In Laborers’ Local #231 Pension Fund v. Cowan, No. 17-478, 2018 BL 85103 (D. Del. Mar. 13, 2018), the court granted Rory Cowan and his co-executives’ (“Defendants”) motion to dismiss Laborers’ Local #231 Pension Fund’s (“Plaintiffs”) amended complaint. The court held Plaintiffs failed to state a claim in violation of the Securities Exchange Act of 1934 (the “Exchange Act”) because they failed to allege “a misleading or false statement or omission” in the proxy statement.

According to the amended complaint, in December 2016, Rory Cowan, acting on behalf of Lionbridge Technologies, Inc. as the CEO, signed a plan of merger agreement to combine his company with HIG Capital LLC. HIG offered $5.75 per Lionbridge share to merge the latter into two HIG affiliates: LBT Acquisition, Inc. and LBT Merger Sub, Inc. Lionbridge retained Union Square Advisors LLC to evaluate HIG’s offer for fairness as well as prepare projections based on Lionbridge’s current finances, should Lionbridge desire to accept the offer. Union Square concluded HIG’s offer was fair and produced financial projections for Lionbridge through 2020; Lionbridge then sent these projections in a proxy statement to its shareholders, including Plaintiffs, seeking their approval for the proposed merger. Lionbridge stated the financial projections arose “under the assumption of continued standalone operation as a publicly-traded company and did not give effect to any changes or expenses as a result of the merger or any effects of the merger.”

Plaintiffs are Lionbridge shareholders who allege this proxy statement contained certain “nondisclosures,” specifically “materially false and misleading statements and omissions,” in violation of Section 14(a) of the Exchange Act. Additionally, Plaintiffs claim that HIG, its affiliates, and Lionbridge’s board are “controlling persons” who should face liability for such alleged misleading statements and omissions under Section 20(a) of the Exchange Act. 

In order to successfully state a claim under Section 14(a) of the Exchange Act, Plaintiffs must allege that: (1) a proxy statement contained a material misrepresentation or omission; and (2) this misrepresentation or omission caused injury. Finally, Plaintiffs must show that “The proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.” Section 20(a) imposes liability on every person who controls anyone liable under any provision of the Exchange Act; therefore, to sustain their Section 20(a) claim, Plaintiffs must first show Defendants violated Section 14(a) of the Exchange Act.

Here, however, the court determined Plaintiffs’ allegations mandated an even stricter pleading standard because the amended complaint indicates fraud. Plaintiffs alleged Lionbridge gave false statements to Union Square to ensure approval of HIG’s offer in order to convince shareholders to vote for the planned merger. Plaintiffs alleged Lionbridge’s management team was so motivated because HIG offered it continued employment and specifically offered Mr. Cowan the opportunity to rollover part of his Lionbridge stock into the surviving company’s stock. The court noted that, according to OFI Asset Mgmt. v. Cooper Tire & Rubber, 834 F.3d 481 (3d Cir. 2016), when a 14(a) claim sounds in fraud it is subjected to the heightened pleading standards of the Private Securities Litigation Reform Act (“PSLRA”). The PSLRA requires a complaint to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.”

First, the court found the projections qualified for the PSLRA’s safe harbor protecting forward-looking statements because they contained “a lengthy and specific disclaimer.” Lionbridge explained the financial projections “[were] not included…to influence a Lionbridge stockholder’s decision whether to vote for the merger agreement or for any other purpose.” The statement cautions shareholders “not to place undue, if any, reliance on the [financial] forecasts.” The court concluded, based on this disclaimer, nothing in the proxy statement rose to the level of a statement of fact other than the assertion that Lionbridge provided the same projections to its shareholders as it did to HIG et al. and Union Square.

Next, the court found Plaintiffs’ 14(a) claim did not qualify as actionable because the filings failed to allege the projections provided to shareholders contained different information from those provided to other parties. The court concluded the only relevant fact was whether the projections provided to shareholders read the same as those provided to other relevant parties. Here, Plaintiffs did not allege the projections in the proxy statement differed from those provided to the other parties involved; therefore, Plaintiffs failed to state a 14(a) claim based on the projections contained in the proxy.

The court proceeded to conclude, without further analysis, that Plaintiffs’ Section 20(a) claim also failed because the court found that Plaintiffs did not adequately plead a Section 14(a) violation and a Section 20(a) claim requires an underlying Exchange Act violation.

For the above reasons, the court granted Cowan’s motion to dismiss Plaintiffs’ Section 14(a) and 20(a) Securities Exchange Act of 1934 claims.

The primary materials for this case may be found at DU Corporate Governance Website.