Absent a duty to disclose, "silence . . . is not misleading under Rule 10b-5." Basic, 485 U.S. at 239 n.17. In Basic, the Court held the materiality of statements regarding acquisition negotiations often depends on the facts of each case. 485 U.S. at 239. The Court's holding leaves open the possibility a party's statements concerning acquisition negotiations could be considered material. As a result of Basic, a terse "no comment" statement may well be the safest statement for any entity involved in acquisition negotiations. See id. at 239 n.17.
The Second Amended Complaint does not allege the Defendants made any public statement concerning the Snapple Acquisition before the November Press Release. The Second Amended Complaint does not allege the Defendants were trading in Quaker stock during the Class Period. Plaintiffs argue, however, Defendants had a duty to disclose part of the acquisition negotiations to inform stockholders Quaker would exceed the Leverage Ratio Guideline and not achieve the Earnings Growth Target. See Plaintiffs Brief at 12.
Disclosure concerning the Leverage Ratio Guideline and Earnings Growth Target, which Plaintiffs assert Defendants had a duty to make, relates solely to Quaker's acquisition of Snapple and is indistinguishable from a disclosure concerning the potential acquisition negotiations. To require Quaker to disclose the possibility it might seek loans to finance an acquisition is tantamount to requiring the disclosure of the acquisition negotiations.
If Quaker disclosed partial information about the acquisition negotiations, it would have to disclose all material information about the potential acquisition. See Basic, 485 U.S. at 239 n.17; Glazer, 964 F.2d at 157; Taylor, 857 F.2d at 243; In re General Motors, 694 F. Supp. at 1129. Premature release of this information might have had an impact on the market and the price of Snapple stock; in turn the acquisition may have been more costly or unsuccessful. If the acquisition negotiations collapsed after disclosure, however, the value of Quaker common stock might have been affected. The latter development may have led stockholders to sue Quaker for making premature statements concerning the potential acquisition. Such suits are not uncommon. See, e.g., In re Fischbach Corp. Sec. Litig., 1992 Fed.Sec.L.Rep. (CCH) P 98,665 (S.D.N.Y. 15 Jan. 1992) (stockholders initiated an action for violations of Section 10(b) and Rule 10b-5 alleging the company was reckless in announcing an anticipated merger agreement before fully researching the financial viability of the target).
In these circumstances, to hold Defendants had a duty to disclose the potential acquisition is unreasonable. As discussed, if Quaker had disclosed the potential acquisition too early in the process, it may have been sued for securities fraud. If Quaker had disclosed only partial information about the potential acquisition, it may have been sued for securities fraud. And when Quaker remained silent and did not disclose any information about the potential acquisition, it was sued for securities fraud. With the acceptance of Plaintiffs' argument, the result would be that a company in Quaker's position could not enter into any discussions about a potential acquisition without facing potential liability for securities fraud. Defendants were under no general duty to disclose the negotiations or the possible acquisition during the Class Period.
E. Materiality of Previously Disclosed Statements
A corporation is under a duty to disclose "any material facts that are necessary to make disclosed material statements . . . not misleading." In re Craftmatic Sec. Litig., 890 F.2d 628, 641 (3d Cir. 1989); see also In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993), cert. denied, U.S. , 114 S. Ct. 1397 (1994). Plaintiffs contend the Leverage Ratio Guideline and Earnings Growth Target are material facts that became misleading once the Snapple acquisition appeared "probable." Plaintiffs Brief at 18-21. Plaintiffs argue Defendants should have disclosed the acquisition negotiations, or at least, disclosed the financial aspects of the potential acquisition. Id. at 20-21. Before any duty to update a statement arises, a material statement must first have been made and subsequently rendered misleading by intervening factors. See Craftmatic, 890 F.2d at 641.
