In Re U.S. West, Inc. Securities Litigation ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
5-30-2003
In Re: U.S. West Inc
Precedential or Non-Precedential: Non-Precedential
Docket 02-2479
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NOT PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 02-2479
____________
IN RE: U.S. WEST, INC. SECURITIES LITIGATION
Lead Plaintiffs Lawrence King, George Karatzas,
Herbert Rothman, and Michael Ferrara, and Plantiff
Adele Brody, on behalf of themselves and all others
similarly situated,
Appellants
(D.C. Civil Nos. 00-cv-00188 & 00-cv-00198)
______
Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 00-cv-00188)
District Judge: Hon. Roderick R. McKelvie
____________
Submitted under Third Circuit L.A.R. 34.1(a)
April 3, 2003
Before: MCKEE, SMITH, Circuit Judges, and HOCHBERG, District Judge* .
(Filed: May 30, 2003)
Joseph H. Weiss, Esq.
Weiss & Yourman
551 Fifth Avenue, Suite 1600
New York, NY 10176
*
Hon. Faith Hochberg, United States District Court for the District of New Jersey, sitting
by designation.
Robert A. Wallner
Milberg, Weiss, Bershad, Hynes & Lerach LLP
One Pennsylvania Plaza
New York, NY 10119
Attorneys for Appellant
Anne C. Foster, Esq.
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Attorneys for Appellee
____________
OPINION OF THE COURT
____________
SMITH, Circuit Judge.
Plaintiffs in this matter are two purported classes of investors who held shares in
what was U.S. West, Inc. (“U.S. West”), a publicly traded company prior to its June 2000
merger with Qwest Communications International Inc. (“Qwest”). The Plaintiffs contend
that the defendants, Qwest and Joseph P. Nacchio, its Chief Executive Officer, are liable
to them for unspecified damages pursuant to § 14(a) of the Securities Act and under the
common law doctrine of promissory estoppel. Because neither proposed class sufficiently
pled facts upon which relief may be granted, the judgment of the District Court granting
Qwest and Nacchio’s motion to dismiss will be affirmed.
I.
2
On July 18, 1999, U.S. West and Qwest announced a proposed Merger
Agreement. Under that agreement, U.S. West shareholders were to receive Qwest shares
valued at $69 for each share of U.S. West. The share price was conditioned upon
Qwest’s average trading price remaining between $28.26 and $39.90 during the period
preceding the closing of the merger. The two companies issued a joint Proxy Statement
to their shareholders on September 17, 1999, seeking the shareholders’ approval of the
merger. The Proxy Statement summarized the terms of the merger and attached the
Merger Agreement for the shareholders’ review. The shareholders of both companies
approved the merger on November 2, 1999.
Page I-40 of the Proxy Statement contained the following disclosure summarizing
the “no solicitation” covenant of the Merger Agreement.
NO SOLICITATION. U S WEST and Qwest have agreed that
they and their subsidiaries and their officers, directors,
employees and advisers will not take action to solicit or
encourage an offer for an alternative acquisition transaction
involving U S WEST or Qwest of a nature defined in the
merger agreement.
Restricted actions include engaging in any discussions with or
furnishing any information to a potential bidder, or knowingly
taking any other action designed to facilitate an alternative
transaction. Qwest or U S WEST, as the case may be, is
permitted to take these actions in response to an unsolicited
offer, however, if the unsolicited offer is made prior to the
time that the U S WEST or Qwest shareholder approval, as
the case may be, is obtained . . . .
This provision was based upon Section 5.03 of the Merger Agreement, which detailed
3
limitations on solicitations of and negotiations with third parties.
Nonetheless, on March 1, 2000, the Bloomberg news service reported that Qwest
and Deutsche Telekom were engaged in merger talks. Plaintiffs pled that, following that
report, Qwest’s shares rose $12 13/16 to a closing price of $59 3/16 a share, while U.S.
West’s shares purportedly dropped 8% in price to close at $72 a share. On March 3,
2000, The Denver Post reported that Nacchio made statements explaining how Qwest
could break off its merger with U.S. West. According to the report, Nacchio stated that
“[e]very merger can be intervened on; it only costs money.” He was also quoted as
saying that “this [merger] is not like at any costs. At the end of the day, I have an
obligation to Qwest shareholders to make this deal really worthwhile. . . . I want the
merger to go through, but I’m not going to get blackmailed to do dumb business things to
make it go through.” On March 8, 2000, Deutsche Telekom announced that it had ended
negotiations with Qwest. Following the termination of those negotiations, The Wall
Street Journal and The Denver Post reported statements by persons opining that Qwest’s
talks with Deutsche Telekom breached the Merger Agreement with U.S. West. However,
U.S. West never declared Qwest in material breach of the Merger Agreement. On June
30, 2000, despite the early March discussions between Qwest and Deutche Telekom, U.S.
