Michael Kuebler v. Vectren Corporation

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19‐2973
MICHAEL KUEBLER, et al.,
Plaintiffs‐Appellants,
v.
VECTREN CORPORATION, et al.,
Defendants‐Appellees.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Evansville Division.
No. 3:18‐cv‐00113‐RLY‐MPB — Richard L. Young, Judge.
____________________
ARGUED SEPTEMBER 18, 2020 — DECIDED SEPTEMBER 13, 2021
____________________
Before SYKES, Chief Judge, and HAMILTON and ST. EVE, Cir‐
cuit Judges.
HAMILTON, Circuit Judge. This securities case arose from
the 2018 merger between Vectren Corporation, an Indiana
public utility and energy company, and CenterPoint Energy,
Inc., a public utility holding company. CenterPoint eventually
acquired all Vectren stock for $72.00 per share in cash. In the
meantime, however, several Vectren shareholders filed this
2 No. 19‐2973
suit alleging violations of the Securities Exchange Act of 1934
(“Exchange Act”), 15 U.S.C. § 78a et seq.
First, the shareholders tried to enjoin the shareholder vote
on the merger. The district court denied that request. The
shareholders then filed an amended complaint alleging that
Vectren’s Proxy Statement was misleading in violation of Sec‐
tion 14(a) of the Exchange Act, § 78n(a). Plaintiffs argued that
the Proxy Statement should have included two omitted finan‐
cial metrics used by Vectren’s financial advisor in its analysis
leading to its opinion that the merger terms were fair to Vec‐
tren shareholders. The first omitted metric, Unlevered Cash
Flow Projections, forecast the gross after‐tax annual cash flow
for Vectren between 2018 and 2027. The second omitted met‐
ric, Business Segment Projections, showed separate financial
projections for each of Vectren’s three main business lines.
Without this information, the shareholders allege, they
were unable to assess the fair value of their Vectren shares be‐
cause they could not replicate the adviser’s valuation analysis.
In other words, the shareholders believe that the adviser un‐
dervalued their Vectren shares, and they wanted to double‐
check its work. The district court granted Vectren’s motion to
dismiss, finding that the shareholders had failed to allege ad‐
equately both materiality of the omissions and any resulting
economic loss. We affirm.
I. Factual Background
A. The Merger
We review de novo a district court’s decision on a motion
to dismiss for failure to state a claim under Rule 12(b)(6), treat‐
ing plaintiffs’ well‐pleaded factual allegations as true and giv‐
ing the plaintiffs the benefit of reasonable inferences from
No. 19‐2973 3
them. Manistee Apartments, LLC v. City of Chicago, 844 F.3d 630,
633 (7th Cir. 2016).
In late 2017, Vectren began to explore the possibility of a
strategic merger. In January 2018, Vectren retained Merrill
Lynch as its financial advisor and directed it to contact parties
who might be interested in acquiring Vectren. Vectren’s board
of directors told Merrill Lynch to tell potential buyers that the
board strongly preferred a transaction in which a substantial
portion of the consideration would be paid in cash rather than
other securities.
By February 2018, Vectren had narrowed the pool of inter‐
ested buyers to four serious contenders: CenterPoint and
three others that we refer to as Bidders A, B, and D. On Feb‐
ruary 21, all four submitted non‐binding proposals. Center‐
Point proposed an all‐cash transaction at $70.00 per share.
Bidder A proposed a price of $72.50 per share with up to 83
percent in cash and the remainder in common stock of Bidder
A. Bidder B proposed an all‐cash price range of $73.00 to
$75.00. Bidder D proposed a price range of $65.00 to $70.00
paid in an unspecified combination of cash and stock of Bid‐
der D. Through late February and March, Vectren negotiated
with all four toward the end of inviting binding offers to ac‐
quire Vectren.
In early April, CenterPoint and Bidder A submitted new
offers. Bidder A proposed $70.50 per share with a mix of 83
percent cash and 17 percent common stock of Bidder A. Cen‐
terPoint proposed $70.00 per share, all cash. Bidders B and D
declined to submit binding offers. The Vectren board told
management to continue negotiating with both Bidder A and
CenterPoint and to tell them that the board was not ready to
4 No. 19‐2973
move forward at less than $72.00 per share and strongly pre‐
ferred an all‐cash or substantially all‐cash deal.
On April 16, CenterPoint and Bidder A submitted their
“best and final” offers. Bidder A offered $71.00 per share, with
the initial 83 percent to 17 percent cash‐stock mix unchanged.
CenterPoint increased its offer to $71.50, all cash. On April 18,
Merrill Lynch told CenterPoint that Vectren wanted to move
forward if CenterPoint was willing to negotiate on the final
price per share and on certain other terms (primarily related
to operational restrictions, financing covenants, and termina‐
tion fees). Merrill Lynch also said that the board continued to
push for a final offer of at least $72.00 per share. CenterPoint
said it was prepared to offer that price, and over the next three
days, CenterPoint and Vectren hammered out the remaining
issues in the merger agreement.
On April 21, 2018, the Vectren board met to consider the
final terms of CenterPoint’s offer at $72.00 per share, all cash.
The $72.00 per share was a 17.4 percent premium over the
stock’s closing price on August 21, 2017, the last day before
the first media reports about a possible takeover of Vectren.
Following the meeting, Merrill Lynch reviewed the financial
aspects of the transaction and provided the board with its fair‐
ness opinion. The opinion said that as of April 21, subject to
various assumptions and limitations described in the opinion,
Merrill Lynch deemed the $72.00 per share price to be fair.
Later that day, the Vectren board unanimously adopted the
merger agreement, and Vectren and CenterPoint executed the
agreement. On April 23, the merger was announced publicly.
