Feis Equities, LLC v. Sompo International Holdings, Ltd.

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Appellate Court Date: 2021.12.20
11:27:41 -06'00'
Feis Equities, LLC v. Sompo International Holdings, Ltd.,
2020 IL App (1st) 191072Appellate Court FEIS EQUITIES, LLC, an Illinois Corporation, Plaintiff-Appellant, v.
Caption SOMPO INTERNATIONAL HOLDINGS, LTD., a Bermuda
Corporation, f/k/a Endurance Specialty Holdings, Ltd., and SOMPO
HOLDINGS, INC., a Japanese Corporation, Defendants-Appellees.
District & No. First District, Sixth Division
No. 1-19-1072
Filed August 14, 2020
Decision Under Appeal from the Circuit Court of Cook County, No. 18-L-3568; the
Review Hon. Daniel J. Kubasiak, Judge, presiding.
Judgment Affirmed.
Counsel on Steven J. Rosenberg and M. Elysia Baker, of Golan Christie Taglia
Appeal LLP, of Chicago, for appellant.
Gail E. Lee and Charles F. Smith, of Skadden, Arps, Slate, Meagher
& Flom LLP, of Chicago, for appellees.
Panel JUSTICE HARRIS delivered the judgment of the court, with opinion.
Presiding Justice Mikva and Justice Connors concurred in the
judgment and opinion.
OPINION
¶1 This appeal concerns a securities fraud action by plaintiff Feis Equities, LLC, against
defendants Sompo International Holdings, Ltd. (International) and Sompo Holdings, Inc.
(Holdings). Defendants filed motions to dismiss that the trial court granted, ultimately with
prejudice. On appeal, plaintiff contends that the dismissal with prejudice of its complaint as
amended was erroneous because each count properly alleged claims upon which relief could
be granted. For the reasons stated below, we affirm.
¶2 I. JURISDICTION
¶3 On September 7, 2018, and January 10, 2019, the circuit court dismissed all counts of the
initial and amended complaint, respectively, with leave to file an amended complaint. On May
3, 2019, the court dismissed the second amended complaint with prejudice. Plaintiff timely
filed its notice of appeal on May 23, 2019. Accordingly, this court has jurisdiction over this
matter pursuant to article VI, section 6, of the Illinois Constitution (Ill. Const. 1970, art. VI,
§ 6) and Illinois Supreme Court Rule 301 (eff. Feb. 1, 1994) and Rule 303 (eff. July 1, 2017).
¶4 II. BACKGROUND
¶5 Plaintiff filed its initial complaint in April 2018, its amended complaint in September 2018,
and its second amended complaint in February 2019. In all, plaintiff alleged that International,
a “wholly-owned indirect subsidiary” of Holdings, acquired in September 2017 “substantially”
all the assets and liabilities of Endurance Specialty Holdings, Ltd. (Endurance), another
subsidiary of Holdings. Endurance common shares were traded publicly until the merger of
Endurance and Holdings on March 28, 2017, while Endurance preferred shares were traded
until October 20, 2017. Plaintiff is an arbitrage firm that owned Endurance preferred shares in
2017.
¶6 Plaintiff alleged that Endurance filed with the Securities and Exchange Commission (SEC)
on March 28, 2017, a document announcing its merger with Holdings, with the transaction
described repeatedly as a merger and never as a liquidation and with Holdings stating in its
prospectus and Certificate of Designations (Certificate or Certification) that it “would pay a
full merger redemption price of $26 per preferred share plus accrued dividends.” Under the
prospectus and the November 2015 Certificate, “a merger could not be considered a
liquidation.” However, on October 6, 2017, Endurance announced in another SEC filing that
its preferred shares would be redeemed at a liquidation price of $25 per share plus accrued
dividends, which plaintiff characterized as “a flat-out contradiction of its earlier filings” that it
would pay a merger price of $26 per preferred share plus dividends. Plaintiff relied upon the
October 2017 filing and sold 52,124 preferred shares of Endurance “for a price well below the
$26 merger price” so that it held no shares by October 11, 2017. On November 6, 2017,
Endurance announced that it would pay an additional “Final Payment” of $1 per preferred
share, but plaintiff did not own any shares by then.
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¶7 Plaintiff alleged that “highly suspicious market activity occurred after the announcement
of the redemption price of $25.167 from which it may be inferred that certain shareholders
knew or expected additional payment would be made.” Plaintiff would not have sold its
Endurance preferred shares in October if it knew that Endurance would pay an additional $1
per share in November. Plaintiff alleged that defendants committed fraud by misrepresenting
that shareholders would receive $25 per share plus dividends and by failing to disclose that
some shareholders would later receive an additional $1 per share. Plaintiff incurred a loss of
over $51,000, including commissions, interest, and “$26,000 which was improperly debited
from Plaintiff’s account on November 7, 2017, in connection with the shares it had sold short.”
¶8 In all iterations, count I alleged that International violated section 12(F) of the Illinois
Securities Law of 1953 (Law or Securities Law) (815 ILCS 5/12 (West 2018)), prohibiting
engaging in a transaction or course of business connected to the sale or purchase of securities
“which works or tends to work a fraud or deceit upon the purchaser or seller”; count II alleged
that International violated section 12(I) of the Law, prohibiting a scheme to defraud in
connection with the sale or purchase of securities; count III alleged that International violated
the Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS
505/1 et seq. (West 2018)), prohibiting deceptive acts in trade or commerce with the intent that
the deception be relied upon and that cause actual damage; and count IV alleged common-law
fraud by International.
¶9 A. Initial Complaint & Dismissal
¶ 10 In the April 2018 initial complaint, plaintiff summarized its central allegation thus:
“Defendants, sophisticated, public companies, represented by a major law firm,
engaged in a stock redemption that was at best confusing and at worst deceptive. The
Plaintiff, with extensive experience in stock redemptions, relies on accurate public
filings in making its trading decisions. However, because Defendants failed to
accurately describe how it would effect the stock redemption, plaintiff made trading
decisions which caused it to suffer losses of at least 50k.”
Count V of the April 2018 initial complaint alleged that both defendants committed conspiracy,
specifically that they executed the scheme to defraud by engaging in a conspiracy to draft, file,
and disseminate the “knowingly false and fraudulent” documents referred to above. Count VI
alleged breach of contract by both defendants for offering or promising a full redemption price
of $25 plus dividends, plaintiff accepting that offer or promise and selling shares for $25.167
in reliance thereon, and defendants breaching the resulting contract by paying an additional $1
per share to those that had not sold their shares. No documents were attached to the initial
complaint.
