint alleges that one of the Special Committee Defendants “is a neighbor and friend” of Focus’ CEO and lives in the same “private community.” ( Id. ¶ 136). Two others are members of the same “Young Presidents” club and serve on the same policy group advisory board. ( Id. ¶¶ 134-36).
The Complaint does not spell out, however, how these inter-director relationships “likely
influenced their decision-making on the Merger.” ( ¶ 132). And even if it did, “[a]llegations
that [the Company’s] directors moved in the same social circles, attended the same weddings,
developed business relationships before joining the board, and described each other as ‘friends,’
even when coupled with [strong] voting power, are insufficient, without more, to rebut the
presumption of independence.”
Freedman v. Redstone
, No. 12-1052 (SLR),
The remainder of the conflict allegations are similarly attenuated. As to Special Committee
Chairman LeMieux, Plaintiffs ask the Court to draw an inference of impropriety from the fact that
he contemporaneously served as the chairman of his law firm, which “represents CD&R in
immigration matters.” (D.I. 19 ¶ 133). They say, accordingly, that “LeMieux benefits directly
from his firm’s ongoing business dealings with CD&R.” ( ). But these allegations do not claim
that LeMieux is an immigration attorney, personally worked on CD&R matters, or explain how he
himself was compensated by dint of that representation. Thus, they fail to raise the inference that
any benefit was
material
to LeMieux such that he would rubberstamp the $7 billion sale to CD&R.
See In re Suprema Specialties, Inc. Sec. Litig.
,
The Complaint attempts to allege a different conflict of interest for LeMieux through
political donations. Plaintiffs say that Board Defendant Carey donated $10,000 to the Republican
Governors Association, which in turn “provided funding” in an unspecified amount to Florida
Governor Ron DeSantis’ political action committee, which in turn (presumably) funded DeSantis’
campaign, on which LeMieux served as a member of the 2018 transition team. (D.I. 19 ¶ 134).
Plaintiffs thus ask the Court to infer that LeMieux somehow benefitted from Carey’s contribution,
without any allegation that any of the $10,000 donation made its way to LeMieux’s pocket. (
Id
.).
Going another step further, Plaintiffs assert that the Florida state Retirement System (ostensibly –
but not allegedly – under the control of DeSantis) invested millions of dollars in Stone Point funds.
(
Id.
). According to Plaintiffs, therefore, Stone Point, Focus, LeMieux, and Carey were intertwined
in a conflict that bore on the CD&R Merger. (
Id
.);
Basic
,
Therefore, Plaintiffs have failed to plausibly allege a material misstatement or omission as to the Special Committee’s independence and conflicts of interest.
c. The Alleged Insider Incentives Third, Plaintiffs allege that Stone Point and the Officer Defendants were enticed by undisclosed illicit incentives to ensure that Focus would sell to CD&R: (1) ongoing employment for Focus’ management; and (2) roll-over equity for Stone Point. (D.I. 19 ¶¶ 192-93). According to the Complaint, the Proxy omitted CD&R’s intention to retain Focus’ senior executives after the Merger, thereby concealing management’s conflict of interest at the expense of shareholder value. ( ). Additionally, Plaintiffs argue, the Proxy omitted Defendants’ knowledge that, if successful in its bid, CD&R would allow for Stone Point to roll-over much of its equity interest from Focus into the post-Merger company. ( Id . ¶¶ 194-95).
To begin, the Proxy disclosed that keeping Focus’ management on after the Merger was a
possibility.
[7]
(
See
D.I. 28-2 at 102) (“[The post-Merger company] may hold preliminary
discussions with certain members of the Company’s management team regarding employment.”).
More germanely, the prospect of continued employment is not an actionable conflict, because
“simply alleging a corporate defendant’s desire to retain his position with its attendant salary, or
realize gains on company stock, would force the directors of virtually every company to defend
securities fraud actions every time that company effected a merger or acquisition.”
GSC Partners
CDO Fund v. Washington
,
The same is true for the Stone Point allegations. The Complaint asserts that the Proxy
failed to comply with the securities laws because it ought to have “disclose[d] that CD&R had an
expectation of a ‘
material
roll-over of equity’ from Stone Point as part of CD&R’s bid.”
