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House v. Akorn, Inc.

United States District Court, N.D. Illinois, Eastern Division

June 24, 2019

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,


          Honorable Thomas M. Durkin United States District Judge.

         As the 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.

         SEC 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.”).

         The 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)).

         Plaintiffs 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.[1]

         1. GAAP Reconciliation

         All three plaintiffs sought GAAP reconciliation of the proxy's projections.[2]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. 2017).

         Plaintiffs 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.

         2. Components of J.P. Morgan's Analysis

         Plaintiffs 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.”[3]Similarly, Plaintiff Carlyle sought “the basis” for the growth rate J.P. Morgan chose.[4] 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.

         3. J.P. Morgan's Compensation from Akorn

         All three plaintiffs sought disclosures regarding J.P. Morgan's compensation from Akorn and Fresenius. As to J.P. Morgan's “specific compensation figures, ”[5]A ...

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