"Information is material if there is a substantial likelihood that, under all the circumstances, the information would have assumed 'actual significance in the deliberations of the reasonable shareholders.'" Lewis, 949 F.2d at 649 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976)); Basic, 485 U.S. at 231-32 (expressly adopting the materiality standard of TSC Indus. for use in Section 10(b) and Rule 10b-5 cases). The Supreme Court has been "careful not to set too low a standard of materiality" in order to avoid "an overabundance of information" especially concerning corporate developments of "dubious significance." Lewis, 949 F.2d at 649 (quoting Basic, 485 U.S. at 231). It is not enough that a statement is false or incomplete; if the misrepresented fact is not material, then the misrepresented fact is not actionable. Basic, 485 U.S. at 238.
Omitted information is material if there is a "'substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.'" Basic, 485 U.S. at 231-32 (quoting TSC Indus., 426 U.S. at 449); accord Craftmatic, 890 F.2d at 639. When the impact of a corporate development is "contingent and speculative in nature"
it may be "difficult to ascertain whether the 'reasonable investor' would have considered . . . omitted information significant at the time." Basic, 485 U.S. at 232.
While "'the task of determining whether a given omission is material is especially difficult when the plaintiff alleges nondisclosure of soft information . . . such as opinions, motives, intentions, or forward looking statements, such as projections, estimates and forecasts,'" a court can, as a matter of law, conclude an estimate of an action's cost to shareholders is not material for Section 10(b) and Rule 10b-5 purposes. Lewis, 949 F.2d at 652 (quoting Craftmatic, 890 F.2d at 642). Materiality is appropriately resolved as a matter of law when reasonable minds cannot differ as to the materiality or immateriality of the omissions. TSC Indus., 426 U.S. at 450; Craftmatic, 890 F.2d at 641.
1. The Leverage Ratio Guideline
Plaintiffs contend a reasonable investor would understand the Leverage Ratio Guideline as establishing a ceiling on total debt-to-total capitalization. Plaintiffs Brief at 14-15. Plaintiffs argue nondisclosure of the potential acquisition rendered the Leverage Ratio Guideline misleading. Id. at 18-21. Every statement concerning the Leverage Ratio Guideline, however, indicated it was a desired "guideline"; a guideline does not constitute the type of "express statement of intent" that must be corrected if circumstances subsequently change. See In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1245 (3d Cir. 1989). A corporation is under no obligation to disclose "every piece of information in its possession that could affect the price of its stock." Time Warner, 9 F.3d at 268.
The Leverage Ratio Guideline challenged by Plaintiffs stands in contrast to those cases where a defendant made statements which directly contradicted and were entirely inconsistent with the allegedly omitted material facts. For example, in Phillips, the Mesa Partnership ("Mesa") issued a press release stating that it was commencing a tender offer for 15 million shares of Phillips Petroleum Company ("Phillips") common stock. Id. at 1239. The press release also stated that Mesa would "not sell any Phillips shares owned by it back to Phillips except on an equal basis with all shareholders." Id. In the Schedule 13-D filed with the SEC, Mesa reiterated its intention to not sell shares back to Phillips except on an equal basis with all shareholders. Id. This statement was again reaffirmed by a Mesa spokesperson during a televised interview. Id. During subsequent negotiations between Mesa and Phillips, Mesa revised its Schedule 13-D eight times. Id. None of the amendments changed Mesa's original statement that it would not sell shares back to Phillips except on an equal basis with all shareholders. Id. at 1240.
Less than three weeks after Mesa's initial statement regarding its intention with respect to Phillips stock, Mesa and Phillips reached an agreement "in which all shareholders were not treated on an equal basis." Id. at 1241 (emphasis added). This was antithetical to the clear and absolute statement previously made. This Circuit held that Mesa's actions were reckless, satisfying the scienter requirement for a violation of Section 10(b) and Rule 10b-5. "A jury could . . . reasonably find making the statements to be an extreme departure from the standards of ordinary care." Id. at 1247.
Likewise, in Time Warner, the corporation announced a plan to forge "strategic alliances" to infuse itself with billions of dollars in capital in an effort to overcome over $ 10 billion in debt. 9 F.3d at 262. The corporation was also considering a new stock offering to reduce its debt; consideration of the stock offering, however, was not announced. Id. at 262.