[8]
(D.I. 19
¶ 195). But, as is the case with many of the alleged misstatements and omissions here, the Proxy
disclosed the structure of the Support Agreement, (D.I. 28-2 at 99-100), and so challenges to the
omission of that information cannot be actionable.
See Bartesch
,
Accordingly, the Court finds that Plaintiffs’ allegations regarding the Defendants’ insider incentives fail, as the statements at issue were neither materially misleading nor omissions.
d. The Alleged Financial Advisors’ Conflicts
Last, Plaintiffs argue that the Proxy misled Focus shareholders about the role of the Company’s financial advisors, Goldman Sachs and Jefferies. First, they say that Defendants omitted to disclose that Jefferies would be paid $8 million in fees for assisting in the Merger. (D.I. 19 ¶¶ 216-17). Second, Plaintiffs argue that Goldman Sachs’ parallel banking representation in the acquisition of a Focus subsidiary, NKSFB, created a conflict of interest that unfairly limited the pool of potential bidders. ( Id. ¶¶ 103-12). To avoid a perceived conflict of interest, says the Complaint, the Proxy omitted to mention that Goldman Sachs declined to market the sale of Focus to as many as seven other potential bidders in connection with the NKSFB representation. ( Id . ¶¶ 202-05).
The Court again finds these allegations unavailing. The Proxy plainly disclosed that
“Jefferies may be entitled to a discretionary fee of up to $8.0 million, payable at the Special
Committee’s full and absolute discretion.” (D.I. 28-8 at 84). It then proceeded to list factors of
consideration governing such discretion. ( ). Jefferies was subsequently awarded that $8 million
maximum. On that basis alone, there is no “expressly embedded, untrue factual assertion” upon
which to base a claim.
City of Warren
,
Additionally, Plaintiffs allege that minutes from a February 26, 2023, Special Committee
meeting show that Jefferies’ compensation increase was approved prior to rendering its fairness
opinion as a quid-pro-quo. (D.I. 19 ¶¶ 155-58). In other words, Jeffries only signed off on the
Merger as fair once it knew it would be paid its full rate. But the minutes state no such thing.
They instead note that, after “Jefferies and Goldman Sachs left the meeting,” only then did the
Special Committee proceed to vote on Jefferies’ compensation increase. (D.I. 27-9 at 3-4) (“The
representatives of Goldman Sachs and Jefferies left the meeting at approximately 9:45 p.m.,
Eastern Time. The Committee then reviewed the presentations made, and matters discussed . . .
After further discussion . . . the Committee unanimously adopted the Resolutions.”). Because the
Proxy clearly disclosed the possible total amount of Jefferies’ compensation, and because the
documents upon which Plaintiffs rely clearly show Jefferies’ increase was approved after its
fairness opinion was delivered, not before, the Court finds Plaintiffs’ claims inadequately pled.
Bartesch
,
Plaintiffs’ allegations about Goldman Sachs fail for similar reasons. The Complaint
acknowledges the Special Committee’s opinion that it “did not believe that [Goldman’s] additional
role [in the sale of NKSFB] would present a material conflict of interest for Goldman,” but proffers
no challenge to the basis for that opinion. (D.I. 19 ¶¶ 200-03). Under
Omnicare
, a plaintiff must
offer “facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not
have” to adequately challenge an opinion statement.
Omnicare
,
*****
Having assessed each category of alleged misrepresentations and omissions, the Court concludes that, under Section 10(b) of the Exchange Act, Plaintiffs fail to adequately plead a material misrepresentation or omission about the adequacy or fairness of the Merger process.
2. Scienter
Next, the Court turns to the Complaint’s allegations of scienter. “Scienter is a mental state
embracing intent to deceive, manipulate, or defraud, . . . and requires a knowing or reckless state
of mind.”