¶ 11 In June 2018, defendants filed their appearance and their motion to dismiss the complaint
pursuant to sections 2-615 and 2-619 of the Code of Civil Procedure (Code) (735 ILCS 5/2-
615, 2-619 (West 2018)). They argued that plaintiff was a sophisticated trader that “made a
trading decision in October 2017 that it later came to regret” when it sold Endurance shares,
and also sold “short” Endurance shares it did not have, “rather than tender them in a liquidation
a few weeks later” when plaintiff would have received the additional $1 per share. They argued
that plaintiff’s claims were conclusory and contradicted by the documents referred to in the
complaint, noting that plaintiff failed to attach those documents to the complaint.
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¶ 12 Defendants stated that, on November 17, 2015, Endurance issued a prospectus stating that
it would offer preferred shares with a liquidation preference of $25 per share and providing
that “[u]pon any voluntary or involuntary liquidation, dissolution or winding-up of
Endurance,” preferred shareholders would receive “a liquidating distribution” of $25 per share
plus any declared but unpaid dividends. On November 24, 2015, Endurance issued the
preferred shares pursuant to the Certification, which described the liquidation rights of
preferred shareholders “substantively” identically to the prospectus. On March 28, 2017,
Holdings acquired Endurance pursuant to a merger agreement of October 5, 2016, with
Endurance surviving the merger “as an indirect, wholly-owned subsidiary of Holdings.” “On
September 27, 2017, Endurance and International, an indirect, wholly-owned subsidiary of
Holdings, entered into a Stock and Asset Purchase and Sale Agreement (the ‘Agreement’)
pursuant to which Endurance transferred substantially all of its assets and liabilities to
International.” The related SEC filing “stated that after the execution of the Agreement,
Endurance planned to commence a voluntary liquidation and to pay out the required liquidation
preference on the” preferred shares. On October 6, 2017, Endurance “announced that it would
be distributing the liquidation preference of” $25 per share plus dividends. Endurance preferred
shares traded publicly until October 20, 2017. On November 6, 2017, Endurance “announced
that it would be making an additional payment of *** $1 per” preferred share for all such
shares outstanding on October 23, 2017. Defendants attached to their motion the documents
referenced in the complaint and the motion to dismiss.
¶ 13 Defendants argued that plaintiff “chose to sell its shares, and short sold others, at $25 per
share in between the October 6th announcement of the $25 liquidation and the November 6th
announcement of additional consideration, and thus missed out on the $1 additional liquidation
amount.” While the crux of the complaint was “that Defendants somehow worked a fraud by
making an additional payment to” preferred shareholders, “Endurance continued to liquidate
and get its affairs in order, after Endurance’s contractual obligations to those shareholders had
allegedly already been fulfilled.” Thus, the documents that the complaint relied upon, but did
not include, directly refuted the conclusory allegations of the complaint. Defendants argued:
“Plaintiff fails to acknowledge *** what is clear from the plain language in the relevant
public filings *** there were two separate transactions involving Holdings,
International, and Endurance in 2017: first the Merger between Holdings and a
subsidiary of Endurance, which Endurance survived as a subsidiary of Holdings, and
six months later a stock and asset purchase between International and Endurance, after
which Endurance was liquidated.”
Thus, defendants’ “statements were accurate when made and demonstrate that they fulfilled
their obligations to [preferred shareholders] at each step of each transaction.”
¶ 14 Defendants argued that Endurance had the option, but not the obligation, to redeem the
preferred shares at the time of the merger, and then did not exercise that option. “When
Endurance voluntarily liquidated after entering into the Agreement with International, six
months after the Merger, the terms of the Certificate make clear that the” preferred
shareholders “were entitled to receive $25 per depository share plus certain dividends if any.”
The facts pleaded in the complaint showed that defendants fulfilled that obligation. “Plaintiff
does not, and indeed cannot, plead that Endurance ever stated that, in the event of a liquidation,
it would only pay [preferred shareholders] $25 plus dividends and not a penny more.”
Defendants noted that the complaint referred to “payment in full” but the documents issued by
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defendants never used that phrase. Under the various documents, the “liquidation preference
represented a floor, not a ceiling, as to what Endurance could pay to the shareholders.” In other
words, the documents accurately described a merger as a merger and a liquidation as a
liquidation, and “no public statement foreclosed the possibility of additional payments.”
Defendants asserted:
“What Plaintiff does not allege—and cannot—is that Defendants knew on October 6th
that they would make an additional payment a month later. Without this allegation,
which Plaintiff cannot make because it is false, this is nothing more than a case of fraud
by hindsight, where Plaintiff insists that a prior public statement must have been false
or misleading when made solely because the company later issued another statement
with additional information.”
While plaintiff alleged that only some preferred shareholders received the additional $1 per
share, all holders of such shares on October 23, 2017, received that payment. Plaintiff made
only a vague and conclusory allegation of suspicious market activity and alleged in a
conclusory manner that defendants intended to induce reliance on their allegedly false
statements. Defendants argued that “no conceivable motive can be inferred to Defendants for
announcing the additional payment at a later date, other than a subsequent business decision to
provide additional compensation to the holders of the [preferred shares] in connection with the
liquidation” because they “paid out the same amount of money to shareholders regardless of
who held the shares.” Defendants contended that the conspiracy count merely recited the
elements of conspiracy and the breach of contract count should be dismissed because plaintiff
failed to show how defendants breached any contract with plaintiff.
¶ 15 Plaintiff responded to the motion to dismiss, arguing that the motion relied upon the truth
of various statements and disclosures by defendants, while the crux of the complaint was
“what Defendants did not disclose: that after publicly declaring a liquidation dividend
of $25 [plus dividends], they turned around four (4) weeks later, without any public
disclosure after Plaintiff sold its shares and declared a retroactive additional payment
of $1 per share to those lucky enough to still be shareholders on October 23, 2017,
Plaintiff was not so lucky. Had it known there would be an additional payment. Plaintiff
would not have sold any shares.” (Emphases in original.)