The Second Circuit held that defendants' public statements regarding strategic alliances lacked the sort of definitive positive projections that would require later correction. Id. ("the statements suggest only the hope of [the] company that the talks would go well. No identified defendant stated that he thought deals would be struck by a certain date, or even that it was likely that deals would be struck at all"). Id.
The corporation's failure to disclose its consideration of a stock offering, however, was viewed differently. The court held Time Warner "may have come under a duty to disclose" because the stock offering would place the corporation's statements regarding strategic alliances in a different light. Id. at 268. The court was careful to limit its holding:
We hold that when a corporation is pursuing a specific goal and announces that goal as well as an intended approach for reaching it, it may come under an obligation to disclose other approaches to reaching the goal when those approaches are under active and serious consideration.
Id. (emphases added).
Quaker's comments regarding the Leverage Ratio Guideline are not analogous to the statements held actionable in Phillips or in Time Warner. Unlike the statements found to be misrepresentations in Phillips and Time Warner, Quaker never announced an express statement of intent; nor did it announce an "intended approach" for maintaining the Leverage Ratio Guideline in the upper sixty percent range.
Quaker's 1994 Annual Report states Quaker had recently acquired four companies and debt had increased significantly.
1994 Annual Report at 35, 42 (attached as Exh. E to Block Aff.). A reasonable investor, therefore, was on notice that acquisitions and increasing debt were to be expected in the future. See id. No reasonable investor could interpret the Leverage Ratio Guideline as an absolute restriction on Quaker's ability to take advantage of a corporate opportunity which might cause Quaker to exceed the Leverage Ratio Guideline. If Quaker wanted to set an absolute ceiling rather than a guideline, it would have done so; it did not.
2. Earnings Growth Target
Projections and statements of optimism held to be material are false and misleading for the purposes of the securities laws if they were issued without good faith or lacked a reasonable basis when made. In re Trump Casino Sec. Litig., 7 F.3d at 371; Herskowitz v. Nutri/System, Inc., 857 F.2d 179 (3d Cir.) (citing Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied, 474 U.S. 946, 88 L. Ed. 2d 290, 106 S. Ct. 343, 106 S. Ct. 342 (1985)), cert. denied, 489 U.S. 1054 (1989). Management projections of profit and growth can have a reasonable basis if there is a history of profitable operations. Craftmatic, 890 F.2d at 642 n.19; Kowal v. MCI Communications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271, 1279 (D.C.Cir. 1994) ("history of successful operations . . . may provide management with a reasonable basis for predictions of similar prospects in the future"); Renz, 832 F. Supp. at 777-78 ("'a reasoned and justified statement of opinion, one with a sound factual or historical basis, is not actionable'") (quoting Eisenberg, 766 F.2d at 776); accord Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331 (7th Cir. 1995).
The 1994 Annual Report expressly states that in the past "earnings per share increased 9 percent per year on average" in real terms for five consecutive years. 1994 Annual Report at 33 (attached as Exh. E to Block Aff.). This history of successful performance -- achieved during a period when Quaker was pursuing a strategy of using leverage to finance growth by acquisition -- fatally undermines any inference that Quaker's optimistic Earnings Growth Target lacked a reasonable basis when made. See, e.g., Kowal, 16 F.3d at 1279; Herskowitz, 857 F.2d at 184; Eisenberg, 766 F.2d at 776. Plaintiffs, therefore, have failed state a claim that the Earnings Growth Target lacked a reasonable basis when made or even once the Snapple acquisition was announced.
Accordingly, the Second Amended Complaint fails to state a claim upon which relief can be granted. No allegation supports the contention that Quaker or Smithburg misrepresented a material fact or had a duty to disclose any aspect of the Snapple acquisition negotiations prior to the November Press Release. When no duty to disclose exists, there can be no finding of securities fraud. Plaintiffs' Section 10(b) and Rule 10b-5 claims are dismissed.
