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Vardakas v. American DG Energy, Inc.

United States District Court, D. Massachusetts

March 2, 2018

LEE VARDAKAS, Individually and on Behalf of All Others Similarly Situated, Plaintiff,


          Leo T. Sorokin United States District Judge.

         This class action case, brought by and on behalf of William Chase May[1] and other similarly situated holders (“the Vardakas class”) of the common stock of American DG Energy Inc. (“American DG”), alleges American DG; Tecogen; Tecogen.ADGE Acquisition Corp. (“Merger Sub”); Cassel Salpeter & Co., LLC (“Cassel”); and various individuals[2] violated securities laws and state common law duties all in connection with the merger of American DG and Tecogen. The Defendants filed a joint Motion to Dismiss, Doc. No. 41, and May, on behalf of May and the Vardakas class, opposed, Doc. No. 45.

         I. BACKGROUND

         On February 15, 2017, Vardakas commenced this class action, essentially alleging the merger between Defendants American DG and Tecogen was the result of a conflicted sales process, which undervalued the common stock of American DG, and that the Defendants disseminated a misleading Form S-4 Registration Statement containing material omissions in order to convince American DG's unaffiliated shareholders to vote in favor of the unfair transaction.

         On April 21, 2017, William Chase May and Lee Vardakas jointly moved to appoint May as lead plaintiff in the action, Doc. No. 18, and on May 2, 2017, the Court granted their motion, Doc. No. 25. Thereafter, on June 19, 2017, May filed an amended class action complaint (“the Complaint”), identifying May as the lead plaintiff. Doc. No. 34.

         On July 19, 2017, the Defendants filed a motion to dismiss the amended complaint. Doc. No. 41.


         The Complaint alleges five counts against Defendants all arising from the proposed (now consummated) merger of American DG and Tecogen. Doc. No. 34. First, the Complaint alleges all Defendants violated Section 14(a) of the Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder, 17 CFR § 240.14a-9, by preparing, reviewing, and disseminating an incomplete and misleading proxy statement to shareholders (Count I). Doc. No. 34 at ¶¶ 113-25. Second, it alleges the Director and Officer Defendants violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), by exercising control over American DG and Tecogen during which time American DG and Tecogen violated the Exchange Act (Count II). Id. at ¶¶ 126-33. Third, it claims that the Director and Officer Defendants, as well as John and George Hatsopoulos, breached their common law fiduciary duties owed to American DG shareholders by virtue of their positions as directors and officers, and as control group, respectively (Counts III and IV). Id. at ¶¶ 134-41. Finally, the Complaint alleges George Hatsopoulos, Tecogen, and Merger Sub are liable for aiding and abetting the Director and Office Defendants in breaching their common law fiduciary duties (Count V). Id. at ¶¶ 142-145.


         To survive a motion to dismiss, a complaint “must provide fair notice to the defendants” and “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Bruns v. Mayhew, 750 F.3d 61, 71 (1st Cir. 2014) (citation and internal quotation marks omitted); Ashcroft v. Iqbal, 556 U.S. 662, 678 (citation and internal quotation marks omitted). “The plausibility standard is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (citation omitted); see also id. at 679 (noting that a complaint must “permit the court to infer more than the mere possibility of misconduct”) (citation omitted). “Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679 (citation omitted).

         A. Section 14(a)/Rule 14a-9 Claims

         SEC Rule 14a-9, promulgated pursuant to Section 14(a) of the Exchange Act, prohibits solicitation by means of a proxy statement containing “any statement which, at the time and in the light of the circumstances under which it is made . . . omits to state any material fact necessary in order to make the statements therein not false or misleading.” 17 CFR § 240.14a-9(a).

         To prevail on a claim under SEC Rule 14a-9, a plaintiff must show “(1) the proxy statement contained a material misstatement or omission, which (2) caused plaintiff's injury, and (3) that the proxy solicitation . . . was an essential link in the accomplishment of the transaction.” In re JP Morgan Chase Secs. Litig., 363 F.Supp.2d 595, 636 (S.D.N.Y. 2005).

         “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). “It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote . . . [but just that it] would have assumed actual significance in the deliberations of a reasonable shareholder . . . [i.e., ] would have been viewed by the reasonable investor as having significantly altered the ‘total mix' of information made available.” Id. “The ‘total mix' of information available to a shareholder may include information outside of the proxy statement itself where, given the particular solicitation, a reasonable investor would be likely to consider such outside information.” Kaplan v. First Hartford Corp., 447 F.Supp.2d 3, 8 (D. Mass. 2006). With respect to the causation element, “[s]o long as the misstatement or omission was material, the causal relation between violation and injury is sufficiently established” if “the proxy solicitation itself . . . was an essential link in the accomplishment of the transaction.” TSC Indus., 426 U.S. at 444.

         Finally, “under the additional pleading requirements imposed by the Private Securities Litigation Reform Act (“PSLRA”), in order to survive a motion to dismiss, the plaintiff must specify each statement alleged to have been misleading [or rendered misleading by a material omission] and the reason or reasons why the statement is misleading.” Ganem v. InVivo Therapeutics Holdings Corp., 845 F.3d 447, 454-55 (1st Cir. 2017) (quotation omitted); 15 U.S.C. § 78u-4 (“In any private action arising under [the Exchange Act] in which the plaintiff alleges that the defendant . . . (B) omitted to ...

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