Defendants’ public filings initially characterized the transaction between Holdings and
Endurance as a merger, triggering a $26 redemption price, then called the transaction a
liquidation, triggering a $25 redemption price, while defendants also stated that a merger could
not be deemed a liquidation. Plaintiff claimed that
“[d]efendants’ reason(s) for making the additional payment—blowback from
shareholders, tax consequences, whatever—are as yet unknown. What is known,
however, is that between the announcement of the $25 payment on October 6, 2017,
and the payment of an additional $1 per share, nearly a million shares were bought at a
price above the $25, an entirely irrational trading strategy unless someone knew or had
reason to expect the additional payment.”
Plaintiff noted its allegations that the March 28, 2017, SEC filing referred repeatedly to a
merger and never to a liquidation, that the merger redemption price was $26 per share, that a
merger was not a liquidation pursuant to the prospectus and Certificate, and that Endurance
announced in October 2017 that it would pay a liquidation redemption price of $25 per share.
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¶ 16 Plaintiff argued that section 6(c) of the Certificate, providing “If the Liquidation Preference
has been paid in full to all holders of [preferred] shares *** the holders of the other shares of
the company shall be entitled to receive all remaining assets of the Company,” rendered the
$25 per share price “a ceiling not, as Defendants argue, a floor.” Thus, plaintiff maintained
that “[d]efendants’ payment of an additional $1 per share was therefore in direct conflict with
its public filings stating that the payment of $25.167 would be in ‘full satisfaction’ of the
Defendants’ obligations.” (Emphasis in plaintiff’s response.) Plaintiff asserts that defendants
should have “announced the additional payment well in advance so traders like Plaintiff could
factor that important and material information into their trading decisions.” Plaintiff argued
that requiring it to prove defendants’ intent to induce reliance at the pleading stage was
“premature” and that it was sufficient for plaintiff to allege such intent. Plaintiff further argued
that it duly alleged the elements of breach of contract.
¶ 17 Attached to plaintiff’s response was the affidavit of Lawrence Feis, plaintiff’s director and
majority owner, averring in relevant part that (1) in his 38 years of trading experience, this was
the only instance of a redemption payment in excess of the announced liquidation price,
(2) plaintiff sold its Endurance shares before October 11, 2017, in reliance on defendants’
filings, (3) almost one million Endurance shares were purchased between the announcement
of the $25.167 per share payment on October 6 and the last day of Endurance share trading on
October 20 at a price above $25.167 per share, and (4) Feis would not have sold its Endurance
shares after October 6 had he known or had reason to believe that an additional $1 per share
would be paid. Feis also opined that, “[u]nless a buyer had inside information or other reason
to know or reasonably expect that Endurance would pay an additional $1 per share no rational
investor would pay anything above the liquidation price of $25.167 to buy Endurance shares.”
(Emphasis in original.)
¶ 18 Defendants replied in support of their motion to dismiss, arguing that their filings speak
for themselves and refute the allegations of the complaint. Pointing to various filings including
an SEC filing of March 2, 2017, they argued that
“Plaintiff selectively quotes from the *** Certificate, contending that Defendants were
only allowed to pay Series C Preferred Shareholders $25 per share, and not a penny
more unless they wanted to risk committing fraud, because the Certificate states that if
the liquidation preference had been paid to Series C Preferred Shareholders and any
other preferred shareholders, any holders of other shares would be entitled to receive
all remaining assets of the company or proceeds thereof. [Citation to Certificate section
6(c)] What Plaintiff neglects to mention, or perhaps did not realize, is that at the time
of the liquidation there were no other shareholders in Endurance. All of Endurance’s
other preferred shares had been redeemed in the years prior, and all ordinary/common
shares were cancelled and converted into the right to receive cash upon the Merger with
Holdings’ indirect subsidiary in March of 2017. [Citation to the March 2017 SEC filing,
section 2.01.] In the process of winding up Endurance, Defendants made a business
decision, weeks after the $25 payment, to distribute additional funds to the only
remaining shareholders in the company at the time the shares stopped trading. This is
not fraud and does not run counter to any of Endurance’s public statements or filings.”
(Emphasis in original.)
In response to plaintiff’s argument that defendants failed to disclose their intent to pay an
additional $1 per preferred share, defendants argued that one cannot disclose something that
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does not yet exist; in other words, plaintiff pleaded no facts showing that defendants intended
on October 6—when they announced the $25.167 distribution—to make an additional
distribution later. Defendants noted that plaintiff did not allege the sale of a million shares at a
price above $25.167 in its complaint but belatedly in its response to the motion to dismiss.
They also offered an explanation: “[C]urrent and prospective shareholders who, unlike
Plaintiff, read Endurance’s public filings likely did anticipate there could be additional
payments made as Endurance was liquidating with only one class of shares remaining: the
Series C Preferred Shares.” (Emphasis in original.)
¶ 19 In September 2018, the trial court dismissed without prejudice all counts of the initial
complaint, count I under section 2-619 and counts II through VI under section 2-615.
¶ 20 In dismissing count I, the court noted that defendants interposed in their motion to dismiss
that their filings were not false or misleading because (1) Endurance had the option to redeem
the preferred shares at the time of the merger but chose not to exercise it and (2) when
Endurance voluntarily liquidated, the Certificate made clear that preferred shareholders were
entitled to receive $25 per share plus certain dividends, an obligation that was fulfilled, with
“nothing suspicious about the fact that subsequent, additional payments were made to
shareholders.” The court found that plaintiff did “not allege any facts or present any legal
authority showing that the defendants breached any obligations or violated any specific law.”
¶ 21 Noting that fraud must be pled with specificity, the court found regarding counts II, III,
and IV that plaintiff had not alleged defendants’ “knowledge or intent in making their alleged
misrepresentations and omissions.” While plaintiff alleged that defendants fraudulently
concealed their intent to pay an additional $1 per share after representing that they would pay
only $25.167 per share, it did “not allege any facts that, taken as true, would support the
assertion that the defendants knew they would sell the shares at the $26 merger price,” nor
“specifically allege the defendants’ intention in not disclosing that it would later sell the shares
at the higher price.” Regarding count V on conspiracy, the court found that plaintiff had not
alleged that “defendants acted together when filing the allegedly fraudulent SEC filings” but
only that Endurance had made the October 6 filing. The court found regarding count VI on
breach of contract that plaintiff had not alleged specific facts as to the formation of a contract
nor attached to the complaint a copy of any written contract as required by the Code. 735 ILCS
5/2-606 (West 2018).
