In re Tangoe, Inc.

          RULING AND ORDER ON MOTION TO DISMISS

          THE HONORABLE VICTOR A. BOLDEN UNITED STATES DISTRICT JUDGE

         Plaintiffs, owners of shares of Tangoe common stock, filed a consolidated class action Complaint (“CAC”) against David Coit, James D. Foy, Gary Golding, Ronald Kaiser, Jackie R. Kimzey, Gerald D. Kokos, Richard Pontin, Tangoe, Inc., and Noah Walley (“Defendants”), alleging violations of Sections 14(e), 14(d)(4), and 20(a) of the Securities Exchange Act of 1934 (“the Exchange Act”), 15 U.S.C. §§ 78n(d)(4), 78t(a), and SEC Rule 14d-9, in connection with a tender offer for the sale of outstanding shares of Tangoe in 2017.^[1] CAC ¶¶ 1, 11, ECF No. 46.

         Defendants have moved to dismiss this case, arguing that Plaintiffs failed to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as under the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(2). Mot. Dismiss, ECF No. 47.

         For the reasons that follow, Defendants' motion to dismiss is GRANTED.

         To the extent that the deficiencies identified in this ruling can be addressed, Plaintiffs may file a motion for leave to amend the Complaint by September 7, 2018.

         I.FACTUAL AND PROCEDURAL BACKGROUND

         A. Factual Allegations

         1. The Parties

         Plaintiffs bring claims against the following Defendants:

. Tangoe, a Delaware Corporation and a “global telecom expense management solutions company.” CAC ¶ 12. Previously based in Connecticut and now based in New Jersey, Mot. Dismiss at 2, Tangoe's stock traded on the National Association of Securities Dealers Automated Quotations (“NASDAQ”), under the symbol “TNGO, ” until NASDAQ delisted it on March 14, 2017. CAC ¶ 12.

. James D. Foy, who allegedly served as Tangoe's Chief Executive Officer (“CEO”) since May 2, 2016, and as a member of its Board of Directors (the “Board”) since March 2014. Id. ¶ 13.

. Gerald G. Kokos, who allegedly served as a member of Tangoe's Board since September 2002, and as its Lead Director and Executive Chairman since May 2, 2016. Id. ¶ 14.

. David M. Coit, who allegedly has served as a member of the Board since August 2006. Id. ¶ 15.

. Gary Golding, who allegedly has served as a member of the Board since September 2002. Id. ¶ 16.

. Ronald W. Kaiser, who allegedly has served as a member of the Board since January 2009. Id. ¶ 17.

. Jackie R. Kimzey, who allegedly has served as a member of the Board since March 2008. Id. ¶ 18.

. Richard S. Pontin, who allegedly has served as a member of the Board since March 2007. Id. ¶ 19.

. Noah J. Walley, who allegedly has served as a member of the Board since July 2008. Id. ¶ 20.

         2. Securities and Exchange Commission (“SEC”) and NASDAQ Filings

         Plaintiffs allege that, on March 7, 2016, Defendants announced that Tangoe's financial statements for 2013, 2014, and the first three quarters of 2015 needed revision because of “errors in recognizing revenue, primarily non-recurring revenue.” CAC ¶ 33. The announcement allegedly assured investors that Tangoe's core operations and cash flow would be “minimally affected or unaffected.” Id. Tangoe's stock price allegedly immediately dropped after the announcement, but “several analysts maintained price targets ranging from $7.00 to $14.00 per share.” Id.

         On March 15, 2016, in a Form 12b-25^[2], Tangoe allegedly reported that it would not timely file its Form 10-K.^[3] Id. ¶ 34. Tangoe allegedly stated that “[a]lthough the Company cannot at this time estimate when it will complete the Restatement and file its restated financial statements and its Form 10-K for the year ended December 31, 2015, it is diligently pursuing completion of the Restatement and intends to file the Form 10-K as soon as reasonably practicable.” Id. ¶ 34 (emphasis added by Plaintiffs in CAC). NASDAQ allegedly responded by informing Tangoe that it was in violation of NASDAQ rules and could be delisted if it did not comply by May 20, 2016. Id.

         In April 2016, Tangoe allegedly replaced its Chief Financial Officer (“CFO”) Gary P. Martino with an interim CFO, Jay Zager. Id. ¶ 35. In early May, Tangoe allegedly replaced its Chairman and CEO, Albert R. Subbloie, Jr., with an interim CEO, James D. Foy, and an interim Chariman, Gerald G. Kokos. Id. On May 16, 2016, Tangoe allegedly engaged Mr. Stifel as its advisor. Id.

