The opinion of the court was delivered by: LECHNER
This is a purported class action brought by plaintiffs Myron Weiner ("Weiner"), Nicholas Sitnycky ("Sitnycky"), Ronald Anderson ("Anderson") and Robert Furman ("Furman") on behalf of themselves and all others similarly situated (collectively the "Plaintiffs") against defendants The Quaker Oats Company ("Quaker") and William D. Smithburg ("Smithburg") (collectively the "Defendants") seeking monetary relief for alleged violations of sections 10(b) ("Section 10(b)") and 20(a) ("Section 20(a)") of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated under the 1934 Act. The initial complaint was filed on 10 November 1994 (the "Complaint"); on 20 January 1995 Plaintiffs filed an amended complaint (the "First Amended Complaint"). A second amended class action complaint (the "Second Amended Complaint") was filed on 2 May 1995.
In essence, the allegations of the Second Amended Complaint center around the acquisition of Snapple Beverage Corporation ("Snapple") by Quaker and the statements by Quaker and Smithburg preceding the acquisition.
Jurisdiction is alleged pursuant to 15 U.S.C. § 78aa and 28 U.S.C. § 1331. Venue is alleged pursuant to 15 U.S.C. § 78aa and 28 U.S.C. § 1391(b).
Currently before the court is a motion filed by Defendants to dismiss the Second Amended Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedures (the "Motion to Dismiss").
For the reasons set forth below, the Motion to Dismiss is granted.
Weiner, Sitnycky, Anderson and Furman allege they represent a class of people who purchased Quaker common stock during the period 4 August 1994 through and including 1 November 1994 (the "Class Period").
Second Amended Complaint, PP 4, 12. On 22 September 1994, Weiner purchased 300 shares of Quaker common stock at a price of $ 80 3/8 per share and 700 shares at a price of $ 80 7/8 per share. Id., P 7(a). On 23 September 1994, Sitnycky purchased 500 shares of Quaker common stock at a price of $ 78 3/4 per share and on 27 September 1994, purchased an additional 2000 shares at a price of $ 80 1/4 per share. Id., P 7(b). On 29 September 1994, Anderson purchased 200 shares of Quaker common stock at a price of $ 78 1/8 per share. Id., P 7(c). On 12 October 1994, Furman purchased 1000 shares of Quaker common stock at a price of $ 77 1/8 per share. Id., P 7(d).
Quaker is a corporation incorporated under the laws of the State of New Jersey. Id., PP 8, 19. Quaker is a worldwide producer of brand name packaged foods; it produces and markets a variety of consumer products including hot and ready-to-eat cereals, breakfast syrups, pancake mixes, snack foods, dog and cat foods, and frozen pizzas. Id., P 8. Gatorade thirst quencher is Quaker's largest single product, with sales of the sports drink totaling approximately $ 1.2 billion annually. Id., PP 8, 20. In its fiscal year ending 30 June 1994, Quaker had more than $ 5.9 billion in sales, up about 3.9% from the previous year. Id., P 19. Earnings for 1994, however, fell 19% to $ 227.5 million, reflecting a restructuring charge for cost reduction activities. Id.
Quaker common stock is traded on the New York Stock Exchange. Id., P 18. During the Class Period, the average daily trading volume of Quaker common stock exceeded 560,000 shares. Id. Plaintiffs allege the market price during the Class Period reflected all publicly available information concerning Quaker. Id.
Smithburg is the Chairman, President and Chief Executive Officer of Quaker. Id., P 9. Plaintiffs allege Smithburg had the power to influence and control Quaker and cause Quaker to engage in a scheme to inflate artificially the market price of its common stock. Id., PP 10-11. Plaintiffs further allege Smithburg controlled the content of press releases, Security and Exchange Commission ("SEC") filings and other disclosures to securities analysts and the investing public during the Class Period. Id., P 10. Because of his executive, managerial and directoral positions with Quaker, Smithburg was privy to internal corporate memoranda and other information unavailable to the Plaintiffs and other members of the investing public. Id.
B. Alleged Anti-Takeover Maneuvers
Plaintiffs allege that prior to Quaker's acquisition of Snapple, there had been speculation Quaker was a candidate for takeover. Id., P 20. Plaintiffs further allege Smithburg and other Quaker officials, in an effort to protect and preserve their own positions, devised a plan intended to thwart any potential hostile acquisition of Quaker. Id., PP 5-6. Significantly, plaintiffs do not allege, however, that any entity actually attempted or was attempting to acquire Quaker before or during the Class Period or that any entity actually was deterred from doing so by the Snapple acquisition.