No. 19‐2973 5
B. The Lawsuit
On June 18, 2018, Vectren filed its preliminary proxy state‐
ment. In response, six shareholders sued Vectren and its
board alleging that the preliminary proxy statement was mis‐
leading because it omitted key information. A seventh share‐
holder filed suit after Vectren filed its definitive proxy state‐
ment with the U.S. Securities and Exchange Commission on
July 16.
All seven suits alleged violations of Section 14(a) of the Ex‐
change Act. When two of the seven shareholders moved to
enjoin the planned shareholder vote on the merger, the dis‐
trict court consolidated the seven suits and appointed Michael
Kuebler, James Danigelis, and Michael Nisenshal as lead
plaintiffs. Following a hearing, the district court denied a pre‐
liminary injunction. Shareholders voted on August 28. The
merger was approved by 61.6 percent of Vectren’s outstand‐
ing shares, which amounted to more than 95 percent of the
total shares voted. Vectren and CenterPoint announced the
completion of their merger on February 1, 2019.
After their effort to block the merger failed, plaintiffs
amended their complaint to ask for damages based on the
omission of two allegedly material financial metrics that they
alleged rendered the Proxy Statement “misleadingly incom‐
plete” in violation of Section 14(a) of the Exchange Act and
the SEC’s implementing Rule 14a‐9, 17 C.F.R. § 240.14a‐9. The
first category of omitted metrics, Unlevered Cash Flow Pro‐
jections, showed the gross after‐tax cash flow that Vectren was
forecast to generate annually between 2018 and 2027. The sec‐
ond category, Business Segment Projections, reflected indi‐
vidual financial projections for Vectren’s three main business
lines: gas, electric, and non‐regulated (engineering and
6 No. 19‐2973
construction). The district court granted the defendants’ mo‐
tion to dismiss for failure to state a claim. Kuebler v. Vectren
Corp., 412 F. Supp. 3d 1000 (S.D. Ind. 2019).
Before diving into the law of Section 14(a), we address a
procedural wrinkle that arose in the district court. Plaintiffs
sought to bolster their allegations by attaching to the
amended complaint an affidavit from a financial expert, M.
Travis Keath. The district court did not consider the Keath af‐
fidavit on the ground that it did not form the basis of plain‐
tiffs’ claims but was “merely evidence.” Id. at 1004. For that rea‐
son, the court explained, the Keath affidavit was irrelevant in
determining whether plaintiffs had stated a claim. On this
procedural point, we respectfully disagree.
A plaintiff opposing a Rule 12(b)(6) motion to dismiss may
submit evidence to illustrate allegations without turning that
motion into a Rule 56(a) motion for summary judgment. A de‐
fendant filing a motion under Rule 12(b)(6) or 12(c) can base
its motion on only “the complaint itself, documents attached
to the complaint, documents that are critical to the complaint
and referred to in it, and information that is subject to proper
judicial notice.” Geinosky v. City of Chicago, 675 F.3d 743, 745
n.1 (7th Cir. 2012).
In opposing such a motion, however, a plaintiff enjoys
much more flexibility. In the wake of Ashcroft v. Iqbal, 556 U.S.
662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544(2007), a plaintiff who is opposing a Rule 12(b)(6) or Rule 12(c)
motion and who can “show a court that there is likely to be
some evidentiary weight behind the pleadings the court must
evaluate” may find it beneficial to do so. Geinosky, 675 F.3d at
745 n.1, quoting Roe v. Bridgestone Corp., 492 F. Supp. 2d 988,
1007 (S.D. Ind. 2007); see also Peterson v. Wexford Health
No. 19‐2973 7
Sources, Inc., 986 F.3d 746, 752 n.2 (7th Cir. 2021) (“In ‘oppos‐
ing a Rule 12(b)(6) motion,’ Peterson was free to ‘elaborate on
his factual allegations so long as the new elaborations are con‐
sistent with the pleadings.’”), quoting Geinosky, 675 F.3d at
745 n.1; Bell v. Publix Super Markets, Inc., 982 F.3d 468, 480 n.2
(7th Cir. 2020) (“In opposing a motion to dismiss … a plaintiff
may describe the evidence she expects to offer to support fac‐
tual allegations, and nothing prevents a plaintiff from … ten‐
dering affidavits … to show that those expectations about ev‐
idence are realistic.”) (citations omitted); Bishop v. Air Line Pi‐
lots Ass’n, 900 F.3d 388, 399 & n.28 (7th Cir. 2018) (“under the
more stringent pleading standards” of Iqbal and Twombly, dis‐
trict court properly considered “several exhibits that [were]
consistent with the allegations in the complaint”). Accord‐
ingly, there was nothing improper in plaintiffs’ inclusion of
the Keath affidavit or their reliance upon it in opposing dis‐
missal.
As explained below, however, the Keath affidavit does not
provide sufficient support for plaintiffs’ assertion that the
omitted metrics were material to voting for or against the pro‐
posed merger. See TSC Industries, Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976). While the Keath affidavit generally sup‐
ports plaintiffs’ position that shareholders would have liked
to have more information rather than less, it does not help
plaintiffs explain why any shareholder was actually or likely
to have been misled by the omission of the two additional
metrics in light of all the other information provided to share‐
holders in the Proxy Statement. See Beck v. Dobrowski, 559 F.3d
680, 685 (7th Cir. 2009) (affirming dismissal of Section 14(a)
claim for lack of materiality).
8 No. 19‐2973
II. Discussion
A. Section 14(a) of the Exchange Act
Section 14(a) prohibits soliciting proxies in violation of
SEC rules and regulations. 15 U.S.C. § 78n(a)(1). The SEC’s
Rule 14a‐9 prohibits including “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,”
as well as omitting any material fact required to render state‐
ments within the proxy statement not false or misleading. 17
C.F.R. § 240.14a‐9(a).