Avaya
,
Plaintiffs offer three basic types of allegations of scienter. They assert that the Individual Defendants had: (1) “substantial, personal involvement in the alleged wrongdoing”; (2) “motive and opportunity” to commit the alleged fraud; and (3) involvement in the Company’s “core operations.” (D.I. 30 at 25-27). Each fails for the reasons that follow.
a. Personal Involvement Plaintiffs assert that Defendants acted with scienter because they “had personal knowledge of, and involvement in” the alleged misconduct here. (D.I. 19 ¶ 222). The Complaint alleges that among other things, the individual Defendants refused to canvas strategic acquirors, executed their own compensation increases, harbored undisclosed conflicts of interest, drafted a misleading Proxy, and more. ( ¶¶ 74, 76, 123-25, 133, 135-36, 220). There are several shortcomings with these allegations.
i. Group Pleading
First, blanket assertions of scienter across a group of individuals – otherwise known as
“group pleading” – cannot satisfy the particularity required under the PSLRA.
In re Suprema
,
Here, Plaintiffs broadly say that Defendants – without specifying which ones – were “privy to confidential information” that “reflect[ed] the true facts” of the Merger process, “well aware of Stone Point’s unique position as a significant private equity investor,” and cognizant that “it was a challenging market [in which] to execute a deal.” (D.I. 19 ¶¶ 218, 219, 223). They do not extrapolate, however, on specifically who knew these things, specifically what information they were privy to, or specifically why it impacted the alleged misstatements and omissions at issue here.
Such “[g]eneralized imputations of knowledge,” made “regardless of the defendants’ positions within the company,” are the type of “blanket allegations against numerous different defendants” that the Third Circuit has routinely found “runs afoul of the particularity requirements of the PSLRA.” In re Suprema , 438 F.3d at 282; Barnard v. Verizon Commc’ns, Inc. , 451 F. App’x 80, 85 n.6 (3d Cir. 2011) (“[T]he complaint fails to ascribe any given statement to either defendant particularly.”). Accordingly, the vast majority of the Complaint’s allegations of scienter fail as insufficiently particularized as to specific Defendants.
ii. Connection to the Misstatements
The allegations that do identify specific Defendants and their personal involvement in the
Merger fail as well. (
See, e.g.
, D.I. 19 ¶¶ 220, 222). By and large, they do not allege “that the
defendant acted with the required state of mind” as to “each act or omission alleged.” 15 U.S.C.
§ 78u-4(b)(2)(A). In other words, the Complaint’s allegations of involvement fail to show
“[D]efendants’ knowledge of facts or access to information contradicting their public statements.”
City of Roseville Employees’ Ret. Sys v. Horizon Lines, Inc.
,
For example, the Complaint alleges that “[t]he Proxy was in fact signed by Defendants Adolf and McGranahan.” (D.I. 19 ¶ 220). That is not enough, however. Defendants “can only be held liable under § 10(b) and Rule 10b-5 for [their] certifications if plaintiffs plead with sufficient particularity that either [defendant] was aware or should have been aware of the [alleged] scheme at the time those certifications were made.” City of Roseville , 686 F. Supp. 2d at 420. The Complaint does not bolster this asserted fact with any allegations that Adolf and McGranahan had specific knowledge of the falsity of any of the statements they were certifying in the Proxy.
Similarly, the Complaint claims that Board members “Carey and Muhtadie[] were Stone
Point managing directors with personal knowledge of, and involvement in, Stone Point’s efforts
to steer the Focus sale to CD&R.” (D.I. 19 ¶ 222;
see also
D.I. 30 at 27 (“Defendants allowed
Stone Point’s unique financial needs to drive the deal toward their preferred bidder.”)). Once
again, though, Plaintiffs are missing the link between this alleged “personal knowledge and
involvement” and any of the Company’s purported misrepresentations or omissions.