West and Qwest merged with Qwest as the successor corporation.
Plaintiffs in this action are two professed classes of shareholders alleging to have
been harmed by Qwest and Nacchio. Both sets of plaintiffs filed their actions in March of
4
2000. The plaintiffs of the first purported class alleged that “had [U.S. West
shareholders] known of Nacchio’s intent not to abide by and not to be bound by the terms
of the Merger Agreement, they would not have voted to approve the Merger.” Instead,
those shareholders alleged they would have “required that the merger consideration be
substantially more favorable for U.S. West shareholders than set forth in the Merger
Agreement.” The second class of plaintiffs based their allegations on a theory of
promissory estoppel.
With the consent of the parties, the District Court ordered the two separate actions
consolidated and appointed lead plaintiffs and lead counsel on September 14, 2001. An
amended complaint asserted claims for relief pursuant to Sections 14(a) and 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78n(a), 78t(a), and state law promissory
estoppel. Therefore, the District Court predicated its subject matter jurisdiction upon 15
U.S.C. § 78aa and 28 U.S.C. § 1331 and 1367.
Qwest and Nacchio brought their motion to dismiss on January 2, 2002. This
appeal is to consider the District Court’s decision to grant that motion. In re U.S. West,
Inc. Sec. Litig., 201 F. Supp. 2d 302 (D. Del. 2002). A motion to dismiss is a dispositive
motion, the grant of which is final and appealable pursuant to 28 U.S.C. § 1291. Our
review of a district court’s grant of a motion to dismiss is plenary. Malia v. General Elec.
Co., 23 F.3d 828, 830 (3d Cir. 1994).
II.
5
Plaintiffs assert that the Proxy Statement they received in September 1999 was
“misleading” and that U.S. West shareholders voted to approve the merger of Qwest and
U.S. West based on that misleading document. Section 14(a) of the Securities Act of
1934 makes it unlawful “to solicit any proxy or consent or authorization in respect of any
security” “in contravention of such rules and regulations as the Commission may
prescribe.” 15 U.S.C. § 78n(a). Those rules and regulations provide:
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 the 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 . . .
17 C.F.R. § 240.14a-9(a).
There is a private right of action under Section 14(a) to enforce these regulations,
requiring a plaintiff to “show that (1) a proxy statement contained a material
misrepresentation or omission which (2) caused the plaintiff injury and (3) that the proxy
solicitation itself, rather than the particular defect in the solicitation materials, was ‘an
essential link in the accomplishment of the transaction.’” General Elec. Co. by Levit v.
Cathcart, 980 F.2d 927, 932 (3d Cir. 1992) (quoting Mills v. Electric Auto-Lite Co., 396
U.S. 375, 385 (1970)). However, in order to bring such a claim for relief, a plaintiff must
meet enhanced pleading requirements pursuant to the Private Securities Litigation Reform
Act of 1995, Pub. L. 104-67, § 21D(b), 109 Stat. 737 (“PSLRA”). Thus, in litigation
6
pursuant to § 14(a), a plaintiff “shall specify each statement alleged to have been
misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. §
78u-4(b)(1). Those requirements apply “[i]n any private action arising under this chapter
in which the plaintiff alleges that the defendant . . . omitted to state a material fact.” Id.
(emphasis added). Furthermore, a plaintiff’s “complaint shall state with particularity all
facts on which that belief is formed.” Id.
One of the “elements of a private cause of action for violation of 14(a)” is that a
“misstatement or omission was material.” TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438, 444 (1976). According to the Plaintiffs, “the Complaint states a claim because the
proxy failed to disclose material facts which contravened the proxy’s disclosure and
misrepresented the parties’ intentions;” more specifically, “at the time the proxy statement
was disseminated [in September 1999], [Qwest and Nacchio] were not acting in good
faith and intended to shop the Company and pursue a competing merger.” Plaintiffs’
theory of omission and, thereby, recovery is premised on Wharf (Holdings) Ltd. v. United
Int’l Holdings, Inc., 532 U.S. 588 (2001). Thus, in addition to showing all the other
elements required for a securities violation, prevailing on this theory requires a plaintiff to
prove that defendants were (1) “secretly intending from the very beginning not to”
comply with the agreement, and thereby (2) affected “the value of a security purchase or
the consideration paid.” See id. at 596-97.
