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In re Analogic Corp. Shareholder Litigation

United States District Court, D. Massachusetts

September 30, 2019

In re ANALOGIC CORP. SHAREHOLDER LITIGATION

          MEMORANDUM AND ORDER ON MOTION TO DISMISS

          ALLISON D. BURROUGHS, U.S. DISTRICT JUDGE.

         Lead Plaintiff Louis Buttny (“Buttny”) brings this shareholder class action on behalf of the former shareholders of Analogic Corporation (“Analogic” or the “Company”) against the Company and several members of its board of directors (the “Board, ” as parties the “Individual Defendants, ” and together with Analogic, “Defendants”)[1] for violating federal securities laws in connection with the sale of the Company to Altaris Capital Partners, LLC (“Altaris”). Defendants arranged the sale to Altaris for $84.00 per share and succeeded in obtaining stockholders' approval. [ECF No. 45 (“Amended Complaint” or “Am. Compl.”) ¶ 12]. The sale price was well below Analogic's stock closing price of $96.05 just hours before the merger was announced. [Id.]. Buttny claims that Defendants violated Section 14(a) of the Securities Exchange Act of 1934 (“Section 14(a)”), 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder (“Count I”), see [Am. Compl. ¶¶ 101-07], and that the Individual Defendants also violated Section 20(a), 15 U.S.C. § 78t(a), (“Count II”) by including materially false and misleading statements in the proxy that was disseminated to shareholders to secure their approval of the sale, [Am. Compl. ¶¶ 108-12]. Presently before the Court are the Individual Defendants' and Analogic's respective motions to dismiss. [ECF Nos. 46, 49]. For the reasons discussed below, the motions to dismiss are GRANTED and the Amended Complaint is dismissed with prejudice.

         I. BACKGROUND

         The following facts are drawn from the Amended Complaint, the well-pleaded allegations of which are taken as true for the purposes of evaluating the motion to dismiss. See Ruivo v. Wells Fargo Bank, N.A., 766 F.3d 87, 90 (1st Cir. 2014) (citing A.G. ex rel. Maddox v. Elsevier, Inc., 732 F.3d 77, 80 (1st Cir. 2013)). Certain details are also culled from documents attached to the Amended Complaint and from documents whose authenticity is not disputed by the parties. See Álvarez-Maurás v. Banco Popular of P.R., 919 F.3d 617, 622 (1st Cir. 2019) (citing Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993)).

         Before the sale at issue here, Analogic was a publicly traded company that designed, manufactured, and sold medical and security technology components to healthcare and industrial customers. [Am. Compl. ¶ 40]. It operated three segments: (i) medical imaging, which included computer tomography, magnetic resonance imaging, and digital mammography; (ii) ultrasound; and (iii) security and detection, which sold medical technology for use in automated baggage inspections. [Id.].

         On June 6, 2017, the company reported revenue declines in its medical imaging and ultrasound segments for its third quarter, which were at least partially offset by revenue growth in its comparatively smaller security and detection segment. [Id. ¶ 41]. Management assured stockholders that these declines were temporary and that the Company's Board-approved financial operating plan (the “Operating Plan”) suggested Analogic would experience a turnaround in 2018 and would be able to return long-term value to its shareholders. [Id.].

         An activist shareholder, Voce Capital Management, LLC (“Voce”), used the disappointing revenue numbers as an opportunity to begin pushing for a near-term sale of the Company. [Id. ¶¶ 4, 42]. On June 26, 2017, Analogic CEO Fred Parks agreed to meet with Voce, and Analogic subsequently terminated its CFO and retained Citigroup Global Markets, Inc. (“Citi”) as its financial advisor. [Id. ¶¶ 43-45]. On August 30, 2017, Voce announced its intention to nominate four candidates to replace Board members at Analogic's 2017 shareholder meeting. [Id. ¶ 47]. In September 2017, Analogic held discussions with Voce and announced that it had initiated a process for the sale of the entire Company to maximize shareholder value on an accelerated timeline. [Id. ¶¶ 48-52]. On October 12, 2017, Analogic and Voce entered a cooperation agreement under which Analogic agreed to add Voce's nominee Joseph Whitters as a new Board member and to form a strategic alternatives committee consisting of Defendants Whitters, Bernard Bailey, and Jeffrey Black (the “Committee”) to explore a sale. [Id. ¶ 53]. In exchange, Voce agreed to withdraw its notice of intent to nominate new board candidates and agreed not to disparage the Board or Analogic's management. [Id. ¶ 54].

         According to the proxy, during the sale process, Analogic was in contact with 75 potential strategic and financial buyers, 38 of whom entered into non-disclosure agreements and received confidential information concerning the Company. [ECF No. 48-1 at 44]. From November 15 to November 17, 2017, Analogic received several proposals from entities interested in acquiring a part or all of the Company, [Am. Compl. ¶ 55], including Altaris, who submitted a preliminary, non-binding indication of interest in acquiring the Company for a price of $80.00 per share. [ECF No. 48-1 at 45]. During December 2018, Analogic evaluated the bids and discussed the need to perform reverse due diligence on the companies that had proposed purchasing Analogic for a combination of stock and cash. [Id. at 47].