¶ 22 B. Amended Complaint and Dismissal
¶ 23 In its September 2018 amended complaint, plaintiff summarized its theory of the case:
“The essence of this case is whether the combination of Endurance and Holdings
was a merger or a liquidation. If properly classified as a merger, as Plaintiff contends
it should have been, Defendants were obligated to pay $26 per share upon redemption,
whenever that occurred. If classified as a liquidation, as Defendants contend,
Defendants would have been limited to paying only $25 [plus dividends] per share.”
“Defendants tried to get away with intentionally misclassifying the merger as a
liquidation so they would not have to pay the additional dollar per share (or for other
material, financial considerations). But, after it heard complaints from shareholders, it
paid the additional dollar to shareholders of record as of October 23, 2017, but not to
Plaintiff who had already sold his shares.”
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Plaintiff alleged that it was “a fair, reasonable and compelling inference that the
misclassification was intentional for one or more reasons,” including that defendants knew the
difference between a merger and liquidation, their filings described the transaction between
Endurance and Holdings as a merger, the Certificate provided that a merger would not be
deemed a liquidation, and Endurance first announced that it would pay the $25 liquidation
price in full satisfaction of its obligation to preferred shareholders but then paid an additional
$1 per share to preferred shareholders as of October 23, 2017.
¶ 24 Plaintiff attached Endurance’s Certificate and its SEC filings for September and October
of 2017 to the amended complaint in support of its narrative of events. No other document
such as an affidavit was attached. Plaintiff alleged that the price of Endurance preferred shares
fell between October 8 and October 20, 2017, but still traded at $25.30, above the $25.167
liquidation price, “contrary to normal trading practice.” After preferred shareholders received
the $25.167 per share payment, “investors began to complain,” according to a named officer
of defendant Holdings. Plaintiff alleged that an Endurance SEC filing of November 13, 2017,
just before the announcement of the additional $1 per share, stated that there was one owner
of nonpreferred Endurance shares.
¶ 25 Regarding its damages, plaintiff noted that short sellers, who borrow shares rather than
selling shares they already own, are responsible for paying dividends and liquidation payments
to the lender of the borrowed shares. Plaintiff alleged that its short sale of Endurance preferred
shares resulted in plaintiff having to pay the additional dollar per share itself and in incurring
an “improper” deduction of $26,717 from plaintiff’s account with the Depository Trust
Corporation.
¶ 26 Defendants filed a motion to dismiss the amended complaint under section 2-615 in
October 2018. They argued that the amended complaint did not address the insufficiencies of
the initial complaint. While plaintiff alleged that defendants intentionally mischaracterized a
merger as a liquidation, defendants contended that they
“did not describe a merger as a liquidation. There were three separate
transactions/events at play, which were described accurately in Endurance’s public
filings and statements—a fact that Plaintiff ignored in its first Complaint and ignores
now. The Amended Complaint is riddled with logical fallacies, contradictory theories
of fraud, and recycled ‘facts’ from the original Complaint that are demonstrably
untrue.”
Specifically, and pointing to various attached documents in support, defendants asserted that
(1) Holdings acquired Endurance in a merger on March 28, 2017, with Endurance remaining
intact as a wholly owned subsidiary of Holdings, (2) then Endurance and International entered
into an agreement on September 27, 2017, whereby substantially all of Endurance’s assets and
liabilities would be transferred to International, and (3) thereafter, Endurance voluntarily
liquidated.
¶ 27 Defendants reiterated their argument that Endurance never represented that preferred
shareholders would never receive more than $25 per share plus dividends, and that it was
merely conclusory to allege that defendants knew when announcing the $25.167 payment that
they would later pay an additional $1 per share. Plaintiff’s allegation that shareholders
complained about the $25.167 price undercut plaintiff’s own case that trading in preferred
shares above $25.167 suggested foreknowledge of the $1 per share payment because
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complaining shareholders would have had some hope of an additional payment in response to
their complaints and would have traded accordingly.
¶ 28 Plaintiff responded to the motion to dismiss, arguing that its claim “is not that Defendants
secretly planned to pay the extra dollar but, to the contrary, that it tried hard to do so by
intentionally misclassifying the merger as a liquidation and to falsely claim that the extra $1
payment was just a final distribution of the liquidation.” Because the transaction was not a
liquidation, $26,717 should not have been deducted from plaintiff’s account. Against
defendants’ argument of three separate transactions, plaintiff argued that there was only one
substantive transaction, the March 2017 merger, with the subsequent transactions being
internal to defendants and not liquidations, so that the merger price of $26 should have been
paid. Plaintiff argued that defendants then improperly paid the $26 merger price when
preferred shareholders complained about the $25 liquidation price. Generally, plaintiff argued
that its well-pleaded facts and reasonable inferences therefrom must be accepted as true for
purposes of a motion to dismiss.
¶ 29 Defendants replied in support of their motion to dismiss, arguing that plaintiff’s allegations
were not well-pleaded and its inferences were not reasonable. Defendants argued that plaintiff
had fundamentally changed its theory of the case from defendants concealing their intent to
pay the additional $1 per share to defendants misleadingly describing a merger as a liquidation.
They reiterated their argument that the filings and other documents supported the conclusion
of three separate transactions. They argued that plaintiff’s distinction between the merger as a
substantive transaction and the subsequent transactions as merely internal was not supported
by the transactional documents and filings, as a “triggering corporate event is a triggering
corporate event.” Defendants pointed to Endurance’s option to redeem preferred shares at the
March 2017 merger to refute the allegation that Endurance was required to redeem preferred
shares at $26. While the Certificate indeed “prevented [Endurance] from designating a sale or
asset purchase or a merger as a liquidation,” Endurance properly treated the merger, the asset
purchase agreement, and the liquidation as separate events. While plaintiff argued that the
liquidation distributions were merger payments in disguise—“if Endurance paid anything other
than $25 per share at the time of the liquidation, the transaction cannot have been a liquidation
because the liquidation preference designated in the Certificate is $25 per share”—Endurance
never stated that it would pay preferred shareholders no more than $25 per share plus
dividends. Defendants argued that (1) its arguments rested upon the documents and filings and
thus were an appropriate basis for a motion to dismiss and (2) the documents by themselves
showed that, “[i]n the process of winding down Endurance, Defendants made a business
decision, weeks after the initial $25 payment, to distribute additional funds to the only
remaining shareholders in the company at the time the shares stopped trading.”