7
Plaintiffs pled no facts from September of 1999 as a basis for their allegations,1
but solely based their assertions on Nacchio’s March 2000 comments to The Denver Post.
Based on Nacchio’s statements, Plaintiffs believe they “are entitled to the fair and
reasonable inference that defendants Qwest and Nacchio, in truth, did not act in good
faith and never viewed themselves bound by and never intended to honor the no-shop
covenants.” While it appears that Nacchio’s admitted March 2000 discussions with
Deutsche Telekom may then have amounted to a breach of the “No Solicitation”
provision of the Merger Agreement, had U.S. West proceeded to act on that apparent
breach, we do not agree that those statements can support the inferences required for
Plaintiffs’ theory, no matter how distasteful we find Nacchio’s comments.
Plaintiffs pled that in March 2000 “Nacchio ‘explained several times how the two
companies could break off the $40 billion merger, if necessary. ‘Every merger can be
intervened on; it only costs money,’ Nacchio said, noting that the breakup fee for the US
West-Qwest deal was $800 million.’” App. 11 (Pls.’ Compl. ¶ 24) (emphasis added). The
figure Nacchio is quoted as stating, $800 million, is not without significance. The same
Proxy Statement that contained the “No Solicitation” clause also contained the following
clause:
TERM INATION FEES (SEE PAGES I-43)
1
We will assume, without deciding, that Qwest and Nacchio’s “intent” on September 17,
1999, the date the signatories circulated the proxies to the shareholders, is the point relevant
to Plaintiffs’ Wharf theory, not the date the Merger Agreement was signed.
8
* * *
Qwest must pay U S West a termination fee of $850 million
in cash if:
* * *
- the merger agreement is terminated by U S WEST as a
result of Qwest’s material breach of its non-
solicitations in the merger agreement.
App. 57-58.2 Furthermore, it cannot be disputed that the most onerous requirements of
the “No Solicitation” provision at issue did not become fully effective until shareholder
approval. Prior to shareholder approval, nothing prohibited Qwest from “engaging in any
discussion with or furnishing any information to a potential bidder . . . to facilitate an
alternative transaction,” so long as the other potential offer was “unsolicited.” App. 92.
Considered in light of the full text of the Merger Agreement contained in the
Proxy Statement, Nacchio’s statements are insufficient to give rise to an inference that
Qwest and Nacchio either acted without good faith when entering into and later
circulating the agreement or never intended to comply with the non-solicitation provision.
2
While this part of the Proxy Statement was not quoted in Plaintiffs’ complaint, “an
exception to the general rule [that courts cannot rely on documents outside the pleadings at
motion to dismiss] is that a ‘document integral to or explicitly relied upon in the complaint’
may be considered ‘without converting the motion [to dismiss] into one for summary
judgment.’” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997)
(quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir. 1996)) (emphasis
original). “[W]hat is critical is whether the claims in the complaint are ‘based’ on an
extrinsic document and not merely whether the extrinsic document was explicitly cited.” Id.Plaintiffs’ claims are obviously premised on the Merger Agreement and other contents of the
Proxy Statement.
9
First, expressly agreeing to a significant penalty for violating the no solicitation provision
is inconsistent with the notion that Qwest and Nacchio agreed to the no solicitation
provision in bad faith. It would have made no sense for Qwest to agree to such an
explicit and expensive remedy for solicitation while, at the same time, acting without a
good faith intention to comply with that no solicitation provision.3
Furthermore, the specific statements alleged fail to support an inference, as
Plaintiffs contend, that “Defendants did not consider themselves bound by the no-shop
clause.” Quite to the contrary, Nacchio’s statements indicate he clearly did believe Qwest
was bound by the Merger Agreement and its “No Solicitation” provision; Qwest was
bound to the tune of about $800 million, and Nacchio noted that very fact. See App. 11.
Considered in this context, the only inference that Nacchio’s statements can provide is
that Nacchio believed in September 1999 what he effectively stated in March 2000: if
either party materially breaches the agreement by soliciting another merger, resulting in
the termination of the U.S. West/Qwest merger, that breaching party would have to pay
the other a termination fee of $850 million.
Finally, there is a significant contradiction between the shareholder approval
Qwest and Nacchio were allegedly attempting to procure by misrepresentation and the
practical effect that same shareholder approval had on Qwest and Nacchio’s ability to
3
Qwest and Nacchio must also have been of like mind and have foreseen no other
superior business opportunities when circulating the proxies in September 1999 because they
proceeded to obtain the shareholder approval that made it far more difficult to solicit other
offers.
