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Beck v. Dobrowski

March 20, 2009


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 06 C 6411-Harry D. Leinenweber, Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.


Before POSNER, WOOD, and TINDER, Circuit Judges.

The plaintiff sued the members of the board of directors of the former Equity Office Property Trust charging that they had violated section 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n(a), and the SEC's implementing Rule 14a-9, 17 C.F.R. § 240.14a-9, which forbid material misrepresentations or omissions in soliciting a shareholder's proxy vote. There is also a state-law claim. The district judge dismissed the federal part of the suit for failure to state a claim. Fed. R. Civ. P. 12(b)(6). He ruled that the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, is applicable to suits under section 14(a), which is correct, §§ 78u-4(b)(1), (2), (4), and that it required the complaint to state "with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," § 78u-4(b)(2), which is incorrect. Invoking the doctrine of abstention, he dismissed the state-law claim as well and thus the entire suit.

There is no required state of mind for a violation of section 14(a); a proxy solicitation that contains a misleading misrepresentation or omission violates the section even if the issuer believed in perfect good faith that there was nothing misleading in the proxy materials. Kennedy v. Venrock Associates, 348 F.3d 584, 593 (7th Cir. 2003); In re Exxon Mobil Corp. Securities Litigation, 500 F.3d 189, 196-97 (3d Cir. 2007); Shidler v. All American Life & Financial Corp., 775 F.2d 917, 926-27 (8th Cir. 1985); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1300-01 (2d Cir. 1973); 3 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg & Lowenfels on Securities Fraud & Commodities Fraud § 8.4(430), pp. 204.71-72 (2d ed. 1996). The requirement in the Private Securities Litigation Reform Act of pleading a state of mind arises only in a securities case in which "the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind." 15 U.S.C. § 78u-4(b)(2). Section 14(a) requires proof only that the proxy solicitation was misleading, implying at worst negligence by the issuer. Kennedy v. Venrock Associates, supra, 348 F.3d at 593. And negligence is not a state of mind; it is a failure, whether conscious or even unavoidable (by the particular defendant, who may be below average in his ability to exercise due care), to come up to the specified standard of care. E.g., Desnick v. ABC, 233 F.3d 514, 518 (7th Cir. 2000); United States v. Ortiz, 427 F.3d 1278, 1283 (10th Cir. 2005); W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 31, p. 169 (5th ed. 1984) ("negligence is conduct, and not a state of mind"). That is a basic principle of tort law, though it is sometimes overlooked, as in Dasho v. Susquehanna Corp., 461 F.2d 11, 29-30 n. 45 (7th Cir. 1972).

The problems with the complaint are profound, but lie elsewhere. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), teaches that a defendant should not be burdened with the heavy costs of pretrial discovery that are likely to be incurred in a complex case unless the complaint indicates that the plaintiff's case is a substantial one. As the Supreme Court had earlier explained, a litigant must not be permitted to use "a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741 (1975); see also Limestone Development Corp. v. Village of Lemont, 520 F.3d 797, 802-03 (7th Cir. 2008). He is not to be allowed to extort a settlement by reason of the defendant's having to incur heavy litigation expenses if the suit proceeds beyond the pleading stage even if it is a groundless suit.

The essential facts in this case, either as alleged in the complaint or judicially noticeable, are (with some simplification) as follows. Equity Office Property Trust (we'll abbreviate it to "EO") was a real estate investment trust-the equivalent of a corporation-and the plaintiff was one of its shareholders. On November 19, 2006, EO's board of directors signed an agreement with Blackstone Group L.P., the private-equity firm, to sell EO to Blackstone for $48.50 per share, all cash, for a total of $36 billion. The agreement, which was subject to approval by EO's shareholders, allowed EO to terminate the agreement if it received a better offer, but in that event it would have to pay Blackstone a termination fee of $200 million.

A shareholders' meeting to consider the deal with Blackstone was scheduled for February 5, 2007. EO's board mailed a proxy solicitation to its shareholders in the hope of collecting enough proxies to assure a favorable vote at the meeting.

A bidding war ensued, for on January 17, 2007, EO received an offer from Vornado Realty Trust to buy EO for $52 per share, payable 60 percent in cash and 40 percent in Vornado stock; the purchase would have to be approved by Vornado's shareholders. EO issued a press release describing the offer; filed the press release electronically with the Securities and Exchange Commission, which published it on its website; and mailed its shareholders a supplemental proxy solicitation.

A week later, Blackstone raised its offer to $54 per share. EO's board promptly accepted the offer and agreed to increase the termination fee to $500 million. There was the same flurry of publicity, press release, filing with the SEC, and mailing of a supplemental proxy solicitation to the shareholders.

Vornado responded on February 1 by raising its offer for EO to $56 per share but reducing the percentage of payment that would be in cash rather than stock from 60 percent to 55 percent. There was the same flurry of publicity, filing, etc., but in a supplemental proxy solicitation EO's board continued to recommend that the shareholders approve the acquisition by Blackstone. So on February 4 Vornado proposed a new deal: an initial cash tender offer for up to 55 percent of EO's shares to be followed by the acquisition of the remaining shares by swapping Vornado shares for them. The advantage to EO of this alternative would be speed; a shareholder vote would not be required for acceptance of the cash tender offer.

Blackstone counterattacked by raising its all-cash offer to $55.25. EO's board responded by demanding $55.50, and Blackstone agreed but on the condition (to which the board acceded) that the termination fee be raised from $500 million to $720 million. There was again a flurry of publicity, filing, etc., and a supplemental proxy solicitation in which EO's board recommended approval of the Blackstone proposal. Vornado threw in its hand. It announced that it was dropping out of the bidding for EO because "the premium it would have to pay to top Blackstone's latest bid, protected by a twice increased breakup fee [the $720 million], would not be in its share-holders' interest." On February 7, EO's shareholders voted overwhelmingly to approve Blackstone's new bid.

The plaintiff intimates a possible impropriety in Blackstone's having demanded a stiff termination fee, which would have increased the cost to Vornado of outbidding Blackstone. That would not be a proper claim under section 14(a) of the Securities Exchange Act, how-ever, because it has nothing to do with misrepresentations and anyway Blackstone is not a defendant. The fee was disclosed to EO's shareholders and they could have voted against accepting Blackstone's final offer precisely because it would end the bidding war by making a higher bid too expensive for Vornado to be willing to make.

As we noted in Stark Trading v. Falconbridge Ltd., 552 F.3d 568, 572 (7th Cir. 2009), the antifraud provisions of federal securities law are not a general charter of share-holder protection-which is not to suggest that termi-nation fees in bidding contests are generally improper under any body of law with which we are familiar. See Venture Associates Corp. v. Zenith Data Systems Corp., 96 F.3d 275, 278 (7th Cir. 1996); Cottle v. Storer Communication, Inc., 849 F.2d 570, 578-79 (11th Cir. 1988); Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48-50 (Del. 1997). Blackstone was forgoing other investment opportunities in preparation for having to shell out $39 billion in cash to buy EO. Granted, if the fee were a high percentage of the bid, then, as the cases we have cited suggest, its acceptance by the board of the target company might disserve the target's shareholders by ending the bidding war prematurely. That is not the case here (or for that matter in most cases involving "deal protection" provisions of that ...

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