¶ 30 In January 2019, the trial court dismissed the amended complaint without prejudice, with
“one last chance to file an amended complaint.” Plaintiff “failed to allege any facts showing
that the defendants were required to offer the $26 per share redemption price, given the terms
of [Endurance’s] Certification,” and failed to allege specific facts “showing that a liquidation
of Endurance did not occur,” or showing that plaintiff “was actually induced or forced to sell
its shares at the time the $25 per share redemption price was announced.”
¶ 31 While plaintiff alleged that defendants misclassified the merger of Endurance with
Holdings as a liquidation and intentionally failed to disclose that preferred shareholders would
later be able to sell their shares at the $26 per share price, the documents attached to the
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amended complaint contradicted those allegations. While section 6(d) of the Certification
provided that a merger would not be deemed a liquidation, section 7 regarding share
redemption in case of a merger “specifically states that such a redemption is only optional,”
the court found. The Certification also provided that “in the event of any liquidation,
dissolution, or winding-up *** whether voluntary or involuntary,” preferred shareholders were
entitled to only $25 per share. Thus, under the Certification, “the mere fact that a merger
occurred at some point would not necessarily mandate that the defendants indefinitely offer a
redemption price of $26 per share.”
¶ 32 While plaintiff argued “that its fraud claim is based on the defendants’ allegedly intentional
misclassification of a merger as a liquidation in October 2017,” the court found that plaintiff
did not allege specific facts showing that a liquidation never occurred. Endurance’s SEC filing
of October 6, 2017, attached to the amended complaint, stated that it had on that day “issued a
notice of the distribution of the liquidation preference of” $25 per share “[i]n connection with
the liquidation of Endurance.” Stated another way, plaintiff made “no explanation of why the
selling of Endurance’s assets and liabilities resulted in a merger and not a liquidation.”
¶ 33 C. Second Amended Complaint and Dismissal With Prejudice
¶ 34 In its February 2019 second amended complaint, plaintiff again summarized its theory of
the case:
“The essence of this case is whether the combination of Endurance and Holdings
was a merger or a liquidation and, accordingly, whether Endurance was required to
redeem its preferred shares on October 23, 2017 as part of a liquidation. If properly
classified as a merger, as it should have been, according to the SEC filings, Defendants
were obligated to pay $26 per share upon redemption, if they chose to exercise that
option prior to December 15, 2020. But if classified as a liquidation, as Defendants
claim, Defendants would only have to pay $25 per share. Put differently, while
Endurance was not obligated to redeem its securities, once it made the choice to do so,
it should have been paid the merger price of $26 per share.”
“The fundamental, indeed fatal, problem with classifying the subject transaction as
a liquidation is that no liquidation occurred; no assets were sold, Endurance employees
were not terminated, Endurance offices were not closed, phone numbers were not
changed and the business continued as usual under a new name, Sompo International
Holdings, Ltd., a wholly-owned subsidiary of Sompo Holdings, Inc., the same holding
company that had previously merged with Endurance. In effect, Endurance liquidated
the company to itself, i.e. a sham transaction to save $1 per share; a two-not-three-step
scheme Defendants concocted to extinguish the preferred shares at a liquidation price
of $25 per share.” (Emphasis in original).
¶ 35 In describing the timeline of events, plaintiff alleged that the November 2015 Certificate
“protected investors from redemption of the shares (call protection) prior to December
15, 2020 with two (2) exceptions: First, in the event of a merger, the Company is given
the option—but is not required—to redeem the shares at a price of $26 per share plus
accrued dividends. [Citation to Certificate section 7(2).] Second, however, in the event
of a liquidation, the Company is required to redeem the shares at a price of $25 per
share plus accrued dividends as payment in full. [Citation to Certificate section 6.] In
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short, the only requirement to redeem is in the event of a liquidation.” (Emphasis in
original).
Plaintiff argued that the September 2017 sale of Endurance assets and liabilities to International
provided for Endurance to continue under International’s auspices and then voluntarily
liquidate, which plaintiff characterized as a “maneuver *** to avoid the precise provisions of
Section 6(d) of the Certificate.” Because “no assets were sold, Endurance employees were not
terminated, offices were not closed, phone numbers were not changed, and business continued
as usual under a new name,” nothing “was liquidated for the purpose of Section 6” but
defendants “essentially liquidat[ed] the company to itself and then claim[ed] that it would
begin a liquidation.” (Emphasis in original.)
¶ 36 Plaintiff alleged that the October 6 announcement of a $25.167 payment caused plaintiff
to sell its Endurance preferred shares, and to sell short additional shares “at a price slightly
above the liquidation price of $25.167,” on the next business day. In support of its allegation
that Endurance preferred shares sold before the announcement of the $1 additional per share
at a price above the $25.167 liquidation price, plaintiff attached a price chart. Against
defendants’ claim that the decision to pay the additional $1 per share was a sound business
decision, plaintiff alleged that
“Defendants’ September 27, 2017 filing stated that it had already transferred ‘the
business as a going concern’ to International; therefore, there was no business in
existence that could have made a sound business decision. Second, the $236,151,250,
which Endurance excluded from the transfer of assets, was enough to pay the
liquidation price of $25 per share but not enough to pay the $240,736,400 required for
payment of the additional dollar per share so that Endurance had neither the right, nor
the funds, to pay the additional dollar.” (Emphasis in original.)
¶ 37 Count V of the second amended complaint alleged promissory estoppel against
International, specifically that the Certificate and the SEC filing of October 6, 2017, “promised
that the only payment to preferred shareholders would be $25 per share in full satisfaction of
Defendants’ obligation if a liquidation occurred.” Plaintiff relied on that promise when it sold
its shares and short-sold additional shares on the first business day after October 6, and its
reliance was reasonable and foreseeable because all investors rely upon company filings in
making trading decisions. Plaintiff’s reliance was to its detriment when the announcement of
the additional $1 per share caused plaintiff to (1) not receive that $1 per share on the shares it
had owned and (2) incur the $26,717 deduction from its account.
¶ 38 Plaintiff attached to the second amended complaint Endurance’s SEC filings for November
2015, March 2017, September 2017, and October of 2017, the notice of distribution for the
additional $1 per share, and the stock price chart.