F. Anti-Takeover Maneuvers
Quaker is, furthermore, under no duty to disclose how the acquisition of Snapple benefitted management. Quaker's failure to disclose how management might utilize an acquisition to their own advantage
"is not an actionable omission of material fact because the investing public is charged with 'knowledge of information of which they reasonably should be aware,' which includes 'the universal interest of corporate officers and directors in maintaining corporate control.'"
Lewis, 949 F.2d at 651 (quoting Warner Communications Inc. v. Murdoch, 581 F. Supp. 1482, 1492 (D.Del. 1984)).
The claim that Quaker was obligated to disclose the Snapple acquisition benefitted management is, in effect, a claim that Quaker misrepresented the Leverage Ratio Guideline and Earnings Growth Target as part of its entrenchment scheme. Even if management motives in acquiring Snapple were self-serving as alleged, Quaker's "failure to disclose management's entrenchment scheme is not actionable under the Federal securities laws." Lewis, 949 F.2d at 651. "'Corporate officers and directors do not violate the Federal securities laws by failing to disclose an entrenchment motive or scheme underlying their actions.'" Id. (quoting Warner Communications, 581 F. Supp. at 1490). Indeed, "'the decision to resist a takeover is within the scope of directors' state law fiduciary duties, and there is no Federal securities law duty to disclose one's motives in undertaking such resistance.'" Id. at 652 (quoting Panter v. Marshall Field & Co., 646 F.2d 271, 290 (7th Cir.), cert. denied, 454 U.S. 1092, 70 L. Ed. 2d 631, 102 S. Ct. 658 (1981)).
G. Controlling Person Liability
Plaintiffs contend that, in addition to his liability for primary violations under Section 10(b) of the 1934 Act, Smithburg is also secondarily liable as a controlling person of Quaker under Section 20 of the 1934 Act, 15 U.S.C. § 78t(a).
To establish controlling person liability against Smithburg there must first be primary liability on the part of Quaker.
"Once all predicate § 10(b) claims are dismissed, there are no allegations upon which § 20(a) liability can be based." Shapiro, 964 F.2d at 279; VT Investors v. R&D Funding Corp., 733 F. Supp. 823, 841 (D.N.J. 1990) (controlling person claims must be dismissed as a matter of law when the underlying core allegations are dismissed). Accordingly, because the Section 10(b) and Rule 10b-5 claims are dismissed, the controlling person claim under Section 20 is also dismissed.
H. Private Securities Litigation Reform Act of 1995
In December 1995, Congress enacted the Private Securities Litigation Reform Act (the "Reform Act"), Pub.L.No. 104-67, 109 Stat. 737 (22 Dec. 1995), "to protect investors, issuers, and all who are associated with our capital markets from abusive securities litigation" and to "implement needed procedural protections to discourage frivolous litigation." H.R.Conf.Rep. 104-369, 104th Cong., 1st Sess. 31, 32 (1995).
The Reform Act specifically targets abusive practices including "the routine filing of lawsuits . . . with only the faint hope that the discovery process might lead eventually to some plausible cause of action." Id. at 31.
The Reform Act provides a "safe harbor" for forward-looking statements such as projections of revenue, earnings per share, capital expenditures, dividends, capital structure and statements of management's plans and objectives for future operations or future economic performance. See Sections 21E(c) and 21E(i)(1) of the 1934 Act, 15 U.S.C. §§ 78u-5(c) and 78u-5(i)(1). This safe harbor applies to any statement that is (1) identified as a forward-looking statement and accompanied by a cautionary statement, (2) to any immaterial statement, or (3) when a plaintiff cannot prove the forward-looking statement was made with actual knowledge that it was false or misleading. Section 21E(c) of the 1934 Act, 15 U.S.C. § 78u-5(c).
The Reform Act codifies judicial interpretation of Section 10(b) and Rule 10b-5 and, if it had been applicable to this action, would have provided an additional statutory basis for dismissing the Second Amended Complaint.
I. Other Grounds Asserted Are Moot
The other grounds upon which Defendants argue the Second Amended Complaint must be dismissed, including failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b), are moot.
For the reasons set forth above, the Motion to Dismiss is granted. The Second Amended Complaint is dismissed.
Dated: 23 May 1996