To state a claim under Section 14(a), a plaintiff must allege:
(i) that the proxy statement contained a material misstatement
or omission that (ii) caused the plaintiff’s injury, and (iii) that
the proxy solicitation was an essential link in accomplishing
the transaction. Mills v. Electric Auto‐Lite Co., 396 U.S. 375, 384–
85 (1970).
“An omitted fact is material if there is a substantial likeli‐
hood that a reasonable shareholder would consider it im‐
portant in deciding how to vote.” TSC Industries, 426 U.S. at
449. Keeping in mind that a proxy statement is likely to pro‐
vide a wealth of information, a plaintiff must show “a sub‐
stantial likelihood that the disclosure of the omitted fact
would have … significantly altered the ‘total mix’ of infor‐
mation” available to investors. Id.Causation in securities law consists of two components:
transaction causation and loss causation. Dura Pharmaceuti‐
cals, Inc. v. Broudo, 544 U.S. 336, 341–42 (2005); Grace v.
Rosenstock, 228 F.3d 40, 47 (2d Cir. 2000). Transaction causa‐
tion, often called reliance, is generally easier to establish than
loss causation. See Dura Pharmaceuticals, 544 U.S. at 345–46.
No. 19‐2973 9
Where materiality is alleged and proven, proof of reliance on
the particular statement or omission is not necessary. Mills,
396 U.S. at 384–85 (rejecting court of appeals’ additional re‐
quirement of proof that specific defect in proxy statement ac‐
tually had a decisive effect on voting). The proxy solicitation
itself serves as the causal link in the transaction—that the
challenged violation(s) caused the plaintiff to engage in the
challenged transaction. Id. at 385; Virginia Bankshares, Inc. v.
Sandberg, 501 U.S. 1083, 1099–1100 (1991). The loss causation
requirement, codified in the Private Securities Litigation Re‐
form Act (PSLRA), requires a plaintiff to allege and prove that
the challenged misrepresentations or omissions caused her
economic loss. 15 U.S.C. § 78u‐4(b)(4); Dura Pharmaceuticals,
544 U.S. at 342; see also Law v. Medco Research, Inc., 113 F.3d
781, 786–87 (7th Cir. 1997) (§ 78u‐4(b)(4) codified judge‐made
“loss causation” rule).1
Finally, the PSLRA imposes heightened pleading require‐
ments on Section 14(a) plaintiffs. 15 U.S.C. § 78u‐4(b)(1); Beck,
559 F.3d at 681–82. Plaintiffs must identify each statement al‐
leged to have been misleading, the reason why each statement
1 In Dura Pharmaceuticals, the Supreme Court held that both transac‐
tion causation and loss causation are required under Section 10(b) of the
Exchange Act. 544 U.S. at 341–42. The Court has yet to decide whether loss
causation and transaction causation must both be proved under Section
14(a), as well, but we are persuaded by the Second and Ninth Circuits that
the Court’s reasoning extends to Section 14(a) claims. See Grace, 228 F.3d
at 47 (“both loss causation and transaction causation must be proven in
the context of a private action under § 14(a) of the 1934 Act and SEC Rule
14a‐9”), citing Wilson v. Great American Indus., Inc., 979 F.2d 924, 931 (2d
Cir. 1992); New York City Employees’ Retirement Sys. v. Jobs, 593 F.3d 1018,
1023 (9th Cir. 2010), overruled in part on other grounds by Lacey v. Mari‐
copa County, 693 F.3d 896 (9th Cir. 2012) (en banc).
10 No. 19‐2973
was misleading, and all relevant facts supporting that conclu‐
sion. 15 U.S.C. § 78u‐4(b)(1).
In granting the defendants’ motion to dismiss, the district
court held that plaintiffs had failed to allege adequately both
materiality and loss causation. Kuebler, 412 F. Supp. 3d at
1012. We consider each issue in turn.
B. Materiality
The issue of materiality is a mixed question of law and
fact. TSC Industries, 426 U.S. at 450. A court may resolve the
question of materiality as a matter of law, however, when the
information at issue is “so obviously unimportant” to an in‐
vestor “that reasonable minds could not differ on the ques‐
tion.” Ganino v. Citizens Utilities Co., 228 F.3d 154, 162 (2d Cir.
2000); accord, Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988),
following TSC Industries, 426 U.S. at 449. Here, the district
court determined that the omitted Business Segment Projec‐
tions and Unlevered Cash Flow Projections were immaterial
as a matter of law in light of all the other information dis‐
closed in the Proxy Statement. We agree.
1. Plaintiffs’ Requested “Plainly Immaterial” Standard
Plaintiffs argue first that the district court imposed too
stringent a standard and that dismissal should be denied un‐
less the alleged omissions were “plainly immaterial,” citing
Carvelli v. Ocwen Financial Corp., 934 F.3d 1307 (11th Cir. 2019).
Carvelli held that the puffery defense, generally accepted in
the common‐law context, also applies under securities laws:
“Excessively vague, generalized, and optimistic comments—
the sorts of statements that constitute puffery—aren’t those
that a ‘reasonable investor,’ exercising due care, would view
as moving the investment‐decision needle—that is, they’re
No. 19‐2973 11
not material.” Id. at 1320. The court continued, “when consid‐
ering a motion to dismiss a securities‐fraud action, a court
shouldn’t grant unless the alleged misrepresentations—puff‐
ery or otherwise—are ‘so obviously unimportant to a reason‐
able investor that reasonable minds could not differ on the
question of their importance.’” Id. at 1320–21, quoting Ganino,
228 F.3d at 162.
We do not disagree with plaintiffs’ reliance on Carvelli or
Ganino. We do disagree, however, with plaintiffs’ attempt to
divorce the “so obviously unimportant” language from both
the larger context of Carvelli and the governing materiality
standard in TSC Industries. We do not read Carvelli’s “so obvi‐
ously unimportant” language as narrowing the materiality
standard in TSC Industries, which used essentially the same
language. 426 U.S. at 450. Rather, the Carvelli language was
intended to caution that the conclusion that a statement con‐
stitutes puffery does not relieve a court from considering even
the unlikely possibility that, in context and in light of the total
mix of available information, a reasonable investor might still
attach importance to the “puffed” statement. Carvelli, 934 F.3d
at 1320. In doing so, Carvelli reiterated the familiar TSC Indus‐
tries materiality standard—which the district court here ap‐
plied correctly. That standard requires courts to look at all
available information in determining the materiality of a chal‐
lenged omission or misstatement. Id. at 1317; accord, Basic
Inc., 485 U.S. at 231–32; TSC Industries, 426 U.S. at 449. With
TSC Industries’ holistic approach to the materiality of omis‐
sions in view, we turn to the Proxy Statement.
12 No. 19‐2973
2. Whether the Omitted Projections Were Material
(a) The Proxy Statement
The Proxy Statement provided voluminous information
about the background of the merger and its projected finan‐
cial and community impacts. Most relevant to this appeal, the
Proxy Statement summarized Merrill Lynch’s fairness opin‐
ion, including three valuation analyses: one based on dis‐
counted cash flow, one using comparisons to other publicly
traded companies, and a third comparing other similar trans‐
actions. Only the discounted cash flow analysis is at issue
here. The summary included a table of forward‐looking finan‐
cial information prepared by Vectren’s management and pro‐
vided to Merrill Lynch. Plaintiffs allege that omission of the
Business Segment Projections and Unlevered Cash Flow Pro‐
jections rendered the summary of the discounted cash flow
analysis and the table summarizing forward‐looking financial
information “misleadingly incomplete.”
(1) The Discounted Cash Flow Analysis
A discounted cash flow analysis estimates the present
value of an investment based on future cash flows. If the dis‐
counted cash flow exceeds the current cost of the investment,
the opportunity could result in positive returns. Merrill
Lynch’s discounted cash flow analysis used the weighted cost
of capital—the average rate of return that the company’s
shareholders expect for a given year—as the discount rate.
Here, as part of its fairness opinion, Merrill Lynch performed
the discounted cash flow analysis to estimate the present
value of the unlevered, after‐tax free cash flows that Vectren
was forecast to generate from 2018 through 2027. These esti‐
mates are the omitted Unlevered Cash Flow Projections.
No. 19‐2973 13
As detailed in the Proxy Statement, Merrill Lynch per‐
formed the discounted cash flow analysis as a sum‐of‐the‐
parts analysis, first calculating the cash flows and terminal
values for Vectren’s gas utility business, its electric utility
business, and its non‐regulated business segments, respec‐
tively, to the year 2027.2 These estimated values are the omit‐
ted Business Segment Projections. Next, Merrill Lynch dis‐
counted the cash flows and terminal values for each business
segment to their respective present values as of December 31,
2017.
To do this, Merrill Lynch used three discount rate ranges
based on each business segment’s weighted average cost of
capital: (i) 5.0 to 5.8 percent for the gas utility business; (ii) 4.7
to 5.4 percent for the electric utility business; and (iii) 7.8 to
9.6 percent for the non‐regulated business. Merrill Lynch then
deducted net debt as of December 31, 2017, to derive equity
values for each segment. From there, Merrill Lynch combined
the low ends of the equity value ranges for each business seg‐
ment to calculate a low estimate for Vectren’s implied equity
value, and it combined the high ends of the equity value
ranges for each business segment to calculate a high estimate.
This process yielded an implied per share equity value range
for Vectren of $59.00 to $75.25. The final merger price of $72.00
per share was near the high end of that range.
(2) The Consolidated Projections
The table summarizing forward‐looking financial projec‐
tions, referred to by plaintiffs as the “Consolidated Projec‐
tions,” included estimates of net income, depreciation and
2 A terminal value assumes that a business or business segment will
grow at a set growth rate in perpetuity after the forecast period.
14 No. 19‐2973
amortization, EBITDA,3 and capital expenditures for 2018
through 2027. Here is the table of financial projections actu‐
ally provided in the Proxy Statement, but with only the first
four years:
Year Ended December 31,
2018 2019 2020 2021
(in thousands)
Net Income $ 236,739 $ 257,429 $ 280,241 $ 309,123
Depreciation and $ 292,331 $ 319,246 $ 342,599 $ 355,175
Amortization
EBITDA $ 685,484 $ 753,257 $ 816,175 $ 877,453
Capital Expenditures,
excluding AFUDC
$(631,551) $(622,532) $(599,633) $(778,389)
equity
Vectren’s Proxy Statement omitted the Unlevered Cash Flow
Projections provided to Merrill Lynch for use in its dis‐
counted cash flow analysis.4
(b) The Omitted Metrics
On appeal, plaintiffs focus primarily on the Unlevered
Cash Flow Projections and Business Segment Projections as
they relate to the summary of the discounted cash flow anal‐
ysis. Plaintiffs argue that without those two metrics, share‐
holders could not independently assess the Merrill Lynch
3EBITDA stands for Earnings Before Interest, Taxes, Depreciation,
and Amortization. This metric is often used to evaluate a company’s op‐
erating performance independent of potentially “noisy” factors that can
vary from company to company based on existing capital structure, tax
issues, and the like.
4AFUDC in the table refers to allowance for funds used during con‐
struction.
No. 19‐2973 15
analysis and reach their own opinions on whether $72.00 per
share was actually a fair price in the merger. Plaintiffs allege
that the omissions rendered the Proxy Statement misleading
because the Unlevered Cash Flow Projections are “irreplacea‐
ble when it comes to fully, fairly, and properly understanding
a company’s projections and value.”