See In re
Suprema
,
Therefore, the Complaint’s allegations of “personal involvement and knowledge” are insufficient to raise a strong inference of scienter.
b. Motive and Opportunity Next, Plaintiffs argue that Defendants’ motive and opportunity to defraud the Company’s investors create an inference of scienter. (D.I. 30 at 26; D.I. 19 ¶¶ 224-25). They say that “the Special Committee members had strong personal and financial motivations to favor a deal with CD&R over a deal with other bidders,” because “[a]pproving the deal meant that each of the Special Committee Defendants received total cash payments from the Merger that ranged from $729,467 to $943,690.” (D.I. 19 ¶ 225). In addition, Plaintiffs contend, the Individual Defendants “preferred CD&R’s transaction proposal over WEG’s as it meant the executives would keep their jobs and Stone Point could roll over equity.” (D.I. 30 at 26).
i. Compensation
To begin, as Plaintiffs concede in their briefing, “allegations of motive and opportunity
cannot demonstrate scienter on their own.” (D.I. 30 at 26 n.16 ) (internal quotation marks omitted);
Avaya
,
At the outset, the Court notes that Plaintiffs’ “motive” allegation is implausibly framed.
The inference that Plaintiffs ask to Court to draw is that the Special Committee Defendants
recommended the CD&R Merger because they were being paid between $240,000 and $280,000
to vet it. But, as already discussed, the Special Committee’s project-based fee – which was
disclosed in the Proxy – was not dependent on the outcome of the Merger. The Special Committee
was compensated for their work irrespective of which bidder they selected – or whether they
selected any bidder at all. Thus, Plaintiffs’ allegation that “[a]pproving the deal meant that each
of the Special Committee Defendants received [certain] cash payments” is incorrect, and it is not
plausible that they were motivated to engage in misconduct on that basis. (D.I. 19 ¶ 225);
see
Avaya
,
ii. Post-Merger Job Retention
Plaintiffs additionally contend that Defendants were motivated to unfairly preference CD&R over other bidders because “CD&R made clear in an offer letter that it wanted to retain Focus’ senior executives . . . to run the Company after the Merger closed.” (D.I. 19 ¶ 224). By contrast, according to the Complaint, accepting WEG’s proposal “would likely jettison Focus’ existing management team.” ( Id. ¶ 76). Accepting those allegations as true, this theory nonetheless fails as a matter of law.
The Third Circuit has held that “[a]ssertions that a corporate officer or director committed
fraud in order to retain an executive position, or retain such a position with the merged company,
simply do not, in themselves, adequately plead motive.”
Digital Island
,
c. Core Operations
“Under the core operations doctrine, when the misrepresentations and omissions involve
core matters of central importance to the company and its principal executives, an inference of
scienter may arise.”
Lord Abbett Affiliated Fund, Inc. v. Navient Corp.
,
That flips the pleading burden on its head. It is Plaintiffs who must allege sufficient facts
to plausibly paint a picture that the Individual Defendants knew that their statements were false or
misleading – not Defendants’ burden to show that they didn’t.
GSC Partners
,
It is doubtless that the Individual Defendants grasped the gravity of the Merger. That is,
presumably, why they prepared and issued a multi-hundred-page Proxy. Still, Plaintiffs are
missing particularized “allegations of specific information conveyed to management and related
to fraud.”
Rahman
,
Accordingly, Plaintiffs have failed to adequately allege scienter.
3. Loss Causation
The last element of Plaintiffs’ Section 10(b) claim that Defendants challenge is loss
causation. Loss causation is the “causal connection between the material misrepresentation and
the loss” and its burden of proof upon the plaintiff is codified under the PSLRA.
Dura Pharms.,
Inc. v. Broudo
, 544 U.S. 336, 342 (2005). Under Rule 10b-5, causation is two-pronged: the
plaintiff must allege that (1) “but for the fraudulent misrepresentation or omission, the investor
would not have purchased or sold the security,” and (2) “the fraudulent misrepresentation or
omission actually caused the economic loss suffered.”
McCabe v. Ernst & Young, LLP
, 494 F.3d
418, 425 (3d Cir. 2007). But “[w]here the value of the security does not actually decline[] as a
result of an alleged misrepresentation, it cannot be said that there is in fact an economic loss
attributable to that misrepresentation.”
Semerenko v. Cendant Corp.
,
There are two types of loss causation claims under Section 10(b): “typical” and “non-
typical.”
