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MAZ Partners LP v. Shear

United States District Court, D. Massachusetts

November 21, 2016

MAZ PARTNERS LP, Individually and on Behalf of Others Similarly Situated, Plaintiff,
v.
BRUCE SHEAR, et al., Defendants.

          MEMORANDUM AND ORDER

          Patti B. Saris Chief United States District Judge.

         INTRODUCTION

         This shareholder class action arises from a corporate merger. This Court assumes familiarity with its prior rulings and the factual record of this case. MAZ Partners LP v. Shear (MAZ I), No. CV 11-11049, 2016 WL 183519 (D. Mass. Jan. 14, 2016) (order on class certification); MAZ Partners LP v. Shear (MAZ II), No. CV 11-11049, 2016 WL 4574640 (D. Mass. Sept. 1, 2016) (order on summary judgment).

         Plaintiff MAZ Partners LP (“MAZ”) moves to modify this Court's January 14, 2016 order on class certification. The defendants oppose modification and move to reconsider a portion of this Court's September 1, 2016 order on summary judgment.

         For the reasons stated, the defendants' motion for partial reconsideration (Docket No. 285) is ALLOWED in part and DENIED in part. MAZ's motion to modify (Docket No. 271) is DENIED.

         BACKGROUND

         On January 14, 2016, this Court certified a class defined as follows:

All Class A shareholders of PHC, Inc., who either abstained from voting or voted against the PHC-Acadia merger in the October 26, 2011 shareholder vote, who held their Class A shares immediately prior to October 26, 2011, and whose shares were converted to Acadia shares after the effective merger date, except Defendants and any person, firm, trust, corporation, or other entity related to, or affiliated with, any of the Defendants.

MAZ I, 2016 WL 183519, at *9.

         MAZ had sought a broader class definition that also included Class A shareholders who had voted for the merger, but this Court held that MAZ was not typical of such shareholders because those shareholders faced an acquiescence defense that MAZ did not. Id. at *4-6. This Court rejected MAZ's argument that omissions in the proxy made the shareholders who voted for the merger so poorly informed that the acquiescence defense would not apply. Id. at *6. This Court did, however, note that: “If, after ruling on the parties' motions for summary judgment, the Court concludes that the Class A shareholders were not fully informed based on material omissions in the proxy, the plaintiff may ask this Court to revisit the issue of typicality and the Court may indeed acquiesce.” Id. at *6 n.6.

         On September 1, 2016, this Court stated in its order on summary judgment that there was a triable issue of whether there was a material nondisclosure in the proxy. MAZ II, 2016 WL 4574640, at *5 (“The plaintiff has presented evidence from which a jury could find that the defendants failed to fully inform the shareholders that the SRR fairness opinion did not address the $5 million Class B payment or the $90 million pre-merger dividend. The Final Proxy itself was over 200 pages long and over 500 pages long with attachments. What shareholder is going to wade through the proxy and then jump into the attachments? Even Grieco was confused about the scope of the fairness opinion.”).

         MAZ moves to modify the order on class certification on the basis that this Court's finding of a triable issue of inadequate disclosure supports an expansion of the class definition to include Class A shareholders who voted for the merger. In response, the defendants move for reconsideration of this Court's statement in the summary judgment order that there is a triable issue of whether the scope of the Stout Risius Ross, Inc. (“SRR”) fairness opinion was adequately disclosed. The defendants' motion for reconsideration also asks the Court to rule as a matter of law that the proxy fully and adequately disclosed all material facts.

         DISCUSSION

         I. Disclosure of the Scope of the SRR Fairness Opinion

         This Court's summary judgment order found that the proxy inadequately disclosed the scope of the SRR fairness opinion. While the fairness opinion was attached in full to the proxy, this Court was concerned that the proxy itself failed to adequately disclose the fact that the SRR did not address the fairness of the $5 million paid directly to Class B Common stockholders.

