United States District Court, D. Connecticut
PATRICIA B. BAUM, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
HARMAN INTERNATIONAL INDUSTRIES, INC., DINESH C. PALIWAL, ADRIANE M. BROWN, JOHN W. DIERCKSEN, ANN M. KOROLOGOS, ROBERT NAIL, ABRAHAM N. REICHENTAL, KENNETH M. REISS, HELLENE S. RUNTAGH, FRANK S. SKLARSKY, and GARY G. STEEL, Defendants.
RULING AND ORDER
ROBERT
N. CHATIGNY, UNITED STATES DISTRICT JUDGE
This is
a proposed class action under the federal securities laws
brought by and on behalf of shareholders of Harman
International Industries, Inc. (“Harman”). The
amended complaint alleges that Harman and members of its
board used a false and misleading proxy statement to solicit
support for Harman's acquisition by Samsung Electronics
Co., Ltd. (“Samsung”). Plaintiff seeks
compensatory damages for defendants' alleged violations
of Sections 14(a) and 20(a) of the Securities Exchange Act
and Securities and Exchange Commission (“SEC”)
Rule 14a-9. Defendants move for dismissal on the ground that
plaintiff has failed to state a claim.
Plaintiff
alleges that defendants sought to downplay Harman's value
in order to make the Samsung acquisition seem fair to
shareholders. She claims that the proxy statement (“the
proxy”) was false and misleading in four specific ways.
First, she asserts that the proxy omitted the material fact
that Harman's financial projections did not account for
future acquisitions, even though Harman's growth strategy
was built on acquisitions. Second, plaintiff argues that the
proxy falsely stated that Harman management determined that
its financial projections included more downside risk than
likely upside potential, thereby justifying the development
of a less optimistic set of financial forecasts. These
forecasts, in turn, helped to justify a lower sale price to
Samsung. Third, she claims that the proxy inaccurately stated
that Harman does not as a matter of course release financial
projections and that the projections contained in the proxy
were not prepared for public disclosure. Fourth, plaintiff
argues that the proxy was false and misleading by omitting a
material fact relevant to a potential conflict of interest on
the part of a financial advisor who recommended that
shareholders approve the acquisition.
For
reasons discussed below, plaintiff's first and third
arguments are unavailing. Plaintiff does, however,
sufficiently allege that the proxy was misleading as to the
reason that Harman revised its financial projections and as
to a potential conflict of interest on the part of a
financial advisor. Additionally, plaintiff has adequately
pled loss causation by asserting that Harman shareholders did
not receive adequate compensation in the acquisition.
Accordingly, the motion to dismiss is granted in part and
denied in part.
I.
Background
The
following facts are drawn from the amended complaint and
accepted as true for purposes of the pending motion.
Plaintiff was at all relevant times the owner of Harman
common stock. Harman was a Delaware corporation that
maintained its headquarters in Stamford, Connecticut. The
individual defendants were Harman board members during the
Samsung acquisition in November 2016. Dinesh C. Paliwal was
also Harman's Chairman, CEO and President from 2008 until
the Samsung acquisition.
A.
Harman's Pre-Acquisition Business
Harman
designs and engineers connected products and solutions for
automakers, consumers and enterprises, including connected
car systems, audio and visual products, enterprise automation
solutions, and connected services. Before it was purchased by
Samsung, Harman powered its growth largely by acquiring other
companies. In the period from February 2015 to March 2016,
Harman completed six acquisitions totaling $1.2 billion in
consideration. In an annual report issued August 11, 2016,
Harman affirmed the importance of acquisitions in its
corporate growth strategy. On January 4, 2017 -- several
months after Harman was acquired by Samsung -- Harman CEO and
board member Paliwal told Bloomberg that Harman
would “definitely make some unique technology
acquisitions.”
On
August 4, 2016, Paliwal and Harman's chief financial
officer conducted a conference call, during which they
presented a slideshow called “Fourth Quarter &
Full-Year Fiscal 2016 Highlights.” One of the slides
shown stated that “strategic bolt-on acquisitions that
accelerate growth” remained a key aspect of
Harman's corporate strategy. The slideshow also depicted
projections for Harman's growth during fiscal years 2017,
2019, and 2021. Paliwal expressed optimism about Harman's
future financial performance due to its $24.1 billion
backlog, and confidence that Harman would see accelerated
revenue expansion. On the same day as the fourth-quarter
call, Harman issued a press release providing financial
projections for fiscal years 2017-2019. These projections
accounted only for “organic” growth, meaning that
they did not incorporate potential acquisitions.