         On May 19, 2016, Tangoe allegedly announced that it had received a second notice from NASDAQ, indicating it was not in compliance with NASDAQ's rules requiring periodic financial reporting with the SEC. Id. ¶ 36. Plaintiffs allege that, “[a]gain, the Company stressed that they were diligently pursuing completion of the Restatement and intended to file its 10-Q for the quarterly period ended March 31, 2016, as soon as reasonably practicable.”^[4] Id.

         On August 10, 2016, Tangoe allegedly filed another Form 12b-25, stating that its quarterly Form 10-Q for the period ending on June 30, 2016, would not be timely filed. Id. ¶ 37. Plaintiffs allege that “[t]he Company went on to explain that the amount of misstated revenue was significantly more than previously announced, ” and that “the Restatement would not be completed prior to September 12, 2016.” Id. Tangoe allegedly sought another extension from NASDAQ to regain compliance with the filing requirements, and NASDAQ stated that, if Tangoe did not “submit an updated plan for the Restatement, ” by August 30, 2016, it would be delisted. Id.

         On September 13, 2016, NASDAQ allegedly sent Tangoe a letter with a plan to delist Tangoe's stock as a result of its repeated violations of filing requirements. Id. ¶ 38. NASDAQ allegedly indicated that the stock would be suspended starting September 22, 2016, and that NASDAQ would file a Form 25-NSE with the SEC, which would remove the company's listing from NASDAQ. Id. Tangoe stated that it planned to appeal the decision, submit an amended plan to deal with the Restatement, and request a maximum extension to file until March 2017. Id.

         On November 9, 2016, NASDAQ allegedly granted Tangoe a maximum extension until March 10, 2017, to finish the Restatement and come up to date with all required filings. Id. ¶ 39. Plaintiffs allege that “[t]he Company stated that it was hopeful that it would regain compliance with Nasdaq's filing requirement, but made no assurances.” Id.

         On November 10, 2016, Tangoe allegedly filed another Form 12b-25, indicating that it would not timely file a quarterly Form 10-Q for the period ending on September 30, 2016. Id. ¶ 40. Plaintiffs allege that “[t]his time, the Company indicated that the misstated revenue was nearly double the amount originally represented, and that operating income would be substantially affected.” Id. (emphasis added by Plaintiffs in CAC). Tangoe also allegedly stated:

The internal investigation overseen by the Audit Committee in connection with the Restatement is substantially complete. The Company has also substantially completed its internal review of the financial statements for the periods being restated and is currently working with the Company's independent registered public accounting firm as it audits the restated year-end financial statements. In addition, the Company is completing its closing procedures and preparing interim financial statements for its quarters ending March 31, 2016, June 30, 2016 and September 30, 2016, after which it will work with its independent registered public accounting firm as it reviews the interim financial statements.

Id. (emphasis added by Plaintiffs in CAC).

         Plaintiffs alleged that, on December 14, 2016, “[d]ue to the potential uncertainty of holding an annual [stockholder] meeting without the ability to solicit proxies, the Board concluded that they did not want to risk losing their seats at an election solely voted on by stockholders in attendance at the meeting.” Id. ¶ 41.

         On December 20, 2016, the Audit Committee allegedly told the Board that “it was not practical to complete the Restatement by the March 10 delisting deadline, ” and, on December 28, 2016, the Audit Committee allegedly confirmed that it could not “conclude with any degree of reliability that the Restatement would be complete by the March 10, 2017 deadline at any reasonable cost.” Id. ¶¶ 42-43. On January 3, 2017, Tangoe allegedly “notified Nasdaq that it was unlikely to complete the Restatement by the March 10, 2017 deadline.” Id. ¶ 44. Plaintiffs allege that “[a]ccording to the Recommendation Statement, it was at this point that the Board noted the potential for an acquisition transaction in the near term may obviate the need to complete a Restatement.” Id. Plaintiffs also allege that “[t]he Recommendation Statement also revealed that despite the Company's statements in its November press release that things were ‘substantially complete,' Tangoe had not begun to implement the audit plan of its independent registered accounting firm, ” and therefore “the Board decided to shift focus to producing a quality of earnings report to help execute a potential transaction.” Id.

         On January 4, 2017, NASDAQ allegedly informed Tangoe that its stock could be delisted for failure to hold an annual stockholder meeting. Id. ¶ 45. Plaintiffs allege that “[g]iven this additional basis to delist Tangoe, it appears that the decision to shift focus to selling the Company was not the result of the inability to timely complete the Restatement, but a consequence of the Board's selfish decision to avoid being ousted at an annual stockholder meeting.” Id.