¶ 39 Defendants filed a motion to dismiss the second amended complaint under section 2-615
in March 2019, reiterating their argument that their filings and documents contradicted the
allegations of the complaint as amended. Endurance’s November 2015 Certificate, pursuant to
which it issued the preferred shares now at issue, explained that the preferred shareholders
were entitled to $25 per share plus any dividends upon a voluntary or involuntary liquidation
of Endurance. It also provided that, if Endurance submitted to its common or nonpreferred
shareholders prior to December 15, 2020, “a proposal for an amalgamation, consolidation,
merger, arrangement, reconstruction, reincorporation, deregistration or any other similar
transaction,” Endurance had the option, but not the requirement, to redeem the preferred shares
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for $26 each. A merger—a sale or transfer of substantially all assets—would not be considered
a liquidation and thus would not trigger the mandatory liquidation preference payment. The
three subsequent transactions involving defendants—the merger, asset sale, and voluntary
liquidation—“were undertaken for valid business purposes in connection with the acquisition
of Endurance by Holdings and not in order to avoid any potential payments to the holders of
Endurance securities.” Nothing in the documents supported the proposition that the liquidation
was part of the earlier merger or that it counted as a liquidation only if Endurance’s assets were
sold to an unrelated party. Defendants argued that
“Plaintiff wields Section 6(d) of the Certificate, which provides that a merger or sale
or transfer of assets should not be deemed a liquidation for the purposes of the
Certificate, like a sword, arguing that Endurance’s whole ‘scheme’ of supposedly
liquidating into itself was a method of avoiding the ‘requirement’ that it pay the $26
merger price. [Citation to second amended complaint.] Plaintiff misreads this
provision. Section 6(d) differentiates between mergers, asset transfers, and liquidations
precisely because it is meant to avoid a scenario where the Company’s merger with
another entity or sale of assets would automatically trigger the liquidation of the Series
C Preferred Shares. The Certificate is written so mergers, asset transfers, and
liquidations have to be separately designated, which is precisely what Defendants did.”
Thus, defendants maintained that the “sequence of transactions was not done to ‘avoid the
precise provisions of Section 6(d) of the Certificate’ [as alleged], but rather to comply with the
provisions of Section 6(d).” Assuming arguendo that Endurance elected to liquidate and pay
the $25 per share liquidation preference in October of 2017, rather than redeem the preferred
shares for $26 in March 2017 at the time of the Merger, “nothing in the Certificate prohibits
that choice.”
¶ 40 In reiterating their arguments in support of their earlier motions to dismiss, defendants
responded to plaintiff’s claim that (1) there was no existing business to make a sound business
decision and (2) there was not enough money left after the sale of assets to International to pay
$1 per preferred share. As to the former, International obtained Endurance’s business as a
going concern and could make business decisions. As to the latter, “the fact that initially
Endurance only withheld enough funds from the asset transfer to International to pay $25 per
share shows that there was no failure to disclose that Endurance planned to subsequently pay
an additional dollar to shareholders.” Lastly, regarding promissory estoppel, defendants argued
that the only promise made to preferred shareholders was the $25 liquidation preference, and
no promise was made that said preference would be the only payment. Attached to the motion
to dismiss was the Certification and the merger agreement between Endurance and Holdings.
¶ 41 Plaintiff responded to the motion to dismiss, arguing that its claim was that defendants tried
to not make the additional payment “but were ultimately forced to do so,” and it was not
claiming that defendants knew when they announced the $25.167 per share payment on
October 6, 2017, that they would pay an additional $1 per share. Defendants could have
redeemed the preferred shares at the $26 merger price but “created a sham liquidation in order
to pay $25 per share when, in fact, no liquidation occurred.” Plaintiff relied upon the
Certification’s statement that a sale or transfer of all of Endurance’s assets was not a liquidation
when plaintiff sold its shares and sold short almost immediately after the $25.167 price was
announced. The liquidation was “fraudulent,” as was the $1 additional payment, which “should
never have been made.” Plaintiff argued that “whether the transactions were taken for ‘valid
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business purposes’ or ‘to comply with the provision of Section 6(d)’ are questions properly
directed to the fact finder, judge or jury” rather than a motion to dismiss.
¶ 42 Defendants replied in support of their motion to dismiss, reiterating their argument that the
documents and filings contradicted the allegations of the complaint. Defendants argued that
the key issue in this case was whether they made any misstatements or omissions in their public
filings and statements and argued that plaintiff’s exhibits showed that they had not. While
plaintiff denied claiming that defendants knew when they announced the $25.167 per share
payment on October 6, 2017, that they would pay an additional $1 per share, defendants argued
that the second amended complaint alleged that one of defendants’ fraudulent acts or material
omissions was “intentionally failing to disclose the material fact that some shareholders would
or could, four weeks after the announcement, receive an additional $1 per share.” Defendants
reiterated their argument that plaintiff could not point to anything in the documents providing
that Endurance’s liquidation would be deemed a liquidation only if Endurance sold its assets
to an unrelated party. They added that one of the filings indicated that Endurance ceased to
exist as a corporate entity, and “[t]hat is a liquidation.”
¶ 43 On May 3, 2019, the court dismissed the second amended complaint with prejudice. It
found that plaintiff “failed to make any dispositive changes in its second amended complaint
to sufficiently allege its fraud-based causes of action in counts I through IV,” reiterating that
plaintiff failed to sufficiently allege that defendants were required to offer the $26 per share
redemption price under the terms of the Certification, that Endurance was not liquidated, or
that plaintiff was forced to sell its preferred shares when the $25 price was announced. Plaintiff
“decided to sell its shares at the time that it chose to do so. There is no basis to save [it] from
that decision.”
¶ 44 Regarding count V on promissory estoppel, the court found that plaintiff did not factually
support its allegation that defendants promised that “the only payment to preferred
shareholders would be $25 in full satisfaction of Defendants’ obligation if a liquidation
occurred,” as the only promise to preferred shareholders was that they would receive the $25
per share liquidation preference to fulfill section 6(d) of the Certification. Moreover, plaintiff
itself alleged that “on December 23, 2017, Defendants completed the distribution of payments
at the announced liquidation price of $25.167 per share” so that defendants’ promises in the
Certification and SEC filing of October 6, 2017, were fulfilled. This appeal timely followed.
¶ 45 III. ANALYSIS
¶ 46 On appeal, plaintiff contends that the trial court erred in dismissing its second amended
complaint with prejudice because every count stated claims upon which relief could be granted.
