In re: Resolute Energy Corp. v. ( 2022 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 21-1412
__________
In re: RESOLUTE ENERGY CORPORATION SECURITIES LITIGATION
William A. Langdon, Jr.,
Appellant
__________
On Appeal from the United States District Court
for the District of Delaware
(District Court No. 1:19-cv-00077)
District Judge: Honorable Richard G. Andrews
__________
Submitted Under Third Circuit L.A.R. 34.1(a)
on December 14, 2021
Before: GREENAWAY, JR., KRAUSE, and PHIPPS, Circuit Judges
(Filed: January 27, 2022)
__________
OPINION*
__________
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does
not constitute binding precedent.
KRAUSE, Circuit Judge.
Appellant William Langdon challenges the District Court’s dismissal of this
consolidated securities fraud class action suit, in which he alleges that Resolute Energy
Corporation (“Resolute”) and members of its Board of Directors (collectively,
“Appellees”) violated the Securities Exchange Act of 1934, 15 U.S.C. §§ 78n(a), 78t(a);
17 C.F.R. § 240.14a-9, and breached their fiduciary duties. Because we agree with the
District Court that Appellant failed to adequately plead loss causation, we will affirm.
I. DISCUSSION1
Resolute was an oil and gas company that held assets in the Delaware Basin in
west Texas. Resolute merged with Cimarex Energy Company (“Cimarex”) on March 1,
2019, allegedly after capitulating to activist investors who pressured Appellees to sell the
company. In his amended complaint, filed on April 13, 2020, Appellant2 alleged that, by
authorizing the filing of a materially incomplete and misleading Proxy statement with the
Securities and Exchange Commission (“SEC”), which was used to solicit stockholder
votes in favor of the merger, Appellees violated Section 14(a) of the Securities Exchange
Act and SEC Rule 14a-9, which prohibit corporations from issuing proxies containing
1
The District Court had jurisdiction under 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331and 1337, and we have jurisdiction under 28 U.S.C. § 1291.
2
Appellant was appointed Lead Plaintiff after the District Court consolidated three
lawsuits filed by Resolute stockholders in May 2019. The District Court dismissed
Appellant’s original consolidated complaint, filed on June 14, 2019, for failure to state a
claim, finding that Appellant failed to adequately plead loss causation, as well as material
misrepresentations and omissions in the Proxy, and granted him leave to amend.
2
material misrepresentations or omissions. 15 U.S.C. § 78n(a); 17 C.F.R. § 240.14a-9.3
The alleged misrepresentations included statements suggesting that the merger was fair to
Resolute stockholders, that the merger consideration represented a premium relative to
Resolute’s standalone value, that the resulting combined company would be better
positioned to generate earnings and growth, and that Goldman Sachs, one of Resolute’s
financial advisors, had opined on the fairness of the merger consideration as structured
(when Goldman did not offer an opinion on the fairness of the deal’s proration
procedures). Appellant alleged as omissions, inter alia, the lack of certain financial
information pertaining to Resolute and Cimarex.
The District Court determined that Appellant failed to adequately plead loss
causation, “i.e., a causal connection between the material misrepresentation and the loss,”
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005), because under the theory he
advanced, the real cause of his alleged loss—the difference between the “true value” of
his Resolute shares and the merger consideration he received—was the Board’s failure to
negotiate a better deal, not the Proxy’s alleged misrepresentations and omissions. JA 8–
9. The Court then granted Appellees’ motion to dismiss and declined to exercise
supplemental jurisdiction over Appellant’s state law claims.
3
The amended complaint also alleged a violation of Section 20(a) of the Securities
Exchange Act, which establishes derivative liability for supervisors of those who commit
an independent violation of federal securities laws. 15 U.S.C. § 78t(a). Because violations
of Section 20(a) must be premised upon a predicate violation of another federal securities
law, Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 142 (3d Cir. 2004), we focus
our analysis on Appellant’s Section 14(a) claim.
3
Appellant contends that he sufficiently alleged loss causation by pleading that the
omission of material information from the Proxy “obfuscat[ed] the true value of Resolute
shares, causing stockholders to be uninformed and misled into accepting an unfair deal
that undervalue[d] the company by at least $3.50 per share,” and the District Court erred
when it found that this was not a cognizable theory of loss causation. Opening Br. 16–
17. On de novo review, “accept[ing] as true all allegations in the complaint and all
reasonable inferences that can be drawn therefrom, and view[ing] them in the light most
favorable to the non-moving party,” DeBenedictis v. Merrill Lynch & Co., 492 F.3d 209,
215 (3d Cir. 2007) (citation omitted), we disagree.
To state a Section 14(a) claim, Appellant needed to plead, among other things, that
the alleged misrepresentations and omissions in the Proxy “caused [him] injury.”
Tracinda Corp. v. DaimlerChrysler AG, 502 F.3d 212, 228 (3d Cir. 2007).4 A complaint
fails to adequately plead loss causation if it does not “provide[] the defendants with
notice of what the relevant economic loss might be or of what the causal connection
might be between that loss and the misrepresentation.” Dura Pharms., 544 U.S. at 347.
4
The District Court reviewed the allegations in the amended complaint under the
general pleading standard set out in Rule 8 of the Federal Rules of Civil Procedure.