McCabe
,
Plaintiffs assert that Defendants’ alleged misstatements caused their economic loss. (D.I. ¶ 231). The Court disagrees. In fact, Plaintiffs do not assert an economic loss at all. By their own admission, Named Plaintiffs were net purchasers of Focus stock (at its allegedly deflated price), who received Merger consideration above their purchase points. ( See D.I. 19-1, 19-2, 19- 3). As a result, the assets in question never actually incurred economic loss.
Likely recognizing their alleged deflation does not fit neatly into securities claims,
Plaintiffs cite to
In re MCI Worldcom, Inc. Sec. Litig.
, to suggest the securities laws permit such
theories to pass the motion to dismiss stage. (D.I. 30 at 28) (citing
Accordingly, the Court will dismiss Plaintiffs’ Section 10(b) claim in its entirety. B. Exchange Act § 14(a)
“Section 14(a) prevents corporate directors or officers from securing shareholder approval
for transactions by way of proxy solicitations which contain false or incomplete disclosure of
material information.”
Kaufman v. Allemang
,
Rule 14a-9 implements Section 14(a).
In re Keryx Biopharms., Inc.
,
“To prevail on a § 14(a) claim, a plaintiff must show that (1) a proxy statement contained
a material misrepresentation or omission which (2) caused the plaintiff injury and (3) that the proxy
solicitation itself, rather than the particular defect in the solicitation materials, was an essential link
in the accomplishment of the transaction.”
Tracinda Corp. v. DaimlerChrysler AG
,
1. Proxy Misstatement or Omission
Plaintiffs claim that the same alleged misrepresentations and omissions underscoring their
Section 10(b) claim support their Section 14(a) claim. (D.I. 19 ¶¶ 251, 254-55). Thus, because
the Court has already found that there were no misstatements or omissions in the Proxy, their
Section 14(a) claim fails.
See Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp.
,
2. Loss Causation
As with Section 10(b), Defendants argue that the Complaint fails to allege the second
element of a Section 14(a) violation, injury or loss causation. (D.I. 27 at 29). And they challenge
it for substantially for the same reasons they did under Section 10(b) – that a “bad deal” theory
cannot serve as the basis for causing a loss.
See In re Resolute Energy Corp. Sec. Litig
., 2021 WL
327385, at *3 (D. Del. 2021),
aff’d
,
On the law, Plaintiffs have it right. The Third Circuit recognizes “lost opportunity” as a
viable theory under Section 14(a).
See In re Resolute Energy Corp. Sec. Litig.
, No. 21-1412, 2022
WL 260059, at *3 (3d Cir. Jan. 27, 2022). In other words, a shareholder plaintiff may adequately
allege an economic injury on the basis that management’s misstatements or omissions led to the
“loss of a possible profit or benefit, [or] to the value of [his] investment.”
Gould v American-
Hawaiian S. S. Co.
,
Here, Plaintiffs do not adequately allege that they stood to gain “certain, fixed and
demonstrable profits” from any other deal. They do assert that Focus would have accepted WEG’s
superior $55 per share offer but for Defendants’ improper proxy recommendation to accept
CD&R’s offer at $53 per share. (D.I. 19 ¶¶ 97, 230). But their theory is rendered implausible by
the Proxy’s disclosure that the WEG offer was “unlikely to result in a definitive transaction”
because it was “preliminary and nonbinding and was subject to the completion of due diligence,
debt and equity financing contingencies and regulatory approvals.” (D.I. 28-2 at 43, 55). Indeed,
Plaintiffs acknowledge that point in the Complaint. (
See
D.I. 19 ¶ 97) (“WEG offered to purchase
Focus for $55 per share,
contingent on additional due diligence, obtaining financing, and
receiving exclusivity
.” (emphasis added)). Those hurdles are not trivial. And even accepting the
facts and inferences in the light most favorable to Plaintiffs, they allege only that WEG was willing
to move quickly on due diligence regarding its original $51.75 per share offer, not that there was
a substantial likelihood that the deal could close. (D.I. 19 ¶ 95; D.I. 41 at 27). Thus, “the very
fact of loss in this case is ‘wholly speculative.’”