¶ 47 A. Securities Law
¶ 48 Plaintiff’s second amended complaint was dismissed with prejudice under section 2-615
of the Code, which requires motions attacking civil pleadings to “point out specifically the
defects complained of, and [to] ask for appropriate relief, such as: that a pleading or portion
thereof be stricken because substantially insufficient in law, or that the action be dismissed, or
that a pleading be made more definite and certain in a specified particular.” 735 ILCS 5/2-
615(a) (West 2018). In ruling on such a motion, “the court may enter appropriate orders either
to permit or require pleading over or amending or to terminate the litigation in whole or in
part.” 735 ILCS 5/2-615(d) (West 2018). A motion to dismiss under section 2-615 challenges
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whether the allegations of the complaint, taken as true and viewed in a light most favorable to
the plaintiff, are sufficient to state a cause of action upon which relief can be granted. Fillmore
v. Taylor, 2019 IL 122626, ¶ 35. A cause of action should not be dismissed under section 2-
615 unless it is clearly apparent that no set of facts can be proved that would entitle the plaintiff
to recover. Doe v. Coe, 2019 IL 123521, ¶ 31. We review de novo an order granting a section
2-615 motion. Id. ¶ 20.
¶ 49 In reviewing a dismissal under section 2-615, this court accepts as true all well-pleaded
facts and reasonable inferences from those facts, construing allegations in the light most
favorable to the plaintiff. Id. That said, Illinois is a fact-pleading jurisdiction, requiring
plaintiffs to allege facts—not bare conclusions—that give rise to every element of their causes
of action. Id. ¶ 32; Ruiz v. Cal-Ful Condominium Ass’n, 2019 IL App (1st) 181734, ¶ 33.
Similarly, the principle that courts construe pleadings liberally “does not correct or replace
defective allegations.” Kopnick v. JL Woode Management Co., 2017 IL App (1st) 152054,
¶ 31.
¶ 50 An exhibit attached to a complaint is deemed part of the complaint in reviewing the
complaint’s sufficiency upon a motion to dismiss. Slay v. Allstate Corp., 2018 IL App (1st)
180133, ¶ 30. Indeed, exhibits “prevail over the allegations.” Kopnick, 2017 IL App (1st)
152054, ¶ 31. When an exhibit is a contract or other instrument, the proper construction of that
instrument is a matter of law. CitiMortgage, Inc. v. Parille, 2016 IL App (2d) 150286, ¶ 24.
¶ 51 The elements of a claim under section 12(F) or (I) of the Securities Law are that “the
defendant (1) made a misstatement or omission, (2) of material fact, (3) in connection with the
purchase or sale of securities, (4) upon which the plaintiff reasonably relied and (5) that
reliance proximately caused the plaintiff’s injuries.” Platinum Partners Value Arbitrage Fund,
Ltd. Partnership v. Chicago Board Options Exchange, 2012 IL App (1st) 112903, ¶ 23. These
elements apply to claims under sections 12(F) and (I), except that scienter—intent or
knowledge of wrongdoing—is required for liability under section 12(I). Id. The elements of a
claim under the Consumer Fraud Act are (1) a deceptive act or practice by the defendant,
(2) who intended that the plaintiff rely on the deception, (3) that the deception occurred in the
course of conduct involving trade or commerce, and (4) proximately caused (5) actual damage
to the plaintiff. Pack v. Maslikiewicz, 2019 IL App (1st) 182447, ¶ 113. The elements of
common-law fraud are (1) a false statement of material fact by the defendant, (2) who knew
that the statement was false, (3) and intended to induce the plaintiff to act in reliance upon the
statement, (4) the plaintiff reasonably relied upon the truth of the statement, and (5) the
plaintiff suffered damage as a result of action in reliance upon the statement. Id. ¶ 94.
¶ 52 The elements of promissory estoppel are that (1) the defendant made an unambiguous
promise to plaintiff, (2) plaintiff relied on such promise, (3) plaintiff’s reliance was expected
and foreseeable by defendants, and (4) plaintiff relied on the promise to its detriment. First
Mercury Insurance Co. v. Ciolino, 2018 IL App (1st) 171532, ¶ 49. The reliance element is
similar to the elements of a fraud claim. Id.¶ 53 There is a high standard of specificity for pleading claims of fraud, as the complaint must
contain specific allegations from which fraud is the necessary or probable inference, including
what representations were made, when they were made, who made them, and to whom they
were made. Id. ¶ 39.
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¶ 54 B. The Operative Complaint
¶ 55 Here, we begin by setting forth relevant and indisputable facts from the documents attached
to the second amended complaint. The 2015 Certificate governing the issuance of Endurance’s
preferred shares provides in Section 6 on “liquidation rights” that, in the event of a voluntary
or involuntary liquidation, preferred shareholders “shall be entitled to receive” after creditors
and before common shareholders, “in full” $25 per share plus any declared but unpaid
dividends, with mergers and asset sales “not deemed to constitute a liquidation” for purposes
of Section 6. Section 6(b) provides for partial payment of the liquidation preference when
Endurance’s assets would be insufficient to pay $25 per preferred share, while section (6)(c)
regarding “residual distributions” provides that once the preferred shareholders receive their
liquidation preference, other shareholders would be entitled to be paid from the remaining
assets of Endurance. Section 7 of the Certificate regarding “redemption” provides that the
preferred shares cannot be redeemed by Endurance prior to December 2020, except, in relevant
part, that Endurance “shall have the option” upon a proposed merger to redeem preferred shares
at $26 plus any declared but unpaid dividends. In sum, the Certificate provides that Endurance
(1) must pay preferred shareholders $25 plus unpaid dividends in case of a liquidation and
(2) cannot redeem preferred shares before December 2020, except that, in relevant part, it may
redeem preferred shares at $26 plus unpaid dividends in case of a merger.
¶ 56 Endurance disclosed in a March 2017 SEC filing that Holdings acquired Endurance
pursuant to an October 2016 merger agreement so that Endurance survived “as an indirect,
wholly owned subsidiary of” Holdings. All common shares of Endurance had already been
cancelled and paid as of the disclosure, while the preferred shares at issue would continue as
preferred shares of Holdings with the rights provided in the Certificate.
¶ 57 According to a September 2017 SEC filing by Endurance, it had on September 27 entered
in an agreement with International, another indirect wholly-owned subsidiary of Holdings,
whereby “substantially all of its assets and liabilities” would be transferred to International.