         On March 10, 2017, Tangoe informed stockholders that NASDAQ had made a final determination to delist the company's common stock, and, four days later, trading of Tangoe's shares ended. Id. ¶ 46.

         Plaintiffs allege that “during the course of these efforts, the Company devoted significant internal resources to pursue the Restatement, expended approximately $16 million in costs in 2015 and 2016 for outside assistance on the Restatement, yet failed to ever issue a Restatement or any audited financial statements from the time of the Restatement through the closing of the Transaction.” Id. ¶ 47.

         Plaintiffs allege that, on March 23, 2017, undisclosed stockholders owning 7% of Tangoe's common stock threatened a proxy contest to unseat a majority of the Board if the Board did not complete a transaction. Id. ¶ 55.

         3. Awards and Benefits to Board Members and Management

         Plaintiffs allege that, while the Restatement was still pending, “SEC rules barred Tangoe from issuing traditional equity awards to the Board or management.” Id. ¶ 48. Plaintiffs allege that Tangoe's Board and management avoided those rules by entering “into Equity Award Replacement Compensation Agreements (‘EARCAs') with the Company, ” so that “Tangoe's officers and directors could still receive equity compensation, but that compensation would only have value upon a ‘change in control.'” Id.

         Plaintiffs allege that Tangoe and Mr. Foy, who was, at that point, the interim CEO, entered into an employment agreement on June 6, 2016, under which Mr. Foy became the acting CEO and, “subject to the Company's ability to register the grant of such award on a Form S-8, Mr. Foy [would] be entitled to receive an award of 100, 000 restricted stock units (RSUs).” Id. ¶ 49. On June 8, 2016, Mr. Coit, Mr. Golding, Mr. Kaiser, Mr. Kimzey, Mr. Pontin, and Mr. Walley each allegedly received “EARCAs with respect to 15, 142 measurement shares.” Id.

         On July 28, 2016, the Board allegedly changed Mr. Foy's employment agreement to make him the CEO and to provide him with 100, 000 restricted stock units that would vest upon change in control and 100, 000 new EARCA shares. Id. ¶ 50. That same day, Scott Snyder allegedly received 50, 000 EARCA shares and Charles Gamble allegedly received 20, 000 EARCA shares, all due to vest and be converted to common shares upon a change in control. Id.

         On August 15, 2016, the Board allegedly made Mr. Zager, then the interim CFO, the CFO, and paid him $400, 000 in cash. Id. ¶ 51. The Board also allegedly granted Mr. Foy 400, 000 EARCA shares and Mr. Zager 100, 000 EARCA shares, all to vest upon a change in control of the company. Id. Plaintiffs allege that these shares were different from the other EARCA shares, however, because “25% of the shares would only vest upon a change in control of the Company resulting in consideration payable to holders of common stock of the Company exceeding specified thresholds, ” though Tangoe allegedly “never stated what those thresholds were.” Id.

         On January 11, 2017, the Board allegedly approved a “Retention Agreement” for Mr. Foy, under which he would receive severance benefits in the event of termination for reasons other than cause, death, disability, or resignation for good reason. Id. ¶ 53. Plaintiffs allege that “[a]ssuming a Qualifying Termination followed the Merger, the retention agreement secured Foy an additional $892, 140, consisting of $656, 250 in salary-based severance and $235, 890 in bonus-based severance.” Id.

         On February 2, 2017, the Board allegedly approved amendments to Mr. Foy and Mr. Zager's respective EARCAs, “lowering the minimum threshold consideration necessary to trigger their respective vesting provisions.” Id. ¶ 54.

         Plaintiffs allege that, “[r]ather than act in the best interest of all stockholders by completing the Restatement and executing the Company's standalone plan, as it had determined to do in the spring of 2016, the Board acted selfishly and disloyally by pushing through an inadequate offer with Marlin and, at the same time, ensuring that millions of dollars in equity award equivalents would vest upon consummating the Transaction.” Id. ¶ 56. Plaintiffs further allege that the Individual Defendants “understood that they were set to collectively receive nearly $5 million in exchange for their measurement shares under the EARCAs” if they voted for the transaction with Marlin, and “[i]f the Director Defendants voted against the Transaction and opted to complete the Restatement and proceed as a standalone company, their EARCAs would have been worthless.” Id. ¶ 57.