(1) Business Segment Projections
Plaintiffs briefly address the Business Segment Projec‐
tions, arguing that they were material because they were a key
input in Merrill Lynch’s discounted cash flow analysis. This
argument misses the point. We assume that Merrill Lynch
used the Business Segment Projections in its discounted cash
flow analysis, but that fact does not automatically render
them material for purposes of Section 14(a). Two indisputable
facts make the point. First, CenterPoint was offering to ac‐
quire Vectren as a whole enterprise, not in individual business
segments. Second, plaintiffs owned shares in Vectren as a
whole enterprise also, not individual business segments. The
proposed merger did not give shareholders the option of sell‐
ing separate interests in separate business lines. Plaintiffs thus
failed to allege a substantial likelihood that a reasonable
shareholder would have viewed the Business Segment Projec‐
tions as significantly altering the total mix of available infor‐
mation material to whether to vote for or against the proposed
merger. See TSC Industries, 426 U.S. at 449.
(2) Unlevered Cash Flow Projections
Plaintiffs devote more attention to the omitted Unlevered
Cash Flow Projections, but we agree with Judge Young that
those numbers were immaterial as a matter of law, given all
the other information provided. As part of the Consolidated
16 No. 19‐2973
Projections, the Proxy Statement disclosed Vectren’s own pro‐
jections of net income, depreciation and amortization,
EBITDA, and capital expenditures. On appeal, plaintiffs as‐
sert in conclusory terms the superiority of unlevered cash
flow as a measure of a company’s intrinsic value, but superi‐
ority is not synonymous with materiality. Plaintiffs seek these
projections not because of any alleged error in the disclosed
Consolidated Projections but because plaintiffs say they
wanted to replicate Merrill Lynch’s discounted cash flow
analysis to make an independent determination of fair value.
(a) Vectren’s Disclosure Obligations Under Sec‐
tion 14(a)
Plaintiffs argue that the Proxy Statement could not pro‐
vide a “fair summary” of Merrill Lynch’s fairness opinion
without disclosing all the key inputs used by Merrill Lynch in
its valuation analyses. That argument reaches much too far,
exaggerating Vectren’s disclosure obligations under Section
14(a).
In TSC Industries, the Supreme Court explained the logic
underpinning the materiality standard and its requirement
that a reasonable investor would have viewed the omitted fact
“as having significantly altered the ‘total mix’ of information
made available.” 426 U.S. at 449. The Court emphasized that
“the disclosure policy embodied in the proxy regulations is
not without limit.” Id. at 448, citing Mills, 396 U.S. at 384. To
that effect, the Court reasoned that:
if the standard of materiality is unnecessarily
low, not only may the corporation and its man‐
agement be subjected to liability for insignifi‐
cant omissions … but also management’s fear of
No. 19‐2973 17
exposing itself to substantial liability may cause
it simply to bury the shareholders in an ava‐
lanche of trivial information.
Id. The goal is to strike the proper balance between “not
enough” information and an “avalanche” of information.
TSC Industries rejected this court’s more expansive stand‐
ard of materiality, under which material facts had included
“all facts which a reasonable shareholder might consider im‐
portant.” Id. at 445, quoting Northway, Inc. v. TSC Industries,
Inc., 512 F.2d 324, 330 (7th Cir. 1975) (emphasis added). Such
a standard, the Court reasoned, painted the operative inquiry
in broad brushstrokes unintended by the Court’s earlier deci‐
sions. Id. at 446–47; see, e.g., Mills, 396 U.S. at 381 (Sec‐
tion 14(a)’s purpose is to ensure that disclosures by corporate
management enable shareholders to make informed choices).
Rather, the Court explained, the function of the materiality
standard was to evaluate whether there was a substantial like‐
lihood that a reasonable shareholder would have considered
the omitted fact important in deciding how to vote. TSC In‐
dustries, 426 U.S. at 449. It made sense, then, to formulate a
standard of materiality that acknowledged the value of the
omitted information in light of the total mix of information
made available to shareholders. Id. Because shareholders did
not decide how to vote in the abstract, it did not make sense
to assess the value of an omitted fact in the abstract.
Deciding materiality of the omissions here requires us to
start from all the information made available to shareholders
in the Proxy Statement, including the Consolidated Projec‐
tions for net income, depreciation and amortization, EBITDA,
and capital expenditures, excluding AFUDC equity. Plaintiffs
simply have not articulated a plausible theory under which
18 No. 19‐2973
they needed disclosure of one more metric—the Unlevered
Cash Flow Projections—to discover unrecognized value in
their Vectren shares. The projections came from Vectren man‐
agement, which had no motive to conceal the company’s
value.
This is the fundamental defect in plaintiffs’ allegations of
materiality. The materiality standard requires courts to assess
the value of the omitted information in light of all the infor‐
mation made available to shareholders. Plaintiffs were there‐
fore required to identify circumstances under which disclo‐
sure of the Unlevered Cash Flow Projections would plausibly
have affected their votes for or against the merger, which
would have required that those omitted numbers, if disclosed,
would have shown that their Vectren shares were underval‐
ued in the merger. Plaintiffs have not done so. Instead, as dis‐
cussed above, plaintiffs argue that materiality is a question
best resolved by the trier of fact. That may be true in many
cases, but that general point does not answer the question in
a particular case. We are not saying in the abstract that pro‐
jected net income or loss or other numbers are inherently
“better” or more material than projected cash flows. Rather,
we are saying that in this case, plaintiffs’ have not offered a
plausible theory for treating the Vectren projected cash flows
as material in light of all the other information provided to
shareholders.