Tse
,
Plaintiffs’ framework is akin to
Kuebler v. Vectren Corp.
,
The facts at hand are similar to those in
Kuebler
. Again, as the Complaint concedes,
WEG’s $55 per share offer was “contingent on additional due diligence, obtaining financing, and
receiving exclusivity.” (D.I. 19 ¶ 97). And, as in
Kuebler
, Plaintiffs allegations of a higher offer
(WEG’s) are missing allegations that it was as (or more) certain than the competing offer
ultimately accepted (CD&R’s).
See
Consequently, the Complaint fails to state with the particularity necessary that WEG’s $55 per share offer was a “certain” or “demonstrable” profit sufficient to satisfy loss causation under Section 14(a), and accordingly, the Court will dismiss the Section 14(a) claim.
C. Exchange Act Section 20(a)
Finally, the Complaint asserts claims against the Individual Defendants for control person
liability under Section 20(a).
See
15 U.S.C. § 78t(a). “Section 20(a) imposes liability on
controlling persons who aid and abet violations of the [Exchange] Act.”
In re Aetna, Inc. Sec.
Litig.
,
IV. CONCLUSION
For the foregoing reasons, Defendant’s motion to dismiss (D.I. 26) the Consolidated Class Action Complaint (D.I. 19) is GRANTED. An appropriate order will follow.
Notes
[1] The Special Committee Defendants are George LeMieux, Elizabeth R. Neuhoff, Greg S. Morganroth, and Joseph R. Feliciani. (D.I. 19 ¶ 36).
[2] The Board Defendants include four members of Focus’s Board: Rudy Adolf, Rajini Sundar Kodialam, James D. Carey, Fayez S. Muhtadie. (D.I. 19 ¶ 41).
[3] The Officer Defendants include Focus’s CEO (Adolf), CFO (James Shanahan), General Counsel (J. Russell McGranahan), and Senior Managing Director and Head of M&A (Leonard Chang). (D.I. 19 ¶ 45).
[4] The Complaint details a thorough chronology of many of the events surrounding the transaction in dispute. ( See D.I. 19 ¶¶ 52-117). For brevity, the Court provides a summary of relevant facts and will later refer to facts not restated here but nonetheless alleged in the Complaint.
[5] Plaintiffs object to Defendants’ incorporation of various documents in their briefs in
support of the motion to dismiss. (D.I. 30 at 9-10). It is well-settled, however, that courts
may take judicial notice of matters of public record and documents integral to the
complaint, such as the Proxy statement and the Special Committee minutes here, both of
which are referenced in the Complaint.
Schmidt
,
[6] The
Omnicare
framework initially established a basis to evaluate opinion falsity under
Section 14(a) claims, while the Third Circuit separately developed a materiality standard
under Section 11 claims.
See Jaroslawicz v. M&T Bank Corp
., 962 F.3d 701, 717 n.6
(3d Cir. 2020) (“The Supreme Court’s decision in
Omnicare
provides the relevant
framework for assessing the falsity of opinion statements under § 14(a).”) (internal
quotations omitted);
Merck
,
[7] The Complaint stops short of alleging that CD&R
in fact
promised the Officer Defendants
jobs, instead alleging that CD&R “would
likely
continue to employ existing management.”
(D.I. 19 ¶ 143) (emphasis added). Plaintiffs do not allege that continuing offers of
employment for management ever materialized. And a court in this District has stated that
intent to continue employment without a formal offer cannot serve as the basis of a material
omission or misrepresentation, because no actual incentive is being conveyed.
Wayne
Cnty.
,
[8] Although somewhat unclear, the Court interprets this as a challenge to the roll-over interest Stone Point received under the Support Agreement. (D.I . 19 ¶ 140).
[9] For example, Plaintiffs assert that private equity firm TPG, Inc. (“TPG”) was allegedly excluded from the process until after the Merger’s announcement, yet they also assert that TPG and Focus’ CEO held meetings about the Merger months before its announcement. (D.I. 19 ¶¶ 74, 205).