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The Arbitrage Event-Driven Fund v. Tribune Media Co.

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

January 6, 2020

THE ARBITRAGE EVENT-DRIVEN FUND, et al., on behalf of themselves and all others similarly situated, Plaintiffs,


          Charles P. Kocoras United States District Judge

         Before the Court are three separate motions to dismiss the Plaintiffs' amended class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on behalf of: (1) Defendants Tribune Media Company (“Tribune”), Peter Kern (“Kern”), and Chandler Bigelow (“Bigelow”) (collectively, “the Tribune Defendants”) and Craig A. Jacobson (“Jacobson”), Ross Levinsohn (“Levinsohn”), Peter E. Murphy (“Murphy”), and Laura R. Walker (“Walker”) (collectively, “the Director Defendants”); (2) Defendants Oaktree Tribune, L.P. (“Oaktree”) and Oaktree Capital Management, L.P. (“Oaktree Capital”) (collectively, “the Oaktree Defendants”); and (3) Defendant Morgan Stanley & Co., LLC (“Morgan Stanley”) (collectively with the Tribune Defendants, the Director Defendants, and the Oaktree Defendants, “the Defendants”). For the following reasons, the Court grants the motions to dismiss with prejudice.


         For purposes of this opinion, the Court accepts as true the following facts from the amended complaint. Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). All reasonable inferences are drawn in the Plaintiffs' favor. Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).

         The Parties

         Plaintiff the Arbitrage Event-Driven Fund (“AEDF”) is a fund series of a Delaware statutory trust that seeks capital growth through an opportunistic and flexible approach to event-driven investing. Plaintiff the Arbitrage Fund (“AF”) (collectively, “Arbitrage”) is a fund series of a Delaware statutory trust that seeks capital growth through an investment approach focused on the strategy of merger arbitrage.

         Plaintiff the Water Island Merger Arbitrage Institutional Commingled Master Fund, LP (“the Water Island Fund”) is a Cayman Islands limited partnership which invests in the equity and debt instruments of companies involved in corporate events. The Water Island Fund and its registered investment manager, Water Island Capital LLC (“Water Island Capital”) (collectively, “Water Island”) are headquartered in New York, New York.

         Plaintiff First New York Partners Fund LP (“FNY Partners”) is a Delaware limited partnership which invests in equity securities. Plaintiff FNY Managed Accounts, LLC (“FNY Managed”) (collectively, “the FNY Funds”) (collectively with Arbitrage and Water Island, “the Plaintiffs”) is a Delaware limited liability company that also invests in equity securities. The FNY Funds and their registered investment manager, FNY Investment Advisers, LLC, are headquartered in New York, New York.

         Defendant Tribune is a Delaware corporation headquartered in Chicago, Illinois. It is a media company with a diverse portfolio of television and digital properties, owning or operating 42 local television stations in 33 markets. Defendant Kern is a New York resident who served as the Chief Executive Officer of Tribune since March 2017 and on Tribune's Board of Directors since October 2016. Defendant Bigelow is an Illinois resident who served as Tribune's Chief Financial Officer and Executive Vice President since February 2016. Defendants Jacobson, Levinsohn, and Murphy are California residents who were members of Tribune's Board at all relevant times and remain directors of Tribune. Defendant Walker is a New York resident who was a member of Tribune's Board at all relevant times and remains a director of Tribune.

         Defendant Oaktree is a Delaware limited partnership headquartered in Los Angeles, California. As of November 29, 2017, Oaktree was Tribune's largest shareholder, owning over 14 million shares of Tribune common stock. Oaktree's Tribune holdings were managed by an investment committee comprised of Oaktree Capital senior personnel, including Mr. Karsh (“Karsh”) (Chairman of Tribune's Board until October 2017 and Oaktree Capital co-founder), Howard S. Marks (“Marks”) (co-founder), John B. Frank (“Frank”) (Vice Chairman), David M. Kirchheimer (“Kirchherimer”) (Advisory Partner and former Principal and Chief Financial Officer), and Stephen A. Kaplan (“Kaplan”) (Advisory Partner and former head of Oaktree's Global Principal Group).

         Defendant Oaktree Capital is a leading global alternative investment management firm headquartered in Los Angeles, California. Oaktree Capital is the parent company of Oaktree and was the controlling entity of Oaktree with respect to their Tribune shares. As of December 31, 2017, Oaktree Capital reported sole voting power and sole dispositive power with respect to Oaktree's Tribune shares. Defendant Jacobson served as a director of two unrelated specialty finance companies managed by Oaktree Capital.

