United States District Court, N.D. Illinois, Eastern Division
Shaun A. House, individually and on behalf of all other similarly situated, Plaintiff,
Akorn, Inc.; John N. Kapoor; Kenneth S. Abramowitz; Adrienne L. Graves; Ronald M. Johnson; Steven J. Meyer; Terry A. Rappuhn; Brian Tambi; and Alan Weinstein, Defendants. Robert Carlyle, Plaintiff, Demetrios Pullos, individually and on behalf of all other similarly situated, Plaintiff,
MEMORANDUM OPINION AND ORDER
Honorable Thomas M. Durkin United States District Judge.
Court has recounted in greater detail in previous opinions,
Plaintiffs in these cases sued Akorn and members of its board
of directors seeking certain disclosures regarding a proposed
acquisition by Frensenius Kabi AG. See 17 C 5018, R.
53 (House v. Akorn, Inc., 2018 WL 4579781 (N.D. Ill.
Sept. 25, 2018)); 17 C 5016, R. 81 (Berg v. Akorn,
Inc., 2017 WL 5593349 (N.D. Ill. Nov. 21, 2017)). After
Akorn revised its proxy statement and issued a Form 8-K,
Plaintiffs dismissed their lawsuits and settled for
attorney's fees. Shortly thereafter, Theodore Frank, an
owner of 1, 000 Akorn shares, sought to intervene to object
to the attorneys' fee settlement. The Court eventually
denied Frank's motion to intervene, but in light of
Frank's arguments, ordered Defendants to file a brief
addressing whether the Court should exercise its inherent
authority to abrogate the settlement agreements under the
standard set forth In re Walgreen Co. Stockholder
Litigation, 832 F.3d 718, 725 (7th Cir. 2016). The Court
also invited Frank to file an opposition brief as an amicus
curiae, which he did. The parties then filed reply briefs,
and briefs on supplemental authority. The Court now addresses
whether the settlements should be abrogated.
Rule 14a-9 requires disclosure in proxy statements of all
“material fact[s] necessary in order to make the
statements therein not false or misleading.”
See 17 C.F.R. § 240.14a-9(a). The Supreme Court
has held that “[a]n omitted fact is material if there
is a substantial likelihood that a reasonable shareholder
would consider it important in deciding how to vote.”
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
449 (1976). In other words, omitted information is material
if there is
a substantial likelihood that, under all the circumstances,
the omitted fact would have assumed actual significance in
the deliberations of the reasonable shareholder. Put another
way, there must be 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.
Id. Accordingly, “[o]mitted facts are not
material simply because they might be helpful.”
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174
(Del. 2000); see also TSC Indus., 426 U.S.
at 449 n.10 (noting “the SEC's view of the proper
balance between the need to insure adequate disclosure and
the need to avoid the adverse consequences of setting too low
a threshold for civil liability”); Wieglos v. Com.
Ed. Co., 892 F.2d 509, 517 (7th Cir. 1989)
(“Reasonable investors do not want to know everything
that could go wrong, without regard to probabilities; that
would clutter registration documents and obscure important
information. Issuers must winnow things to produce
manageable, informative filings.”).
Seventh Circuit heightened this standard in the context of
reviewing approval of a class settlement of claims for
disclosures under Rule 14a-9. See Walgreen, 832 F.3d
at 723-24. Adopting a standard set by the Delaware Court of
Chancery in similar cases, the court held that disclosures
must be “plainly material . . . . mean[ing] that it
should not be a close call that the . . . information is
material.” Id. at 725 (quoting In re
Trulia, Inc. Stockholder Litig., 129 A.3d 884, 894 (Del.
Ch. Ct. 2016)).
claim that their complaints caused Akorn to make additional
disclosures in the revised proxy and Form 8-K, which in turn
precipitated their settlement. The parties' briefs focus
on whether these additional disclosures are plainly material
justifying the settlement. This would be the appropriate
perspective if the Court was reviewing a class settlement.
See Walgreen, 832 F.3d at 724 (“No class
action settlement that yields zero benefits for the
class should be approved . . . .”) (emphasis added).