B.
The Samsung Acquisition
Paliwal
held a number of meetings with Samsung executives in
September 2016, and Samsung expressed interest in acquiring
Harman. Without immediately informing the other board
members, Paliwal unilaterally invited Samsung to submit a
formal bid with a specific price. On October 4, Samsung
delivered a written acquisition proposal to Harman for $106
per share. The other board members learned of the letter and
met on October 6. Shortly thereafter, Samsung increased its
proposal to $109 per share. The board met again on October
11, and authorized Paliwal to obtain an offer of at least
$112. The same day, Samsung agreed to increase the offer to
$112 per share in cash, predicated on an exclusivity
agreement.
On
October 13, 2016, Harman's lead financial advisor, J.P.
Morgan, met with representatives of an entity identified as
“Company A.” The representatives indicated that
Company A could submit a bid to purchase Harman for cash and
stock (otherwise known as a mixed consideration proposal).
Company A had submitted a mixed consideration proposal the
previous December to purchase Harman for $115 per share. J.P.
Morgan and Paliwal determined, without contemporaneous input
from the other board members, that Company A was unlikely to
make a proposal that was more attractive than $112 per share.
At Paliwal's request, J.P. Morgan called Company A's
representatives on October 14 and requested a proposal that
consisted of more cash and less stock. Company A did not
respond.
On
October 14, 2016 Paliwal caused Harman to enter into an
exclusivity agreement with Samsung. The agreement provided
that Samsung's acquisition of Harman would be announced
on November 14 and that Harman would not solicit competing
proposals before that date. The agreement did not prohibit
Harman from attempting to negotiate a higher price with
Samsung. From October 20-22, the management teams of Harman
and Samsung held a series of meetings to finalize the deal,
which were not attended by any board members other than
Paliwal. Samsung indicated that it would only consummate the
acquisition if Paliwal signed a suitable employment
agreement. Paliwal responded that he could discuss such a
deal after the basics of the merger agreement were settled.
The
board met again on November 3, 2016. J.P. Morgan and
Harman's other financial advisor, Lazard, reviewed
preliminary financial analyses of the company. Harman
continued to do well during this time period, and Paliwal
affirmed that the company was on track to meet its 2017
fiscal year guidance. He also stated that Harman would
continue to make strategic, bolt-on acquisitions.
Paliwal
began negotiating his personal compensation with Samsung on
November 8, 2016. On November 11, J.P. Morgan and Lazard
showed the board an updated, but still preliminary, financial
analysis. The board authorized management to enter into the
merger agreement and finalize individual compensation
packages, and to announce the acquisition on November 14,
2016. Over the next two days Paliwal finalized a compensation
agreement with Samsung that included a retention award of
approximately $22 million, a guarantee of no less than $21
million in long-term compensation over the next three years,
and acceleration of approximately $29 million in restricted
Harman stock and bonuses. These payments were contingent on
consummation of the acquisition.
On
November 13, 2016, the board held a meeting to formally
approve Samsung's acquisition of Harman. J.P. Morgan and
Lazard presented a discounted cash flow (DCF) analysis of
financial projections that management had developed through
fiscal year 2021 (“the Management Projections”).
J.P. Morgan and Lazard also presented a DCF analysis of a
separate set of projections that were based on the Management
Projections, but downwardly moderated predicted growth by 25%
(“the Sensitized Projections”). Based on this
information, the board formally approved the acquisition at
$112 per share.
C.
The Proxy Statement
On
January 20, 2017 the board issued a proxy statement to
solicit votes on the merger. The proxy contained both the
Management Projections and the Sensitized Projections.
According to the proxy, “the Management Projections
were prepared based on assumptions reflecting the best
currently available estimates of and judgments by
[Harman's] management at the time the Management
Projections were prepared as to the expected future results
of operations and financial condition of the Company.”
Although not labeled as such, the Management Projections
reflected only organic growth, meaning that they did not
account for future acquisitions. In fact, the Management
Projections were very similar to the guidance that Harman had
released in August 2016. The proxy further stated that
“senior management determined, taking into account the
perspectives of the Financial Advisors, that the Management
Projections currently reflected more downside risk . . . than
likely upside potential and that, accordingly, no further
modifications to the Management Projections were necessary or
appropriate.”
The
“Sensitized Projections” were based on the
Management Projections but assumed 25% less growth in revenue
and earnings before interest payments, taxes, depreciation,
and amortization (“EBITDA”). According to the
proxy, Harman's financial advisors developed the
Sensitized Projections “taking into account the views
of management and the board as to certain potential risks and
uncertainties inherent in the Management Projections.”