In the spring of 1994, Quaker was in contact with Snapple concerning a possible strategic relationship. Id., P 29. In early August 1994, Quaker advised Snapple it was interested in pursuing an acquisition of Snapple and commenced a due diligence investigation using confidential internal information provided by Snapple. Id.; Schedule 14D-1 filed by Quaker 1 November 1994 ("14D-1") at 16 (attached as Exh. A. to Block Supp. Aff.).
The Bloomburg Business News quoted Smithburg as stating on 2 November 1994: "Right after some discussions started, it was so obvious that [Snapple] had an interest and we had an interest." Second Amended Complaint, P 29.
C. Alleged False and Misleading Statements During the Class Period
1. Quaker's Debt/Total Capitalization Ratio
Quaker has used borrowed capital, termed leverage, to finance its growth in the recent past. Id., P 21. Plaintiffs allege higher leverage increases the risk to equity investors, whose interests are subordinated to those of debt holders. Id. In its Annual Report to Shareholders for the fiscal year ending 30 June 1993 (the "1993 Annual Report"), Quaker made the following statement concerning leverage:
Components of Debt/Total Capitalization Ratio
1993 Annual Report at 32 (emphasis added) (attached as Exh. B to Block Aff.); Second Amended Complaint, P 22.
Smithburg reiterated this total debt-to-total capitalization ratio guideline (the "Leverage Ratio Guideline") in the 1993 Annual Report's Letter to Shareholders, in which he stated:
Our Board of Directors [has] authorized an increase in our leverage guideline, along with a share repurchase program of up to 5 million shares. Our guideline for leverage in the future will be to maintain a total debt-to-total capitalization ratio in the upper-60 percent range.
1993 Annual Report at 35 (emphasis added) (attached as Exh. B to Block Aff.); Second Amended Complaint, P 23. Quaker included a similarly worded statement in its Form 10-Q for the quarter ending 30 September 1993 ("September 1993 10-Q"), filed with the SEC in November 1993. September 1993 10-Q at 9 (attached as Exh. C to Block Aff.); Second Amended Complaint, P 24.
On or about 23 September 1994, Quaker released its Annual Report to Shareholders for fiscal year ending 30 June 1994 (the "1994 Annual Report"). Second Amended Complaint, P 32. The 1994 Annual Report included the following statement: "At the end of fiscal 1994, our total debt-to-total capitalization ratio was 68.8 percent on a book-value basis, in line with out guideline in the upper 60 percent range. " 1994 Annual Report at 34 (emphasis added) (attached as Exh. E to Block Aff.); Second Amended Complaint, P 32. Plaintiffs allege the Leverage Ratio Guideline statement remained "alive" in the market uncorrected and unrevised throughout the Class Period. Second Amended Complaint, P 25.
Although all of Quaker's statements termed the Leverage Ratio a "guideline," Plaintiffs allege the 1993 Annual Report, including the Smithburg Letter to Shareholders, the September 1993 10-Q and the 1994 Annual Report established a leverage "ceiling" which the Board of Directors agreed not to exceed. Id., PP 6, 25. Plaintiffs further allege Quaker knew it was planning to exceed the Leverage Ratio Guideline by taking on additional debt to finance the acquisition of Snapple. Id., P 25.
On 4 August 1994, Quaker announced its financial results for both the fourth quarter of fiscal 1994 and for fiscal 1994. Id., P 26. Sales had increased to $ 1.618 billion, up from $ 1.545 billion, but due to major cost-reduction measures, net income dropped from $ 93.4 million to $ 23.5 million. Id., P 26. In connection with the announcement of its fiscal 1994 results, Quaker held a meeting for financial reporters and securities analysts. Id., P 27.
Plaintiffs allege Smithburg commented about the fiscal 1994 results and future strategies. Id. A Dow Jones News Wire report quoted Smithburg as stating, he was "'confident' of achieving at least 7% real earnings growth" in fiscal 1995 (the "Earnings Growth Target"). 4 August 1994 Dow Jones News Wire (attached as Exh. D to Block Aff.); Second Amended Complaint, P 27. The Earnings Growth Target was reiterated in the 1994 Annual Report which stated: "We are committed to achieving a real earnings growth of at least 7 percent over time." 1994 Annual Report at 33 (attached as Exh. E to Block Aff.); Second Amended Complaint, P 33. Plaintiffs, however, curiously exclude a significant portion of the Dow Jones News Wire report from the Second Amended Complaint. At the same meeting where Smithburg relayed his confidence in achieving at least seven percent real earnings growth in fiscal 1995, he also stated that Quaker had missed "its 7% target" in fiscal 1994. 4 August 1994 Dow Jones News Wire (attached as Exh. D. to Block Aff.).
3. Alleged False and Misleading Nature of the Leverage Ratio Guideline and Earnings Growth Target