Appellant contends that this was proper because his claims sound in negligence. Appellees
argue that all Section 14(a) claims, even those that sound in negligence, are subject to the
heightened pleading requirements of the Private Securities Litigation Reform Act
(PSLRA). We have not yet determined whether the PSLRA’s heightened pleading
standard applies to Section 14(a) claims that sound in negligence, see Jaroslawicz v. M&T
Bank Corp., 962 F.3d 701, 709 n.8 (3d Cir. 2020), cert. denied, 141 S. Ct. 1284 (2021),
and we need not do so now, as Appellant has not satisfied even the general pleading
standard.
4
Appellant’s theory of loss causation—that the Proxy contained material
misrepresentations and omissions that prevented stockholders from understanding the
true value of both Resolute and Cimarex and induced them to sell their shares for
inadequate consideration—fails on both counts.5 First, Appellant has not alleged that the
market price of his Resolute shares was greater than the market price of whatever
combination of Cimarex stock and cash he received in the merger.6 This is perhaps
because Resolute was trading at about $30 per share before the merger announcement,
and Cimarex agreed to acquire Resolute in a cash and stock transaction valued at $35 per
share, so the merger consideration was approximately 15 percent greater than Resolute’s
market value.7 Although Appellant has pleaded a specific dollar amount by which
Resolute was undervalued, he has not explained where that number comes from, and the
5
Appellant’s theory is premised in part on the fact that the Proxy represented that
stockholders could choose among three consideration options (Cimarex common stock,
$35 per share in cash, or a combination of cash and Cimarex common stock), but ultimately
“no stockholder was able to receive all cash consideration no matter which election he or
she made” because “insufficient funds had been set aside.” JA 506. That said, Appellant
also contends that the nominal value of $35 per share “also undervalued Resolute shares
by more than $3.50 per share.” Id.6
As the District Court astutely noted, we can deduce that Appellant received at least
some Cimarex common stock as consideration in light of his allegation that no Resolute
stockholder was able to receive all cash in the merger.
7
Although the amended complaint does not state the market price of Resolute
shares, we take judicial notice of market price as reflected in a contemporaneous Reuters
article, as the District Court did. JA 34 (citing Shanti S. Nair & Debroop Roy, Cimarex to
Pay $1.6 Billion for Fellow Permian Firm Resolute, REUTERS (Nov. 19, 2018),
https://www.reuters.com/article/us-resolute-energy-m-a-cimarex-energy/cimarex-to-pay-
1-6-billion-for-fellow-permian-firm-resolute-idUSKCN1NO1CW); see also In re Merck
& Co., Inc. Sec. Litig., 432 F.3d 261, 264 n.3 (3d Cir. 2005) (citing Ieradi v. Mylan Lab’ys,
Inc., 230 F.3d 594, 600 n.3 (3d Cir. 2000)) (taking judicial notice of stock prices).
5
only factual allegations supporting his assertion that the true value of Resolute shares was
greater than the merger consideration are wholly speculative.8 E.g., JA 526 (“The
Merger Consideration was inadequate in light of the Company’s recent financial
performance and future prospects prior to the transaction.”).
In addition, Appellant has not set forth a viable scenario in which he and the other
Resolute stockholders could have actually recovered the “true value” of the Resolute
stock they owned. He does not allege, for example, that but for the alleged
misrepresentations and omissions in the Proxy statement, Resolute stockholders would
have voted the merger down and the market value of their Resolute shares would have
been greater than the market value of the merger consideration they received. Nor has he
pleaded that, had the stockholders rejected the merger, the Board would have secured a
better offer from either Cimarex or another company. See Tse v. Ventana Medical Sys.,
Inc., 297 F.3d 210, 220–21 (3d Cir. 2002) (acknowledging the “lost opportunity” theory
of loss causation). Instead, Appellant specifically disclaims reliance on both of these
theories, explaining that the loss he suffered was “the difference between the actual
Resolute share value at the time of the transaction and the actual consideration received,”
but declining to detail how he could have realized that “actual” share value. Reply Br. 9.
8
Even if the price of Cimarex stock was inflated at the time of the merger, as
Appellant alleges, that fact alone is not sufficient to plead loss causation. See Dura
Pharms., 544 U.S. at 342. (“[A]n inflated purchase price will not itself constitute or
proximately cause the relevant economic loss,” as “the plaintiff has suffered no loss [at the
moment of the transaction]; the inflated purchase payment is offset by ownership of a share
that at that instant possesses equivalent value.”).
6
Because he has failed to allege a plausible path by which Resolute stockholders
could have obtained the supposed “actual value” of their Resolute holdings if not for the
alleged misrepresentations and omissions in the Proxy, Appellant has failed to
sufficiently plead loss causation. See Beck v. Dobrowski, 559 F.3d 680, 684 (7th Cir.
2009) (rejecting the argument that “had it not been for misleading proxy solicitations,”
shareholders would have rejected the merger and “reaped the economic benefits of
continuing to own” their shares.). In sum, we perceive no error in the District Court’s
order granting Appellees’ motion to dismiss.9
II. CONCLUSION
For the foregoing reasons, we will affirm the order of the District Court.
9
Although not contested by Appellant, we note that the District Court did not err in
dismissing his Section 20(a) claim, as liability under that section requires a predicate
violation of the Securities Exchange Act, see Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp.,
394 F.3d 126, 159 n.21 (3d Cir. 2004), nor did the Court err in “declin[ing] to exercise
supplemental jurisdiction over state claims after it dismisse[d] a federal claim on which its
jurisdiction is based,” Mauthe v. Optum Inc., 925 F.3d 129, 135 (3d Cir. 2019).
7