Plaintiffs rely on Campbell v. Transgenomic, Inc., 916 F.3d
1121 (8th Cir. 2019), but the case is readily distinguishable
based on the structure of the transaction and the nature of the
omitted information. In Campbell, the acquiring company had
agreed to pay for the target’s shares not with cash but with
the acquiring company’s own stock. In such a transaction, the
No. 19‐2973 19
Eighth Circuit held, whether the acquiring corporation’s pro‐
jected net income or loss was a material fact could not be de‐
termined at the motion to dismiss stage. Id. at 1125–26. In
Campbell, Precipio, Inc. acquired Transgenomic, Inc. through
a merger. Rather than an all‐cash deal, like the CenterPoint
acquisition of Vectren, Precipio offered Transgenomic share‐
holders an exchange of shares. Campbell v. Transgenomic, Inc.,
2018 WL 2063348, at *1 (D. Neb. May 3, 2018). The district and
circuit court opinions in the case do not spell out all the
choices available to Transgenomic shareholders, but at least
one option was an exchange of shares at a ratio of 25.7505 to
1.00, later improved to 24.4255 to 1.00. Id. Since one option for
the Transgenomic shareholders was to become Precipio
shareholders, the financial health of Precipio was clearly ma‐
terial.
After the merger, a former Transgenomic shareholder
sued under Section 14(a) alleging that the proxy statement
“failed to give Transgenomic shareholders an accurate picture
of Precipio’s value.” Campbell, 916 F.3d at 1124. The district
court had dismissed for failure to state a claim, but the Eighth
Circuit reversed. Id.
The Eighth Circuit held in relevant part that whether the
omission of Precipio’s own projected net income or loss made
the proxy statement materially misleading could not be de‐
cided on a motion to dismiss. Id. at 1125–26. The court ex‐
plained that it had long considered this particular metric—net
income or loss—“to be among the three most valuable figures
in determining the fairness of an acquisition under the Clay‐
ton Act.” Id. at 1125, citing Mississippi River Corp. v. FTC, 454
F.2d 1083, 1086 (8th Cir. 1972). While the proxy statement dis‐
closed gross profit projections for pre‐merger Precipio, the
20 No. 19‐2973
court found that “[b]y omitting the (allegedly) significantly
lower projections for Precipio’s net income/loss, the proxy
statement may have presented Precipio in a false light that
was materially misleading.” Id.Put simply, Transgenomic’s disclosure of Precipio’s pro‐
jected gross profits did not resolve as a matter of law the ma‐
teriality of the omission of Precipio’s projected net profits or
losses, at least where the plaintiff alleged that the disclosed
projections significantly overvalued Precipio and the omitted
projections showed or at least plausibly implied a signifi‐
cantly lower value for Precipio. Id. at 1125–26.
In such a stock‐for‐stock deal, the Eighth Circuit’s reason‐
ing is compelling. The merger terms here were quite different,
however. Vectren’s shareholders were not given the option of
becoming CenterPoint shareholders in the merger. They were
being offered only cash for their Vectren shares. If Merrill
Lynch had undervalued Vectren shares, that would have been
important to know, but plaintiffs have not actually alleged
that, nor have they alleged or argued plausibly how the omis‐
sion of the Unlevered Cash Flow Projections could have kept
hidden a value in Vectren shares that was not otherwise dis‐
closed. In other words, plaintiffs have not plausibly explained
why Vectren’s omission of the Unlevered Cash Flow Projec‐
tions rendered the Proxy Statement materially misleading in
light of all the information made available to shareholders.
See TSC Industries, 426 U.S. at 449; Basic, Inc., 485 U.S. at 231–
32. Further, plaintiffs, unlike the plaintiff in Campbell, do not
actually allege that the Consolidated Projections undervalued
Vectren or that the company was worth more than the $72.00
per share paid in the merger. As persuasive as Campbell is on
its facts, it is not apposite here.
No. 19‐2973 21
(b) Independent Determination of Fair Value
As a final note on materiality, we emphasize that share‐
holders are not entitled to the disclosure of every financial in‐
put used by a financial advisor so that they may double‐check
every aspect of both the advisor’s math and its judgment. Sec‐
tion 14(a) is not a license for shareholders to acquire all the
information needed to act as a sort of super‐appraiser: ap‐
praising the appraiser’s appraisal after the fact. E.g., Beck, 559
F.3d at 685 (shareholders’ allegations that they “might have
liked to have more backup information” were not enough to
suggest “that any shareholder was misled or was likely to be
misled” without it); see also Skeen v. Jo‐Ann Stores, Inc., 750
A.2d 1170, 1174 (Del. 2000) (rejecting claim that shareholders
should be given all financial data necessary to make an inde‐
pendent determination of fair value); In re 3Com Shareholders
Litig., 2009 WL 5173804, at *2–3 (Del. Ch. Dec. 18, 2009) (reject‐
ing claim for omission of financial projections because “ade‐
quate and fair summary of the work performed by [advisor]
[was] included in the proxy”); In re Trulia, Inc. Stockholder
Litig., 129 A.3d 884, 900–01 & n.57 (Del. Ch. 2016) (collecting
cases, including Globis Partners, L.P. v. Plumtree Software, Inc.,
2007 WL 4292024, at *12–13 (Del. Ch. Nov. 30, 2007), and In re
General Motors (Hughes) Shareholder Litig., 2005 WL 1089021, at
*16 (Del. Ch. May 4, 2005), (stating that a “[fair] summary
does not need to provide sufficient data to allow the stock‐
holders to perform their own independent valuation”), aff’d,
897 A.2d 162 (Del. 2006)).
After all, information made available to shareholders of a
publicly traded company is also available to competitors.
Courts need to be careful about requiring full public disclo‐
sure of sensitive internal financial information. See Stroud v.