         In January 2018, Analogic began experiencing the turnaround that management had predicted. [Am. Compl. ¶ 57]. Management informed the Board that the Company's financial projections needed to be revised upward to account for the improved performance and outlook. [Id. ¶ 58]. On January 15, 2018, the Committee approved a revision to the Operating Plan to reflect the improved performance and the anticipated effects of tax reform legislation that had been passed in December 2017 (the “Revised Operating Plan”). [Id. ¶ 59]. The Revised Operating Plan reflected expectations of compound annual growth of 10 percent in the ultrasound segment as compared to the 6 percent projected by the original Operating Plan. [Id.]. On January 17, 2018, the Revised Operating Plan was provided to companies that the Board considered viable bidders in the sales process, including Altaris. [Id. ¶ 60; ECF No. 48-1 at 47.] Between January 29 and 31, 2018, three companies submitted a second round of bids to acquire Analogic for between $80.00 and $85.00 per share. [Am. Compl. ¶ 61]. Altaris was the sole bidder to submit an all-cash offer and proposed acquiring Analogic for $82.50 per share. See [ECF No. 48-1 at 48].

         On February 1, 2018, management informed the Board that Analogic would need to revise its financial projections upward once again. [Am. Compl. ¶ 62]. On February 8, 2018, management prepared an updated financial forecast for 2018 that reflected increasing confidence in the ultrasound segment and expected revenue growth in the security and detection segment. [Id. ¶ 63]. The updated projections were provided to the Board, Citi, and the three remaining viable bidders. [Id. ¶ 64].

         Management incorporated the updated projections into an updated Revised Operating Plan and extrapolated to provide projections through fiscal year 2022. [Id. ¶ 65]. The five-year extrapolations assumed a decline in revenue growth to 3 percent in 2021 and 2022 from the 11 percent projected in 2020 (the “Case 1 Projections”). [Id. ¶ 65]. Citi performed a discounted cash flow (“DCF”) analysis using the Case 1 Projections and found an implied equity value per share of $84.40 to $108.20. [Id.].

         On February 26 and 27, 2018, the three remaining companies in the bidding process submitted a third round of bids. [Id. ¶ 67]. The bids were valued at $80.00, $82.50, and $85.00 per share, with Altaris bidding $82.50 per share in cash. [Id.; ECF No. 48-1 at 50].[2] The $85.00 bid was composed of both stock and cash components, and its valuation was therefore subject to fluctuation based on the value of the acquiring company's stock. [ECF No. 48-1 at 50]. According to the proxy, the value of the purported $85.00 bid had declined to approximately $80.60 based on the acquiring company's closing price as of the date of the bid letter. [Id.].

         On February 28, 2018, the Board held a meeting where Citi presented its DCF analysis. [Am. Compl. ¶ 68]. In addition to the analysis that Citi had prepared based on the Case 1 Projections, Citi presented a DCF analysis using projections that were compiled by removing the value expected by management from a channel development initiative for Analogic's medical computer tomography (the “CT Initiative”) (the “Case 2A Projections”). [Id. ¶ 69]. At that time, two bidders had questioned the value of the Company's CT Initiative during meetings with management that occurred in conjunction with the bidding process. [ECF No. 48-1 at 50-51]. The DCF analysis based on the Case 2A Projections yielded an implied value of $81.25 to $103.65 per share. [Am. Compl. ¶ 69].

         After being asked to consider increasing its bid, Altaris submitted a revised proposal to acquire Analogic for $84.00 in cash on March 4, 2018. [Id. ¶ 70; ECF No. 48-1 at 51]. At a March 8, 2018 meeting, the Board determined that Altaris's offer was the only viable bid for Analogic. [Am. Compl. ¶ 72]. That bid remained below the $84.40 low end of the value range implied by Citi's Case 1 Projections DCF analysis and on the low end of the range implied by the Case 2A Projections. Additionally, the bid was well below the market price for Analogic's stock which, spurred by strong quarterly financial results, was trading above $94.00. [Id. ¶ 73]. The Board therefore asked Citi for examples of previous transactions where a company was acquired at a price below the price at which its stock was trading and also requested that its counsel consider the implications for board members' fiduciary duties under the circumstances. [Id. ¶ 74].

         Two weeks later, on March 22, 2018, Citi presented a revised DCF analysis to the Board and Analogic's senior management that used a more pessimistic set of projections and applied a 25 percent reduction in annual revenue growth and in non-GAAP EBITDA margin expansion (the “Case 2B Projections”). [Id. ¶ 75]. This DCF analysis implied a value of $74.40 to $94.15, making the Altaris offer appear relatively attractive. [Id. ¶ 76]. The Committee responded by instructing Citi to use the Case 2B Projections for the purpose of preparing an opinion on the financial fairness of the merger. [Id. ¶ 77].