         Defendant Morgan Stanley is a Delaware limited liability company headquartered in New York, New York.

         Tribune Background

         Founded in 1847, the original Tribune Company was the publisher of the Chicago Daily Tribune. However, in 2008, the company filed for Chapter 11 bankruptcy. On December 31, 2012, Tribune emerged from bankruptcy as a newly-reorganized company. Pursuant to Tribune's confirmed joint plan of reorganization proposed by its committee of unsecured creditors, its largest creditors, including Oaktree Capital, assumed control of the company.

         As Tribune's largest shareholder at 22 percent, Oaktree Capital was entitled to appoint two board members. On January 17, 2013, Karsh was named Chairman of Tribune's Board. At the time, Karsh was also acting as Oaktree Capital's Co-Chairman, Chief Investment Officer, and a member of the investment committee that controlled the disposition of Oaktree's Tribune stock.

         In July 2013, Tribune announced plans to split into two companies, with Tribune focusing on broadcasting and a new company, Tribune Publishing, focusing on print. On August 4, 2014, Tribune completed the split, with Oaktree owning 18.5 percent of Tribune Publishing and 18.5 percent of Tribune. By March 2017, Oaktree owned 16.3 percent of Tribune.

         The Merger with Sinclair

         On February 29, 2016, Tribune announced that they were exploring the option of a merger or sale of the company. Due to investors' positive reaction to the news, Tribune's share price rose 9 percent, closing at $35.90 per share-up from $32.95 at close the previous day. Tribune's share price rose again the following day, closing at $37.91 on March 1, 2016.

         By November 2016, Tribune was in serious negotiations with Sinclair Broadcasting Group, Inc. (“Sinclair”) regarding a merger. On March 1, 2017, Reuters reported that Sinclair executives approached Tribune about a possible acquisition. Investors again responded positively, and Tribune stock rose 8 percent from $34.52 to $37.38.

         On May 8, 2017, Tribune announced that it had entered into a Merger Agreement with Sinclair, pursuant to which Sinclair would acquire Tribune's outstanding stock, and Tribune shareholders would receive cash plus Sinclair stock for a total of $43.50 per share. Investors reacted positively to the news, and Tribune's stock closed at $42.40 per share.

         Pre-Class Period[1] Merger Developments

         Combining Tribune and Sinclair would trigger regulatory scrutiny by both the U.S. Department of Justice (“DOJ”) and the Federal Communications Commission (“FCC”). To allay investor concerns over such scrutiny, Tribune issued a press release on May 8, 2017, saying, “In order to comply with FCC ownership requirements and antitrust regulations, Sinclair may sell certain stations in markets where it currently owns stations. Such divestitures will be determined through the regulatory approval process.”

         The following day, Tribune publicly filed its Form 8-K announcing the Merger Agreement with the U.S. Securities and Exchange Commission (“SEC”). The Form 8-K attaches Tribune's May 8, 2017 press release and the Merger Agreement as exhibits. The Merger Agreement contained the following provisions related to Sinclair's station divestitures:

[Sinclair] shall use reasonable best efforts to take action to avoid or eliminate each and every impediment that may be asserted by any Governmental Authority with respect to the transactions contemplated by this Agreement so as to enable the Closing to occur as soon as reasonably practicable, including … the proffer and agreement by [Sinclair] of its willingness to sell, lease, license or otherwise dispose of, or hold separate pending such disposition, and promptly to effect the sale, lease, license, disposal and holding separate of, such assets, rights, product lines, categories of assets or businesses or other operations or interest therein of [Sinclair] or any of its Subsidiaries [ ] (hereinafter referred to as the “Station Divestitures”) and … the proffer and agreement by [Sinclair] of its willingness to take such other actions, and promptly to effect such other actions (and the entry into agreements with, and submission to orders of, the relevant Governmental Authority giving effect thereto, including the entry into hold separate arrangements, terminating, assigning or modifying Contracts (or portions thereof) or other business relationships, accepting restrictions on business operations and entering into commitments and obligations) (each an “Approval Action”).

         Tribune reiterated this message in its September 2017 Proxy, noting that Sinclair had agreed to divest one or more stations in ten specific overlap markets.

         In September 2017, DOJ Assistant Attorney General in charge of Antitrust, Mark Delrahim (“AAG Delrahim”), took office. AAG Delrahim made clear that he was focused on divestitures in the ten identified overlap markets and that Sinclair's agreement to divestitures in those markets would halt DOJ's investigation of the merger. Sinclair, however, attempted to persuade DOJ that divestitures in most of the ten overlap markets should not be required to approve the merger.