The Sensitized Projections were provided to the board in
connection with its evaluation of the proposed merger, but
not to Samsung.
The
proxy additionally stated that, “Harman does not as a
matter of course make public long-term projections as to
future performance, ” and that the projections
contained in the proxy “were prepared for internal use
and to assist Samsung and our Financial Advisors with their
respective due diligence investigations of the Company or to
assist the board in its review and analysis of the proposed
merger, as applicable. The Projections were not prepared with
a view toward public disclosure. . . .”
Appended
to the proxy were fairness opinions prepared by Harman's
financial advisors J.P. Morgan and Lazard, each recommending
that Samsung's offer to purchase Harman for $112 per
share was fair. As discussed, the financial advisors had
conducted two DCF analyses: one based on the Management
Projections and the other based on the Sensitized
Projections. The former produced a midpoint price of
approximately $116.25 per share; the latter yielded a
midpoint of approximately $100.25 per share.
The
proxy also disclosed that J.P. Morgan had provided certain
services to both Harman and Samsung in the preceding two
years.
Such services during such period have included acting as
joint lead arranger and joint bookrunner on the Company's
syndicated facility in March 2015, as M&A financial
advisor to the Company on the Company's acquisition of
Symphony Teleca in April 2015, as joint bookrunner on
offerings of debt securities by the Company in May 2015, as
joint bookrunner on the initial public offering of Samsung
SDS in October 2014, as joint global coordinator and joint
bookrunner on the initial public offering of Cheil Industries
in December 2014, as financial advisor to Parent on
Parent's disposals of equity interests in Samsung Techwin
and Samsung Chemicals in June 2015 and as joint bookrunner on
the initial public offering of Samsung Biologics in October
2016.
The
proxy did not mention that J.P. Morgan Asset Management
served as an investment manager for a Samsung affiliate
during the same time period that J.P. Morgan acted as a
financial advisor on the Samsung-Harman deal.
On
February 17, 2017, a majority of stockholders voted to
approve Samsung's acquisition of Harman. Approximately 50
million out of 70 million shares, or 67%, were voted in favor
of the deal.
II.
Legal Standard
In
ruling on the motion to dismiss, the Court may consider
“the complaint and the documents incorporated by
reference into the complaint (primarily the proxy statement
in question).” Montanio v. Keurig Green Mountain,
Inc., 237 F.Supp.3d 163, 166 (D. Vt. 2017) (citing
Subaru Distribs. Corp. v. Subaru of Am., Inc., 425
F.3d 119, 122 (2d Cir. 2005)). To withstand dismissal, a
complaint generally “must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.'” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Court
must accept all factual allegations as true and view them in
the light most favorable to the plaintiff. Id.
The
Private Securities Litigation Reform Act
(“PSLRA”) imposes additional pleading
requirements on a plaintiff who alleges that the defendant
“made an untrue statement of a material fact” or
“omitted to state a material fact necessary in order to
make the statements made, in light of the circumstances in
which they were made, not misleading.” 15 U.S.C. §
78u-4(b)(1). In such a case, “the complaint shall
specify 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, the complaint shall state with
particularity all facts on which that belief is
formed.” Id.
In any
private action under the Securities Exchange Act
in which the plaintiff may recover money damages only on
proof that the defendant acted with a particular state of
mind, the complaint shall, with respect to each act or
omission alleged to violate this chapter, state with
particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.
Id. § 78u-4(b)(2)(A). Additionally, where a
Section 14(a) claim is premised on allegations of fraud, the
plaintiff “must state with particularity the
circumstances constituting fraud, ” as required by Rule
9(b) of the Federal Rules of Civil Procedure. See Fresno
Cty. Emps.' Ret. Ass'n v. comScore, Inc., 268
F.Supp.3d 526, 558 (S.D.N.Y. 2017) (citing Rombach v.
Chang, 355 F.3d 164, 171 (2d Cir. 2004); In re JP
Morgan Chase Sec. Litig., 363 F.Supp.2d 595, 636
(S.D.N.Y. 2005)).
III.
Discussion
Section
14(a) of the Securities Exchange Act prohibits the
solicitation of proxy votes “in contravention of such
rules and regulations as the [Securities and Exchange]
Commission may prescribe.” 15 U.S.C. § 78n(a).
Rule 14a-9 provides,
No solicitation subject to this regulation shall be made by
means of any proxy statement, form of proxy, notice of
meeting or other communication, written or oral, containing
any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading
with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any
statement in any earlier ...