         On March 27, 2018, the bidder that had previously submitted an offer to acquire Analogic for $85.00 per share based on an above-market valuation of that bidder's stock, submitted a new offer again at $85.00 per share, consisting of 30 percent cash and 70 percent stock based on the spot price of the bidder's stock. [Id. ¶ 78]. The Board determined, however, that the bidder was not a strategic fit and that it preferred the proposed merger with Altaris at $84.00 per share in cash. [Id. ¶¶ 79-80]. On April 10, 2018, Citi delivered an opinion that $84.00 per share was fair from a financial point of view and the Board unanimously voted to approve the merger. [Id. ¶ 81]. On that day, Analogic's stock closed at $96.05 per share. [Id. ¶ 82].

         On May 16, 2018, Analogic filed and disseminated the proxy soliciting stockholders' approval of the merger. [Id. ¶ 82]. The proxy was supplemented on June 12, 2018 in advance of a June 22, 2018 vote. [Id. ¶¶ 83, 99]. The proxy recommended that shareholders vote in favor of the merger and stated that the merger was “in the best interests of the Company and its shareholders” and that $84.00 per share was “more favorable to the Company shareholders” than all other alternatives, including remaining as a standalone company. [Id. ¶ 84]. The Proxy stated that this opinion was based on several factors, including:

The Company's Past Financial and Operating Performance. Since fiscal 2013, the Company has experienced a period of inconsistent performance, characterized by flat to declining revenues and earnings. Over the period from fiscal 2013 through fiscal 2017, the Company's revenues have declined at a compound annual rate of approximately -3%. The Board also considered the past performance of representative peer companies and the history of third-party analysts making significant negative adjustments to the Company's outlook in each year over this period.
. . .
The Board considered that these factors raised significant concerns regarding the achievability of the Company's financial operating plan, noting in particular that, when compared to the Company's four previous operating plans, the Company's actual performance has been significantly less favorable than the performance projected. This raised significant doubts that the approximately -3% compound annual rate of revenue decline over the past four years could be reversed into the 7.8%, 5.3% and 4.0% compound annual growth rate of the revenues reflected in Case 1, Case 2A and Case 2B, respectively, over the projected periods of fiscal 2018 to 2022. Even if achieved, the revenues reflected in the first two years of each of Case 1, Case 2A and Case 2B would be at the lowest levels recorded by the Company since 2014, in the case of Case 1, and since 2011, in the case of Case 2A and Case 2B.

[Id. ¶¶ 85-86]. The proxy also stated that Defendants instructed Citi, for the purpose of their financial analysis, to assume the Case 2B Projections were the best projections for valuing the Company's stock in comparison. [Id. ¶ 88]. Specifically, the proxy indicated that the projections reflected “the best currently available estimates and judgments of the management of Analogic as to the future financial performance of Analogic” and that “Case 2B represented the most likely standalone financial forecast for the Company's business.” [Id.]. The proxy advised shareholders that the Committee had concluded that the Case 2B Projections were the best because:

The Committee expressed its view that neither Case 1 nor Case 2A adequately reflected the risks associated with the achievability of management's operating plan generally, including long-term macroeconomic trends in the maturing medical imaging market, increasing global competition from larger and better capitalized competitors, increasing industry consolidation and the Company's ability to develop new market channels for its products, as well as its view that certain bidders appeared to share this view and noted that the sensitivity analysis illustrated that all three proposals reflected appropriate valuations on a risk adjusted basis.
In assessing the validity of these risk adjustments [i.e., the 25% haircut from the Case 2A projections to the Case 2B projections], the Committee considered the Company's past performance, the performance of representative peer companies and the history of third-party analysts' adjustments to the Company's outlook. The Committee concluded that the risk adjustments in Case 2B were appropriate and consistent with the Committee's expectations for the business and instructed Citi to consider Case 2B as the best representation of the Company's future prospects.

[Id. ¶ 89].

         Although the Board expressed the view that the Case 2B Projections represented the best standalone financial forecast for the Company's business, the 215-page proxy disclosed all three financial projections-Case 1, Case 2A, and Case 2B-and included an extensive description of the bidding process. See [ECF No. 48-1 at 64-70]. The proxy disclosed the timing of the development of the Case 2B Projections, making it clear that the DCF analysis based upon those projections was completed in late March, well after Altaris submitted its $84.00 per share offer. [Id. at 52-54]. The proxy also contained cautionary statements. For example, it explained that “[r]eaders should not place undue reliance on these forward looking statements, ” and “[t]he estimates contained in Citi's analyses and the valuation ranges resulting from any ...


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