         4. The Sale of the Company

         Plaintiffs allege that “accounting failures marred the sales process from the start” because Tangoe was unable to provide potential bidders with “any accurate, audited GAAP financial statements, ” and therefore “many potential bidders were unable to participate in the sales process.” Id. ¶ 58.

         Plaintiffs allege that, between June 2016 and December 2016, Tangoe had “preliminary discussions with several parties regarding potential investment in the Company and/or acquisition of the Company, ” including Vector Capital IV., L.P. and its affiliates, which owned 9.9% of Tangoe's outstanding common stock, Clearlake Capital Partners IV GP, L.P. and its affiliates, which, as of June 23, 2016, owned 14.9% of Tangoe's outstanding common stock, and Marlin and its associates, which, as of June 24, 2016, owned 10.4% of Tangoe's outstanding common stock. Id. ¶¶ 59-60, 61.

         Plaintiffs allege that, in December 2016, Marlin verbally proposed a transaction at $7.00 per share, and Clearlake and Vector proposed a joint transaction at a price ranging between $7.00 and $7.50 per share. Id. ¶ 63. Plaintiffs allege that, on December 29, 2016, Tangoe “received a revised letter from Marlin substantially similar to the letter of December 27, 2016, but confirming that neither continued listing of the Common Stock on Nasdaq nor audited financial statements would be a closing condition.” Id. ¶ 64. Also, on that day, Marlin submitted a second amendment to its Schedule 13D with the SEC. Id. The amendment stated that Marlin wanted to acquire “all of the outstanding common stock, through a tender offer or otherwise, for $7.50 per share in cash, subject to, among other things, reaching agreement on all material terms.” Id.

         On January 3, 2017, Tangoe allegedly issued a press release “confirming receipt of the proposal from Marlin and the joint proposal from Clearlake and Vector, that the Company had notified Nasdaq that it was unlikely to complete the Restatement by the March 10, 2017 deadline, that the Board would carefully evaluate the proposals and was focused on maximizing stockholder value, and that the Company had retained Stifel as financial advisor to assist in these efforts.” Id. ¶ 65.

         On March 9, 2017, Tangoe allegedly received a letter from Marlin proposing to acquire Tangoe for a cash tender offer of $6.50 per share. Id. ¶ 66. On March 28, 2017, Mr. Foy and Mr. Kokos spoke with Marlin representatives about integrating the two management teams. Id. ¶ 67. On April 28, 2017, Tangoe and Marlin announced a merger agreement at $6.50 per share. Id. ¶ 68.

         Plaintiffs allege that the $6.50 offer price “does not represent fair value for Tangoe stockholders, ” and that Tangoe previously had been trading at an average price above $8.00. Id. ¶ 69. Plaintiffs allege that, since Tangoe went public in 2011, it “has established itself as a leader in the connection lifecycle management space, ” that it “holds a significant size advantage to many of its competitors, ” that its clients include established entities such as “IBM, SAP, American Express, PWC, FedEx, Kraft Foods, CVS, and Comcast, ” and that it has maintained a net cash balance. Id. ¶ 70. Moreover, Plaintiffs allege that analysts project “a positive outlook for Tangoe, ” including growth and high price targets. Id. ¶ 72. Plaintiffs therefore allege that “the fluctuations in Tangoe's stock price did not reflect changes in its underlying value, but the lack of information disseminated by the Tangoe Board.” Id. ¶ 75.

         5. The Recommendation Statement

         On May 12, 2017, Tangoe allegedly filed a Recommendation Statement with the SEC in support of the Tender Offer commenced by Marlin. Id. ¶ 76. Plaintiffs allege that the Recommendation Statement “contained material misrepresentations and omissions of fact that forced Tangoe's stockholders to decide whether to tender their shares without adequate information.” Id. Plaintiffs allege that those misstatements included:

(i) the circumstances surrounding the Company's failure to complete the Restatement, including the likelihood that Tangoe could ever complete the Restatement and, if completable, a reasonable estimation of when it believed the Restatement would be completed and the Company's stock relisted; (ii) any non-merger alternative options left for the Company in light of the Restatement and delisting; (iii) the conflicts of interest faced by Tangoe's management and directors as a result of the EARCAs and their subsequent revisions; (iv) the severity and degree of the numerous revisions of the Company's financial projections; (v) the valuation analyses prepared by Stifel in support of its “fairness opinion”; and (vi) the complete lack of any audited GAAP financial statements.

Id. ¶ 77. Plaintiffs allege that Tangoe has been “unclear and misleading in their communications with stockholders, Nasdaq, and the SEC, ” since March 2016 and continued to do so even after the release of the Recommendation Statement. Id. ¶ 78.

