Baum v. Harman International Industries, Inc.

          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 ...