22 No. 19‐2973
Grace, 606 A.2d 75, 89 (Del. 1992) (noting that courts “must
balance the board’s duty to disclose all available material in‐
formation in connection with the contemplated shareholder
vote against its concomitant duty to protect the corporate en‐
terprise”); Alessi v. Beracha, 849 A.2d 939, 947 (Del. Ch. 2004)
(acknowledging that in some situations a corporation may not
have to disclose material information to its shareholders in or‐
der to protect pre‐merger negotiations). (We recognize that
much of Vectren’s business consisted of regulated monopoly
public utility services. But other business segments faced
competition, and even a public utility faces competition in
buying needed goods and services.)
Plaintiffs also cite Smith v. Robbins & Myers, Inc., 969 F.
Supp. 2d 850 (S.D. Ohio 2013), a Section 14(a) case where
shareholders sufficiently alleged the materiality of omitted
metrics underlying a financial advisor’s appraisal of share
value. In Smith, the plaintiff alleged that the acquisition of
Robbins & Myers by a company called NOVI was the product
of a flawed process conducted in breach of defendants’ duties
under state law and obligations under Section 14(a). The
plaintiff alleged that the Robbins & Myers board had, among
other violations, permitted conflicted parties to control the
sale process, relied on flawed financial analyses, and failed to
inform itself adequately of the value of the company and the
fairness of the merger terms. Id. at 866.
The district court held that the plaintiff had sufficiently al‐
leged the materiality of omitted inputs and assumptions used
to derive the discount rate employed by the target’s financial
advisor, Citi, in its discounted cash flow analysis. Id. at 871–
72. The court reasoned that without the omitted information,
shareholders “were unable to make any meaningful
No. 19‐2973 23
determination whether that range reflected the Company’s
value or was the result of Citi’s unreasonable judgment, and
were unable to reject Citi’s opinion that the Merger Consider‐
ation was fair to the Company’s shareholders.” Id. at 871.
The court acknowledged that other courts had dismissed
shareholder claims seeking disclosure of similar metrics un‐
derlying a financial advisor’s discounted cash flow analysis,
but it distinguished the case at hand based on the problems in
the bidding process. We have no such circumstances here. The
Smith plaintiff had alleged that prior to receiving NOVI’s of‐
fer, Citi and its competitor, UBS, had been using a lower
weighted average cost of capital for Robbins & Myers in dis‐
counted cash flow analyses. After receiving NOVI’s offer,
however, plaintiff alleged, Citi used a grossly inflated
weighted cost of capital in its discounted cash flow analysis,
resulting in a significantly lower valuation of Robbins & My‐
ers. 969 F. Supp. 2d at 871.
Here, we have no similar allegations that the merger be‐
tween CenterPoint and Vectren was marred by bad faith, dis‐
loyalty, and disregard for shareholder value. The Vectren
board conducted a competitive sale, and there is no plausible
claim here of hidden and unappreciated value of the Vectren
shares. The district court correctly concluded that plaintiffs
failed to plausibly allege materiality of the omitted projec‐
tions.
C. Loss Causation
Plaintiffs failed to state a viable Section 14(a) claim for a
second and independent reason: failure to allege loss causa‐
tion. Plaintiffs rely heavily on the Supreme Court’s decision
in Mills to show that they adequately alleged loss causation.
24 No. 19‐2973
In doing so, however, plaintiffs confuse transaction causation
with loss causation. Plaintiffs argue that loss causation is al‐
leged sufficiently where a materially deficient proxy state‐
ment was an essential link in the consummation of a transac‐
tion that the plaintiff alleges caused him financial harm. But
that is the test for transaction causation. See Virginia Bank‐
shares, 501 U.S. at 1106–08 (where minority shareholders’
votes were inadequate to ratify the merger, materially mis‐
leading proxy solicitation was not actionable because proxy
solicitation was not an essential link in consummating the
merger); Mills, 396 U.S. at 385 (holding that causation of dam‐
ages by materially misleading proxy misstatement could be
established by showing that proxy solicitation was an “essen‐
tial link in the accomplishment of the transaction”).
Neither Mills nor Virginia Bankshares used the term “trans‐
action causation” in discussing a Section 14(a) plaintiff’s bur‐
den on causation. As more recent securities cases have made
clear, though, transaction causation and loss causation are dif‐
ferent. Only transaction causation—not loss causation—may
be summed up as “reliance.” E.g., Dura Pharmaceuticals, 544
U.S. at 341–42 (citing “transaction causation” and “loss causa‐
tion” as separate elements and describing “transaction causa‐
tion” as “reliance”); Ray v. Citigroup Global Markets, Inc., 482
F.3d 991, 995 (7th Cir. 2007) (“Transaction causation is noth‐
ing but proof that a knowledgeable investor would not have
made the investment in question, had she known all the
facts.”); Grace v. Rosenstock, 228 F.3d 40, 47 (2d Cir. 2000) (“We
have also noted that both loss causation and transaction cau‐
sation must be proven in the context of a private action under
§ 14(a) of the 1934 Act and SEC Rule 14a‐9 promulgated there‐
under.”).
No. 19‐2973 25
To plead loss causation, a Section 14(a) plaintiff must
plead both economic loss and proximate causation. 15 U.S.C.
§ 78u‐4(b)(4); Dura Pharmaceuticals, 544 U.S. at 342, 346; New
York City Employees’ Retirement Sys. v. Jobs, 593 F.3d 1018, 1023
(9th Cir. 2010); Grace, 228 F.3d at 46. The district court con‐
cluded that plaintiffs’ allegations satisfied neither require‐
ment. We do not proceed beyond the first step. Plaintiffs’ fail‐
ure to plead economic harm is fatal to their Section 14(a)
claim.
Rather than alleging any actual economic harm, they al‐
lege that Vectren shareholders were impeded from realizing
the scope of supposed economic harm. The argument goes
something like this: if plaintiffs had been able to replicate
Merrill Lynch’s discounted cash flow analysis, they would
have been able to determine that the actual value of their
shares was higher than the $59.00 to $75.25 range of implied
per share equity set forth in the Proxy Statement. How would
plaintiffs have shown Vectren’s undervaluation if given the
chance to replicate Merrill Lynch’s analysis? Plaintiffs allege
that Merrill Lynch used too high a discount rate, 6.4 percent,
which artificially deflated Vectren’s value for purposes of the
merger.
