City of Hialeah Employees' Retirement System v. FEI: Defendants' Motion to Dismiss Plaintiff's Second Amended Complaint Granted

In City of Hialeah Employees' Retirement System v. FEI, No. 3-16-cv-1792-SI, 2018 BL 25615 (D. Or. Jan. 25, 2018), the United States District Court for the District of Oregon granted a motion to dismiss the City of Hialeah Employees’ Retirement System’s (“Plaintiff”) Second Amended Complaint (“SAC”), filed against FEI Company ("FEI"), Thermo Fisher Scientific Inc. ("Thermo"), and named Individual Defendants, Thomas Kelly, Donald Kania, Homa Bahrami, Arie Huijser, Jan Lobbezoo, Jami Dover Nachstsheim, James Richardson, and Richard Wills (collectively, "Defendants"), finding Plaintiff failed to adequately plead that Defendants’ violated Section14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and that Individual Defendants violated Section 20(a) of the Exchange Act. 

According to the SAC, in fall 2015, FEI management prepared two sets of financial management projections of combined operations, higher and lower projections. In February 2016, FEI retained Goldman Sachs as a financial advisor, and FEI and Thermo entered into merger negotiations. According to the allegations, FEI directed Goldman Sachs to use the lower projections in its financial analysis and fairness opinion. The proxy that was sent to FEI shareholders included Goldman Sachs’ financial analysis. Plaintiff alleged the proxy statement that FEI’s Board filed and disseminated to the company’s shareholders on July 27, 2016 was false and misleading for several reasons. First, it stated that the Board believed the higher projections were unrealistic, which was both subjectively and objectively false. Second, Goldman Sachs improperly double-discounted the cash flow analysis. Third, the proxy misrepresented the higher projections by omitting certain line items, which were included in the lower projections. Fourth, the proxy did not disclose the underlying data and key assumptions in the Goldman Sachs’ fairness analysis. Finally, Plaintiff alleged that individual Defendants gained material benefits, such as securing liquidity for hundreds of thousands of shares of illiquid FEI stock, valued at more than $42.8 million, and certain benefits not available to other stockholders. In response, Defendants argued the management projections were forward-looking statements protected by the safe harbor provisions of the Private Securities Litigation Reform Act (“PSLRA”).

Under Section 14(a) of the Exchange Act, it is unlawful for any person to solicit a proxy, consent, or authorization through deceptive or misleading means. Specifically, SEC Rule 14a–9 “disallows the solicitation of a proxy by a statement that contains either (1) a false or misleading declaration of material fact, or (2) an omission of material fact that makes any portion of the statement misleading.” Therefore, a plaintiff must allege the defendant omitted material information that caused the proxy statements to become misleading. All private claims under the Exchange Act are subject to the PSLRA’s heightened pleading standard, under which a plaintiff must plead with particularity both falsity and scienter. Further, PSLRA provides safe harbor provisions for forward-looking statements. A forward-looking statement is any statement regarding (1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions underlying or related to any of these issues. Finally, section 20(a) of the Exchange Act holds control persons liable for the fraud of the entities they control. 

The court held the statements were protected by the safe harbor provision as forward-looking statements. Further, even if the statements were not protected, Plaintiff did not sufficiently plead misrepresentation. The court found Plaintiff did not plead with specificity either facts alleging the Board’s opinion about the projections was actually false, or facts alleging the Defendants knew the lower projections were false.  Further, the court held that the Goldman Sachs financial analysis and accounting details did not amount to material misrepresentations. Therefore, Plaintiff failed to state a claim under section 14(a) and SEC Rule 14a–9. Finally, because Plaintiffs failed to state a primary violation of the Exchange Act, the Section 20(a) claim was dismissed. 

For the above reasons, the court granted Defendant’s motions to dismiss the SAC.

The primary materials for this post can be found on the DU Corporate Governance website.