Endurance would “commence a voluntary liquidation” and “intends to redeem” preferred
shares at $25 per share plus unpaid dividends as provided in the Certificate. A copy of the
agreement was attached, providing that Endurance would transfer most of its assets and
liabilities to International, including “the Business as a going concern.” The assets not
transferred under the agreement included $236,151,250 cash.
¶ 58 In an October 6, 2017, SEC filing by Endurance, it announced “[i]n connection with the
liquidation of Endurance” and following the transfer of substantially all of its assets and
liabilities that it had on that same day that it “issued a notice of distribution of the liquidation
preference of” $25 per preferred share plus an unpaid dividend of $0.1675694 per share on all
outstanding preferred shares on October 23, 2017 “in full satisfaction of [its] obligations.”
¶ 59 In November 2017, Endurance issued a notice that it would make “a final payment on
November 7, 2017” of $1 for each preferred share outstanding on October 23, 2017.
¶ 60 It is against this backdrop that plaintiff alleged in its second amended complaint that “the
combination of Endurance and Holdings” was a merger obliging defendants to pay $26 per
share when redeeming preferred shares, that no liquidation occurred because Endurance’s
business continued under International, that the purported liquidation was “a sham transaction
to save $1 per share,” and that defendants “intentionally perpetuated a fraud on Plaintiff
through one or more intentional fraudulent acts or material omissions” in those documents and
transactions.
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¶ 61 In addition to alleging that the documents made promises and representations that
defendants breached by offering the $25.167 per share redemption and the later $1 per share
final payment, plaintiff alleged that “contrary to normal trading practice, shares continued to
be bought at a price of $25.30” after the October 6 announcement of a $25.167 per share
payment, after plaintiff sold its Endurance preferred shares and sold short other such shares “at
a price slightly above the liquidation price of $25.167,” and “after investors complained.”
Plaintiff claimed that “it may be reasonably inferred that certain shareholders knew or expected
an additional payment would be made.” Plaintiff also alleged that defendants did not make a
sound business decision to pay the extra $1 per share because
“[d]efendants’ September 27, 2017 filing stated that it had already transferred ‘the
business as a going concern’ to International; therefore, there was no business in
existence that could have made a sound business decision. Second, the $236,151,250,
which Endurance excluded from the transfer of assets, was enough to pay the
liquidation price of $25 per share but not enough to pay the $240,736,400 required for
payment of the additional dollar per share. In short, Endurance had neither the right,
nor the funds, to pay the additional dollar.” (Emphasis in original.)
¶ 62 C. Our Findings
¶ 63 We find that the dismissal of the second amended complaint with prejudice was not
erroneous. It was insufficient to state a cause of action upon which relief could be granted, and
it is clearly apparent that no set of facts could be proved that would entitle plaintiff to recover.
¶ 64 First and foremost, we conclude from the documents attached to the complaint as amended
that defendants performed all their obligations and did not breach any promises made, under
those documents. Plaintiff conflates two different obligations under the Certificate: (1) paying
$25 per share for a liquidation and (2) having the option to pay $26 per share for a merger as
an exception to the ban on redemptions until December 2020. Plaintiff then relies upon that
conflation in arguing that the merger with Holdings was real but the sale to International and
liquidation of Endurance were a sham because Endurance was sold to International, another
Holdings subsidiary, and Endurance’s business continued as International. However, we find
that the documents do not support plaintiff’s proposition that the asset sale to International and
the liquidation pursuant to that sale were a sham. In other words, the documents do not support
the proposition that defendants breached their obligations or promises by making a $25.167
per share liquidation payment merely because the duly-disclosed Endurance-International
asset sales transaction, including Endurance’s liquidation under that sales agreement, followed
months after the duly-disclosed merger of Endurance with Holdings and involved another
Holdings subsidiary rather than an unrelated party.
¶ 65 We also find that defendants did not violate any obligation or breach any promise under
the documents by paying the additional $1 per preferred share, in light of the facts that Section
6 of the Certificate provides that the $25 (plus dividends) per share liquidation payment is
ahead of Endurance’s common shareholders, but there were no common or other shareholders
in Endurance following the Endurance-Holdings merger, as duly disclosed in Endurance’s
March 2017 SEC filing. Especially in light of the provision for residual distributions in section
6(c) of the Certificate, whereby other shareholders of Endurance would be paid after the
preferred shareholders, we do not consider the words “in full” in section 6(a) to mean that
Endurance was prohibited from paying preferred shareholders more than $25 (plus dividends)
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per share in a liquidation when, as here, there were no longer any shareholders of Endurance
but the preferred shareholders.
¶ 66 Plaintiff would have us infer defendants’ fraudulent intent in structuring the transactions
with Endurance, including the payment of an additional $1 per preferred share, from (1) the
allegations of “unusual market activity” in preferred shares above the $25.167 price announced
on October 6, 2017, “from which it may be reasonably inferred that certain shareholders knew
or expected an additional payment would be made,” (2) claims that Endurance could not make
a sound business decision because it ceased to exist, and (3) assertions that Endurance had
about $236 million left after the liquidation but the $1 per share redemption would cost about
$240 million. However, we conclude that fraud or deceptive intent is not the necessary or
probable inference from those allegations. To proceed out of order, the allegation that
Endurance could not have made a sound business decision because it ceased to exist is
disingenuous. Since International purchased Endurance as a going concern, International could
make business decisions regarding Endurance preferred shares. It is not a necessary or probable
inference that Endurance could not pay the $1 per share, since the $236 million left to
Endurance was not the only asset of Endurance or other source of funds for paying the $1 per
share and since, as plaintiff alleged elsewhere in the complaint, the $1 per share cost $9.2
million.
¶ 67 Lastly, as to the allegedly unusual trading pattern in Endurance preferred shares, we find
that to be the most speculative allegation. Plaintiff alleged that, after Endurance announced the
$25.167 per share payment, plaintiff sold short “at a price slightly above the liquidation price
of $25.167,” shareholders complained, and shares traded at $25.30 per share. When there
were—by plaintiff’s own allegations—shareholders nursing a hope of a payment beyond the
$25.167 per share, trading at somewhat above $25.167 but significantly less than $26 per share
does not create a probable or natural inference that some shareholders knew an additional
payment was coming.
¶ 68 IV. CONCLUSION
¶ 69 Accordingly, the judgment of the circuit court is affirmed.
¶ 70 Affirmed.
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