Plaintiffs calculated the alleged 6.4 percent discount rate
by averaging the midpoints of the discount rate ranges pro‐
vided for each business segment in the summary of the dis‐
counted cash flow analysis.5 As evidence of this artificial
5 The Proxy Statement disclosed the following discount rate
ranges for each business segment, based on each segment’s
weighted average cost of capital: (i) 5.0 to 5.8 percent for the gas
utility business (5.4 percent midpoint); (ii) 4.7 to 5.4 percent for the
electric utility business (5.05 percent midpoint); and (iii) 7.8 to 9.6
26 No. 19‐2973
deflation, plaintiffs include a Bloomberg chart in their
amended complaint showing that Vectren’s weighted average
cost of capital for the first quarter of 2018 was 5.3 percent.
Plaintiffs also allege that in March 2018, one month before the
merger terms were agreed to, the website “Simply Wall
Street” reported that “Vectren’s earnings growth was ex‐
pected to be in the teens in the upcoming years.” Plaintiffs al‐
lege that such growth should presumably have led to robust
cash flows, feeding into a higher share value.
We are not convinced. Behind plaintiffs’ arguments con‐
cerning a supposedly inflated discount rate that supposedly
deflated Vectren’s valuation heading into the merger, the core
of plaintiffs’ allegations of economic injury is feeble. First,
plaintiffs do not allege plausible error with the disclosed dis‐
count rate ranges. Plaintiffs only identify another possible dis‐
count rate, the Bloomberg rate. But as defendants point out,
plaintiffs are silent as to how that 5.3 percent was calculated.
In the end, plaintiffs’ claim that Merrill Lynch used a flawed
discount rate does not cross the line from possible to plausi‐
ble. Plaintiffs are debating the merits of Merrill Lynch’s choice
of a discount rate and its judgment about the fair value of Vec‐
tren shares. That is a debate about the merits of the merger
terms, not whether the Proxy Statement was misleading.
Second, plaintiffs’ allegations amount—at most—to spec‐
ulation that if the omitted metrics had been disclosed, they
would have been able to determine that the value of their
shares exceeded $72.00. Plaintiffs point out that in February
2018, Bidders A and B submitted indications of interest at
percent for the non‐regulated business (8.7 percent midpoint). The
unweighted mean of the three midpoints is 6.3833 percent.
No. 19‐2973 27
prices above the final $72.00 price from CenterPoint. Again,
the argument is incorrect.
Bidder B submitted a non‐binding indication of interest at
an all‐cash price range of $73.00 to $75.00, but it declined to
submit a binding offer. Bidder A’s final offer proposed acqui‐
sition of Vectren for $71.00 per share paid with a mix of 83
percent cash and 17 percent common stock of Bidder A. Vec‐
tren’s board specifically sought a transaction in which as
much of the consideration as possible was cash. Plaintiffs at‐
tempt to reinforce their allegations of an inevitable superior
offer by citing a “Simply Wall Street” projection that Vectren’s
standalone earnings growth was projected to be “in the teens”
in the coming years. But without an allegation that Vectren
turned down an available superior offer, that citation, too, in‐
vites only speculation.
Our decision in Beck v. Dobrowski, 559 F.3d 680 (7th Cir.
2009), is instructive on this point. In Beck, the plaintiff alleged
that if it had not been for misleading proxy solicitations,
shareholders of Equity Office Property Trust (“EO”) would
have rejected a proposed merger with Blackstone Group L.P.,
and in doing so, would have “reaped the economic benefits of
continuing to own [EO] shares.” Id. at 684. The plaintiff at‐
tempted to show these allegedly achievable economic gains
by highlighting Vornado Realty Trust’s offer of $56.00, sup‐
posedly superior to Blackstone’s final all‐cash offer of $55.50.
Plaintiff’s argument was flawed because the two offers were
separated by less than one percent, and Blackstone could also
pay the full price for EO on closing, while Vornado could not
have completed the purchase unless and until its sharehold‐
ers approved the acquisition, which would take months.
28 No. 19‐2973
Also, and critically, Vornado had proposed acquiring EO
at $56.00 per share, but proposed an initial cash tender offer
for no more than 55 percent of EO’s shares. 559 F.3d at 683.
That was to have been followed by acquisition of remaining
EO shares by swapping them with Vornado shares. We rea‐
soned that a delay in several months of the receipt of 45 per‐
cent of the purchase price in Vornado stock reduced the pre‐
sent value of Vornado’s offer by more than one percent. Also,
the sale of EO for cash involved less risk than a sale in which
almost half of the consideration would be paid in stock in the
buyer. Indeed, we observed, EO’s instinct had been rather
prescient. In the months following the sale of EO to Black‐
stone, Vornado’s stock plunged. Plaintiff’s allegations of eco‐
nomic loss were therefore “heavy on hindsight and specula‐
tion, [and] light on verifiable fact.” Id. at 684.
Here plaintiffs do not even allege the existence of a viable
superior offer, making their allegations of economic loss even
weaker than those in Beck. Because plaintiffs did not allege
economic loss, the district court correctly determined that
they failed to plead loss causation.6
The judgment of the district court is AFFIRMED.
6 Plaintiffs also alleged claims under Section 20(a) of the Exchange
Act, 15 U.S.C. § 78t(a), which imposes liability on persons who control
other persons who are liable for violating the Exchange Act. Section 20(a)
liability is derivative. Because plaintiffs’ predicate Section 14(a) claim fails,
their Section 20(a) claim necessarily fails.