         Plaintiffs allege that the Recommendation Statement failed to state whether Tangoe had a legitimate chance of completing the Restatement and regaining compliance with NASDAQ, “misstated the Board's desire to complete the Restatement, ” and “failed to discuss what would happen with the Restatement in the event a deal to acquire Tangoe could not have been made.” Id. ¶ 79. Moreover, Plaintiffs allege that Tangoe possessed information that it concealed from stockholders and the public related to the Restatement. Id. ¶ 80. Plaintiffs allege that, as a result, stockholders did not have the means “to evaluate the choice they were being asked to make- accept the Offer Price that reflected the depressed value caused by the Company's regulatory non-compliance or stay the course in hopes that the Company might return to the good graces of regulators.” Id. ¶ 81. As a consequence, Plaintiffs allege, the market did not “absorb and reflect the true value of the Company, ” placing stockholders in a compromised position, and driving potential bidders away. Id. ¶¶ 82-83.

         On June 5, 2017, the SEC allegedly sent a letter to Tangoe, expressing concern that Tangoe's delinquency in reporting information “would prevent Tangoe investors from making an informed decision.” Id. ¶ 84. In a second letter, dated June 14, 2017, the SEC wrote: “[W]e remind the company and its management of their obligation to ensure that investors have been provided with all material information necessary to evaluate the proposed transaction, particularly given that the company is not current in its Exchange Act reporting obligations.” Id. ¶ 84. Plaintiffs allege that stockholders should have been provided information about what would happen if the transaction with Marlin did not go forward. Id. ¶ 85.

         Plaintiffs also allege that the Recommendation Statement “failed to provide full and adequate disclosure of the conflicts of interest faced by Tangoe's officers and directors, ” including that their EARCAs “were only payable upon a change in control, termination without cause, or the death of the party.” Id. ¶ 86. Specifically, Plaintiffs allege that information that Defendants had adjusted the thresholds for their payouts “would have informed stockholders how much the failure to complete the Restatement cost them.” Id. ¶ 87.

         In addition, Plaintiffs allege that Defendants manipulated financial projections and omitted material information from statements to “make the eventual Offer Price appear more attractive to Tangoe stockholders.” Id. ¶ 90. Plaintiffs allege that when Tangoe published a Discounted Cash Flow Analysis, it failed to disclose key components of the analysis that would have been “material to Tangoe stockholders, ” and their omission rendered the Discounted Cash Flow Analysis (part of the Recommendation Statement) “incomplete and misleading.” Id. ¶¶ 91- 93. Plaintiffs also allege that two other analyses, Selected Company and Selected Transactions, “the Recommendation Statement failed to disclose individual multiples for the companies and transactions observed in the analysis, ” leaving stockholders without “the information to determine how the selected companies and transactions actually compared to” Tangoe or the Transaction with Marlin. Id. ¶ 94. Moreover, Plaintiffs allege that the analyses failed to include an implied valuation range for the comparable analyses, and the “only valuation performed, the DCF, was watered down by artificially deflated projections and incompletely disclosed to stockholders.” Id. ¶ 95. Plaintiffs assert that the “above-referenced omitted information, if disclosed, would have significantly altered the total mix of information available to Tangoe's stockholders.” Id. ¶ 96.

         B. Procedural History

         On May 18, 2017, Mr. McArthur, on behalf of himself and a proposed class, filed a Complaint alleging violations of Section 14(d), 14(e), and 20(a) of the Securities Exchange Act of 1934. Compl., ECF No. 1. On June 1, 2017, Defendants filed a notice of a related case, Joseph Levine v. Tangoe, Inc., et. al., No. 3:17-cv-00873 (AWT). ECF No. 17. On August 7, 2017, Mr. McArthur and Mr. Levine moved to consolidate the related cases, to be appointed co-lead plaintiffs, and approval of Levi & Korinsky LLP and Monteverde & Associates PC as co-lead counsel. ECF No. 32. The Court granted the unopposed motion, see ECF No. 44, on October 4, 2017. ECF No. 45.

         On November 3, 2017, Plaintiffs filed a Consolidated Class Action Complaint, again alleging violations of Sections 14(d), 14(e), and 20(a) of the Securities Exchange Act of 1934. ECF No. 46. In Count One, Plaintiffs allege that “Tangoe filed and delivered the Recommendation Statement to its stockholders, which Defendants knew or recklessly disregarded contained material omissions and misstatements, ” including “information about the consideration offered to stockholders via the tender offer, the intrinsic value of the Company, and potential ...