         On November 17, 2017, DOJ staff sent Sinclair a letter stating that none of its arguments had persuaded them as to any of the overlap markets. That same day, AAG Delrahim called Sinclair's antitrust counsel and Tribune's regulatory counsel to convey that DOJ's concerns with the merger could be resolved if Sinclair agreed to divest stations in eight to ten of the overlap markets. The Plaintiffs allege that Sinclair effectively rejected this offer by November 20, 2017 because DOJ would not pause its investigatory depositions scheduled for that week; however, the Defendants note that Sinclair did not reject the offer until December 15, 2017.[2] In a December 18, 2017 letter from Tribune's general counsel to Sinclair's general counsel, Tribune informed Sinclair that it considered Sinclair's rejection of DOJ's offer to be inconsistent with its obligations under the Merger Agreement. Defendant Kern was copied on that letter.

         The Oaktree Offering

         On November 29, 2017, Tribune announced that Oaktree would be selling seven million of its shares. Pursuant to the Offering Materials, Oaktree would sell each share at $40.36 to underwriter Morgan Stanley. The Offering Materials authorized Morgan Stanley to offer those shares to the public, which they did for $40.76 per share over the next several trading days.

         In the Registration Statement and Prospectus for the Oaktree Offering, Tribune repeated the substance of its previous statements on the merger and did not disclose that Sinclair was not agreeing to DOJ's request to divest eight to ten of its stations in overlapping markets. The Registration Statement and Prospectus included the warnings that “[f]ailure to obtain the necessary governmental approvals and consents would prevent the parties from consummating the proposed Merger, ” and that:

There can be no assurance that the actions Sinclair is required to take under the Merger Agreement to obtain the governmental approvals and consents necessary to complete the Merger will be sufficient to obtain such approvals and consents or that the divestitures contemplated by the Merger Agreement to obtain necessary governmental approvals and consents will be completed.

         Finally, the Registration Statement and Prospectus stated that Tribune anticipated the merger would close in the first quarter of fiscal 2018. The Oaktree Offering closed on December 4, 2017. During the class period, the Plaintiffs purchased shares of Tribune common stock.

         Regulatory Developments During Class Period

         On January 24, 2018, Kern sent an e-mail to Sinclair's CEO, urging Sinclair to comply with its obligations under the Merger Agreement given that they were slated to have their final front office meeting with DOJ the following day. At the conclusion of this meeting, DOJ typically concludes its investigation and decides whether to sue. In relevant part, Kern wrote:

While I know you are well aware of our position and your contractual obligations, and at the risk of belaboring the point - in the event DOJ offers to end its investigation if Sinclair agrees to divest stations within the ten overlap [markets] spelled out in the merger agreement, you are contractually bound to accept.

         Sinclair's CEO responded that day, writing, “Although I do not think it is productive to engage in a legal debate with you, for the record I am writing to advise you that we disagree with the legal conclusion stated in your email as to Sinclair's contractual obligations.”

         At the January 25, 2018 meeting with DOJ, Tribune, and Sinclair, DOJ offered to end its investigation upon Sinclair's agreement to divest its stations in the ten overlap markets. Sinclair countered by offering sales in four of the overlap markets, which DOJ rejected. Sinclair then declared that it intended to litigate with DOJ, with Sinclair's general counsel telling AAG Delrahim, “sue me.” However, after Tribune threatened to sue Sinclair for breaching its contractual obligations, Sinclair altered its position and agreed on February 14, 2018 to offer the divestitures demanded by DOJ.

         Sinclair acted with similar opposition in its dealings with the FCC. On February 27, 2017, Sinclair proposed station sales to parties with ties to Sinclair's Executive Chairman, David Smith (“Smith”) and his family, coupled with joint sales and shared services agreements under which Sinclair would effectively control all aspects of station operations. Under these proposed arrangements, Sinclair would continue to reap the lion's share of the economic benefits of the stations it was purportedly “divesting” and would have the option to repurchase the stations in the future. Tribune warned Sinclair that proposing these related-party sales was incompatible with using best efforts to obtain prompt regulatory approval.

         After reviewing Sinclair's proposal, the FCC expressed frustration over what they viewed as unacceptably aggressive terms for Sinclair's proposed divestitures. The FCC advised Sinclair to propose “clean” ...

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