         The proxy initially stated that SRR was asked to evaluate the fairness “to the holders of PHC's Class A Common Stock and Class B Common Stock . . ., of the merger consideration to be received by such holders (in the aggregate), and to the holders of PHC's Class A Common Stock, of the merger consideration to be received by such holders (in the aggregate).” Docket No. 187, Ex. A, at 2-3. A later portion of the proxy, in bold and italic font, stated: “Although the PHC board of directors received a ‘fairness opinion' with respect to some aspects of the merger consideration, the opinion is limited and does not address the ‘fairness' of all aspects of the merger.” Id. at 20. The proxy then added that “SRR was not requested to opine as to, and its opinion does not in any manner address . . . the amount of the merger consideration to be paid to holders of PHC's Class B Common Stock, the amount of any distribution paid to Acadia stockholders, the allocation of the merger consideration among the PHC stockholders or the amount per share of the merger consideration, [or] the amount of the merger consideration paid to the holders of PHC's Class A Common Stock relative to the merger consideration paid to the holders of PHC's Class B Common Stock or relative to the merger consideration paid to all holders of PHC common stock.” Id.

         While the language on Pages 2 and 3 of the proxy is opaque and confusing, the above-quoted disclosure on Page 20 of the proxy (which was not flagged in the initial briefing) was adequate to clarify to shareholders that the SRR opinion did not separately address the fairness of the $5 million merger compensation.

         However, this disclosure does not end the analysis because MAZ strenuously contends that the proxy improperly failed to disclose that the Board had no basis whatsoever for opining on the fairness of the $5 million Class B payment. MAZ argues that the proxy was misleading because it stated on Page 2 that “[a]fter careful consideration, the PHC board of directors . . . determined that the merger agreement is fair to, and in the best interests of, the stockholders of PHC” while failing to disclose it had no basis for its opinion that the $5 million Class B payment was fair.

         MAZ relies primarily on Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015). In Omnicare, a company's registration statement had stated essentially: “[W]e believe we are obeying the law.” Id. at 1327. The Supreme Court suggested that if that statement had been made without having consulted a lawyer or if that statement had been made in the face of contrary legal advice, the statement might be misleading through omission. Id. at 1328-29.

         However, the Omnicare Court also stated that to succeed in proving a misleading omission through this theory, “the investor cannot just say that the issuer failed to reveal its basis [for an opinion statement].” Id. at 1332. In other words, it is not enough to say in a conclusory fashion that the Board “omitted to state facts necessary to make the statements made not misleading” or that the Board lacked “reasonable grounds for the belief” it expressed. Id. at 1333. Rather, “[t]he investor must identify particular (and material) facts going to the basis for the issuer's opinion -- facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have --whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” Id. at 1332. In Omnicare, the Court flagged a specific possible omission: that an attorney had warned the defendant about a particular legal exposure. Id. at 1333. The Court instructed the trial court on remand to examine the attorney's warning, with a focus on the attorney's “status and expertise” and the context of the statements. Id. Omnicare provides the blueprint for this Court's analysis.

         As an initial matter, this Court rejects the defendants' argument that the logic of Omnicare does not apply because Omnicare was a case under Section 11 of the Securities Act of 1933, which is not pleaded in this case. Section 11 attaches liability to a registration statement that “omit[s] to state a material fact . . . necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). While there is no such statutory definition of materiality in this case, the standard for materiality here similarly allows for an omission of certain facts from corporate disclosures to be material. See MAZ II, 2016 WL 4574640, at *4 (quoting Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001)); see also Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985). Also, Omnicare addressed registration statements, which are “formal documents” for which readers “do not, and are right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff judgments, of the kind that an individual might communicate in daily life.” Omnicare, 135 S.Ct. at 1330. Proxy statements fit that description as well. Omnicare's logic can be extended to the context of this case.

         The defendants argue that even if the logic of Omnicare applies, a reasonable reader of the proxy would not understand there to be any misleading omission. See Tongue v. Sanofi, 816 F.3d 199, 210 (2d Cir. 2016) (“The core inquiry [under Omnicare] is whether the omitted facts would ‘conflict with what a reasonable investor would take from the statement itself.'” (quoting Omnicare, 135 S.Ct. at 1329)). Page 2 of the proxy stated that “[a]fter careful consideration, the PHC board of directors . . . determined that the merger agreement is fair to, and in the best interests of, the stockholders of PHC.” Docket No. 187, ...


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