10
fulfill their alleged “secret intent.” Plaintiffs suggest that, although secretly intending to
breach the no solicitation provision, Qwest and Nacchio included that no solicitation
provision as a contrivance for obtaining shareholder approval. Yet, it was the act of
shareholder approval that led to that provision fully prohibiting the actions in which
Qwest and Nacchio allegedly wanted secretly to engage, effectively eliminating their
ability to solicit other offers. It is, quite simply, too much for us to accept that Qwest and
Nacchio were falsely including that provision so as to obtain an approval that would
actually make it more difficult for them to engage in their desired conduct. Considering
these points along with the not insignificant temporal lag and apparently unanticipated
interest of Deutsche Telekom in Qwest,4 we conclude that the statements in question
cannot support Plaintiffs’ desired inferences under the PSLRA.
Nonetheless, even if one assumes Nacchio had a “secret intent” in September of
1999 to test the limits of the No Solicitation clause if an opportunity availed itself (as it
did), see Wharf, 532 U.S. at 594, Plaintiffs cannot show the omission of that information
was so material as to affect “the value of . . . the consideration paid.” Id. at 596. 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. at 449. “Put another way, there must be a substantial likelihood that the
4
Again, it is difficult to conceive of Qwest proceeding with efforts to obtain shareholder
approval for that merger in September 1999, thereby making it more difficult and expensive
for Qwest to pursue other merger options, if Qwest then foresaw other superior merger
possibilities.
11
disclosure of the omitted fact would have been viewed by the reasonable investor as
having significantly altered the ‘total mix’ of information made available.” Id. Plaintiffs
cannot make this showing.
While Plaintiffs assert that “the true nature of the West/Qwest transaction was not
disclosed to the public shareholders,” the presence of the termination fees did have the
effect of disclosing to present and future shareholders that risks to the merger remained,
risks for which the Plaintiffs reasonably should have accounted. In spite of the “No
Solicitation” provision, due to the inclusion of the “Termination Fees” provision, no
reasonable investor could have understood from the Proxy Statement that the proposed
merger could never be undermined by other solicitations after shareholder approval, only
that it would likely take an extremely aggressive bidder willing to bear the $850 million
fee. Investors were thereby explicitly notified of the parties “intent” only to be bound to
that amount. The termination clause thus served to both mitigate and specifically quantify
the risks to the merger from other possible solicitations. Qwest may have “secretly
intended” to breach the Merger Agreement if a far better merger opportunity presented
itself, but that should hardly have been a surprise. To the extent that Plaintiffs read and
relied upon the non-solicitation provision to the exclusion of other provisions in the Proxy
Statement as a whole to form a belief that neither side would consider other offers and
back out of the merger under any circumstances, that reliance was unreasonable.
Applicable provisions of the PSLRA require plaintiffs to state “the reason or
12
reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1). Plaintiffs assert that
the Proxy Statement is misleading because, pursuant to Wharf, 532 U.S. at 596, Qwest
and Nacchio were “secretly intending” never to comply with the agreement and did not
consider themselves bound by it. As the facts pled by Plaintiffs not only fail to support
that allegation, but, when considered in light of the full Proxy Statement, serve to
undermine that inference, Plaintiffs have not pled a claim for relief under the securities
regulations.
III.
The second class of proposed class action plaintiffs asserted that the “No
Solicitation” provision of the Merger Agreement is independently enforceable by the
shareholders of U.S. West against Qwest and Nacchio by the doctrine of promissory
estoppel. Under Delaware Law,
[t]he elements of a claim for promissory estoppel, which must
be shown by clear and convincing evidence, are as follows:
“(i) a promise was made; (ii) it was the reasonable expectation
of the promisor to induce action or forbearance on the part of
the promisee; (iii) the promisee reasonably relied on the
promise and took action to his detriment; and (iv) such
promise is binding because injustice can be avoided only be
enforcement of the promise.”
In re Aquila Inc., 805 A.2d 184, 193 (Del. Ch. 2002) (quoting Lord v. Souder, 748 A.2d
393, 404 (Del. 2000)). Plaintiffs’ argument fails to satisfy several of these elements.
As the District Court held, Plaintiffs fail even to establish the prerequisite
elements of promissory estoppel as the Proxy Statement was not a “promise . . . to induce
13
action or forbearance,” i.e., a contract less consideration, between Qwest and U.S. West’s
shareholders. See Lord, 748 A.2d at 404. The only apparent “promise” here was an
agreement which was specifically limited to Qwest and U.S. West, the corporation. App.