But no class was certified here, nor were any class claims
released in the settlement. Thus, as the Court explained in
its previous order, the case is in the procedural posture
suggested by the second half of the sentence from
Walgreen just quoted: “. . . a class action
that seeks only worthless benefits for the class
should be dismissed out of hand.” Id.
(emphasis added). To determine whether Plaintiffs' cases
should have been “dismissed out of hand”-in which
case the settlement agreements should be abrogated-the Court
must assess whether the disclosures Plaintiffs'
sought in their complaints-not the disclosures Akorn
made after the complaints were filed in the revised proxy and
Form 8-K-are plainly material.
three plaintiffs sought GAAP reconciliation of the
proxy's projections.Plaintiffs argue that such
reconciliation was necessary because GAAP is the format in
which “Akorn traditionally disclosed its financial
results.” R. 65 at 10. But while such reconciliation
might be helpful, the applicable SEC regulation requiring
GAAP reconciliation does “not apply to . . . a
disclosure relating to a proposed business
combination.” 17 C.F.R. § 244.100(d); see
also Securities Exchange Commission Discl. 5620589,
Question 101.01 (Oct. 17, 2017), available online at:
Although this regulation does not directly address
materiality, the Court finds it highly persuasive in that
regard. Other district courts have reached a similar
conclusion. See Assad v. DigitalGlobe, Inc., 2017 WL
3129700, at *6 (D. Colo. Jul. 21, 2017); Bushansky v.
Remy Intl., Inc., 262 F.Supp.3d 742, 748 (S.D. Ind.
argue that GAAP reconciliation “revealed that the
November 2016 Projections assumed steady increases in
[Akorn's] net income consistent with Akorn's past
performance, while the lowered March 2017 Projections assumed
a sudden drop in Akorn's near term performance, which was
inconsistent with Akorn's recent financial
performance.” R. 65 at 11. But it is obvious that a
lower projection implies lower net income. Disclosure of a
lower projection already constitutes disclosure of the
company's opinion that the company will earn lower net
income. Plaintiffs do not explain why the specific net income
numbers were material to shareholders' ability to
evaluate the merger. Therefore, the Court finds GAAP
reconciliation is not plainly material.
Components of J.P. Morgan's Analysis
House and Pullos also sought certain “components”
of J.P. Morgan's analysis (J.P. Morgan was Akorn's
merger advisor): “(i) the inputs and assumptions
underlying the calculation of the discount rate range of 8.0%
to 10.0%; (ii) the range of terminal values to which the
growth rate range was applied; and (iii) the inputs and
assumptions underlying the calculation of the terminal value
growth rates.”Similarly, Plaintiff Carlyle sought
“the basis” for the growth rate J.P. Morgan
chose. But this information was already in the
original proxy. As to (i), the proxy states that the range of
8.0% to 10.0% “was chosen by J.P. Morgan based upon an
analysis of the weighted average costs of capital of the
Company.” R. 65-1 at 54 (p. 44). As to (ii), the proxy
states that the range of terminal values was calculated by
“applying terminal value growth rates ranging from 0.0%
to 2.0% to the unlevered free cash flows for the Company
during the final year of the ten-year period of the March
2017 Management Case.” Id. As to (iii), growth
rates are simply a choice. Shareholders can evaluate
Akorn's valuation and merger price by making their own
determination of whether a growth rate range of 0-2% is
reasonable in light of the company's prior performance.
Generally, with respect to data underlying a financial
advisor's opinion, courts find that only a “fair
summary” must be disclosed, meaning that the company
“does not need to provide sufficient data to allow the
stockholders to perform their own independent
valuation.” Trulia, 129 A.3d at 901. The data
sought by House and Pullos was not material to evaluating the
merger proposal. Carlyle's more general demand for
“certain internal financial analyses and forecasts
prepared by the management of the Company relating to its
business, ” is even less material.
J.P. Morgan's Compensation from Akorn
three plaintiffs sought disclosures regarding J.P.
Morgan's compensation from Akorn and Fresenius. As to
J.P. Morgan's “specific compensation figures,