146. The mere disclosure of that agreement to U.S. West’s shareholders cannot also be
said to create a “promise” between the U.S. West shareholders and Qwest and Nacchio
where, as here, the disclosed agreement specifically apprised shareholders and third-
parties that the agreement was “not intended to confer upon any person other than Qwest
[and] U S WEST” rights until after the merger closed. App. 188. It is horn-book law, as
well as the law of Delaware, that enforceable contracts require “mutual assent to the
terms of the agreement by all parties and the existence of consideration.” Research &
Trading Corp. v. Powell, 468 A.2d 1301, 1303 (Del. Ch. 1983) (citing Restatement
(Second) of Law of Contracts § 17 (1979)). Promissory estoppel is generally a
“consideration substitute for promises which are reasonably relied upon,” and does not
abrogate the need to plead the basic contractual element of mutual assent. See Lord, 748
A.2d at 400 (citing Corbin on Contracts § 8.12).5 The District Court rightly considered all
the provisions of the Proxy Statement and Merger Agreement in concluding that no
enforceable promise to the shareholders existed. See In re Burlington Coat Factory Sec.
Litig., 114 F.3d at 1426.
5
Mutual assent was clearly present in Lord, as the “complaint state[d] that Lord ‘disclosed
the information related to Souder's improper practices requested by Hagermann, after Lord
sought and obtained from Hagermann assurances that if she disclosed such information, she
would be protected from any reprisals by Souder.’” Lord, 748 A.2d at 399.
14
“The primary purpose of the Securities Act is to protect investors by requiring
publication of material information thought necessary to allow them to make informed
investment decisions concerning public offerings of securities in interstate commerce.”
Pinter v. Dahl, 486 U.S. 622, 638 (1988). These disclosures to shareholders, without a
pleading of specific facts indicating how these routine disclosures were somehow
exceptional, do not also constitute a “promise” between the disclosing corporations and
shareholders, especially shareholders who, as here, were informed in those disclosures
that they had no rights and are not even pled to have owned their shares at either the time
the merger agreement was signed, the agreement was disclosed, or the merger was
approved by shareholders. See App. 5 (second class of plaintiffs was those “who held
their stock on March 1, 2000”). Plaintiffs cite no authority supporting this vast expansion
of liability.
Assuming, arguendo, that the disclosure of the provisions of the merger
agreement created a “promise” to the future shareholders of U.S. West, as plaintiffs here
have effectively pled, the second class of Plaintiffs cannot show that they reasonably
relied on the “No Solicitation” provision to their detriment. First of all, the agreement
included an “ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES”
provision that placed Plaintiffs on notice that there was no promise upon which they
could rely. Furthermore, the “Termination Fees” provision, which was fatal to the first
class of plaintiffs, is equally fatal to the second proposed class. Nacchio may indeed
15
deserve condemnation for the casual manner in which he publicly dismissed Qwest’s
commitments; nonetheless, Plaintiffs cannot claim to have been surprised here. By virtue
of the “Termination Fees” provision, investors who purchased U.S. West stock on March
1, 2000 should have been aware that the non-solicitation clause was not of unlimited
scope. To believe otherwise and fail to account for the risks that remained, risks which
the “Termination Fees” provision actually served to both mitigate and quantify, was
unreasonable. Thus, the presence of this provision likewise precludes any claim of
“promissory estoppel” by the Plaintiffs.
IV.
Establishing a § 14(a) securities violation requires a plaintiff to comply with the
heightened pleading requirements of the PSLRA and sufficiently plead that any alleged
misstatements or omissions would have been material to a reasonable investor. However,
when the non-solicitation provision contained in the U.S. West/Qwest Merger
Agreement, and reprinted in the Proxy Statement, is read in conjunction with the
“Termination” provision in that same Statement, no reasonable investor could believe that
the “No Solicitation” clause was absolute or that the merger could never have been
undermined by alternate offers. When that provision is further considered in conjunction
with Nacchio’s actual statement and Plaintiffs’ particular legal theory – that Qwest and
Nacchio secretly intended not to comply with the non-solicitation clause and did not
consider themselves bound by the agreement – those statements actually indicate that
Qwest and Nacchio did consider themselves bound by its provisions. Plaintiffs’
16
promissory estoppel theory is flawed from the start, as Plaintiffs failed to plead the
existence of an enforceable “promise.” Furthermore, Plaintiffs’ reliance on the non-
solicitation clause was unreasonable. The judgment of the District Court will be
affirmed.
TO THE CLERK:
Please file the foregoing opinion.
/s/ D. Brooks Smith
Circuit Judge
17