Employees' Retirement System v. Williams Companies , 889 F.3d 1153 ( 2018 )

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS May 11, 2018
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
EMPLOYEES’ RETIREMENT SYSTEM
OF THE STATE OF RHODE ISLAND,
Plaintiff - Appellant,
and
MICHAEL ERBER,
Plaintiff,
No. 17-5034
v.
THE WILLIAMS COMPANIES, INC.;
WILLIAMS PARTNERS L.P.;
WILLIAMS PARTNERS GP, LLC;
ALAN S. ARMSTRONG; DONALD R.
CHAPPEL,
Defendants - Appellees.
_________________________________
Appeal from the United States District Court
for the Northern District of Oklahoma
(D.C. No. 4:16-CV-00131-JHP-FHM)
_________________________________
Ira A. Schochet, Labaton Sucharow LLP, New York, New York (Joel H. Bernstein,
Michael W. Stocker, Eric J. Belfi and Eric D. Gottlieb, Labaton, Sucharow LLP, New
York, New York, and William B. Federman and Joshua D. Wells, Federman &
Sherwood, Oklahoma City, Oklahoma, with him on the briefs), for Plaintiff-Appellant.
Sandra C. Goldstein, Cravath, Swaine & Moore LLP, New York, New York (Antony L.
Ryan, Cravath, Swaine & Moore LLP, New York, New York, and Michael J. Gibbens,
Elliot P. Anderson, Crowe & Dunlevy, P.C., Tulsa, Oklahoma, and Mary H. Tolbert,
Oklahoma City, Oklahoma, with her on the brief), for Defendants-Appellees.
_________________________________
Before LUCERO, BALDOCK, and HARTZ, Circuit Judges.
_________________________________
HARTZ, Circuit Judge.
_________________________________
Employees’ Retirement System of the State of Rhode Island (Plaintiff) appeals the
dismissal of its amended complaint (the Complaint) in a putative class-action suit. It
alleges violations of federal securities law because of the failure to disclose merger
discussions that affected the value of its investment. Exercising jurisdiction under 28
U.S.C. § 1291, we affirm. The Complaint fails to adequately allege facts establishing a
duty to disclose the discussions, the materiality of the discussions, or the requisite
scienter in failing to disclose the discussions.
I. FACTUAL ALLEGATIONS
Before setting forth the factual background, we should explain the sources we rely
on. As a general rule, the only facts we consider in assessing the sufficiency of a
complaint are those alleged in the complaint itself. See Gee v. Pacheco, 627 F.3d 1178,
1186 (10th Cir. 2010). On occasion, however, it is proper to look beyond the complaint,
and this appeal presents such an occasion. We have recognized that we may consider
“documents that the complaint incorporates by reference,” “documents referred to in the
complaint if the documents are central to the plaintiff’s claim and the parties do not
dispute the documents’ authenticity,” and “matters of which a court may take judicial
notice.” Id. (internal quotation marks omitted). In securities cases it is not unusual to
consider “documents incorporated by reference into the complaint, public documents
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filed with the SEC [Securities and Exchange Commission], and documents the plaintiffs
relied upon in bringing suit.” Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190, 1196
(10th Cir. 2013). We may look to the contents of a referenced document itself rather than
solely to what the complaint alleges the contents to be. See Roth v. Jennings, 489 F.3d
499, 511 (2d Cir. 2007). But “such documents may properly be considered only for what
they contain, not to prove the truth of their contents.” Id. (citation and internal quotation
marks omitted).
In this case, the Complaint acknowledges that its allegations derive in part from
“regulatory filings with the SEC” and “press releases and media reports,” Aplt. App. at
A22; and it specifically cites several filings and public statements, including a press
release and a transcript of a meeting with security analysts. The following summary
relies for the most part on the specific allegations in the Complaint; but we supplement
those allegations with additional properly referenced material, indicating when we do so.
Defendant Williams Companies, Inc. (Williams) is an energy company. At the
times material to the Complaint, its president and chief executive officer (CEO) was
Defendant Alan Armstrong and its chief financial officer (CFO) was Defendant Donald
Chappel. Armstrong also served on its board of directors. Defendant Williams Partners
GP LLC (Williams Partners GP) is a limited-liability company owned by Williams.
Armstrong was chairman of the board and CEO; and Chappel was CFO and a director.
Defendant Williams Partners L.P. (WPZ) is a master limited partnership, whose general
partner was Williams Partners GP. Williams owned 60% of WPZ’s limited-partnership
units.
3
Plaintiff’s case centers on merger discussions between Williams and Energy
Transfer Equity L.P. (ETE), a competing energy firm. The members of the putative class
purchased units of WPZ between May 13, 2015 (when Williams announced that it
planned to merge with WPZ) and June 19, 2015 (when ETE announced that, despite
having been rebuffed by Williams, it would seek to merge with Williams and that such a
merger would preclude the merger with WPZ). The value of the units dropped
significantly after this announcement. Ultimately, ETE merged with Williams and the
proposed WPZ merger was not consummated. The Complaint alleges that the class
members paid an excessive price for WPZ units because Williams had not disclosed
during the class period its merger discussions with ETE.
Those discussions began in early 2014 when Kelcy Warren, the chairman and
board of directors of LE GP, LLC, the general partner of ETE, contacted Williams’ CEO
Armstrong to informally express ETE’s interest in exploring a merger. Armstrong said
he would take any offer to the Williams board of directors. Although not alleged in the
Complaint, the SEC Form S-4 registration statement filed by ETE (in connection with the
ETE merger with Williams) disclosed that Armstrong told Warren that he did not believe
that Williams was interested in a deal.
Nine months later, ETE conveyed another expression of interest to Williams’
financial advisor Barclays Capital. Williams’ board retained Barclays and legal counsel
to provide guidance on ETE’s interest in a merger. After a special meeting of the board
in early December 2014, it decided that “it was not in the best interest of [Williams]
stockholders to engage in discussions with ETE at that time,” Aplt. App. at A33, although
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it requested its management and Barclays to further study ETE (as well as other strategic
opportunities). Then in January the board agreed to obtain more details about ETE’s
interest in a combination with Williams after completion of a pending merger between
WPZ and a company called Access Midstream Partners (AMP). Accordingly, in
February 2015, after the AMP merger, Defendant Armstrong reached out to Warren.
Armstrong reiterated that he would convey any offer to Williams’ board. The S-4 adds
that Armstrong also told Warren that Williams “was not seeking a combination” but
“always considers strategic proposals.” Id. at A106.
On May 6, Armstrong and Warren met again, with Defendant Chappel and a
colleague of Warren also present. The Complaint describes the meeting as ending with
ETE’s informal proposal to merge still “open.” Id. at A35. The description in the S-4 is
less upbeat. According to that report, the ETE representatives suggested the logic of
combining Williams’s natural-gas assets with ETE’s diversified portfolio of energy assets
and Armstrong pointed out the strength of Williams’s focus on natural-gas infrastructure.
Armstrong said he would discuss with his board any offer made by Warren, Warren said
that ETE would not make an offer unless Armstrong supported it, and an offer from ETE
was neither made nor requested.
In the meantime, Williams was pursuing a plan to acquire WPZ in full (it already
owned 60% of the units). On May 12 the Williams board met with WPZ executives and
advisers to discuss Williams’ possible acquisition of the remainder of WPZ’s outstanding
units. The boards of both companies unanimously approved the merger that day and the
companies entered into a merger agreement. Williams would no longer be a holding
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company that owned shares in WPZ but instead would directly incorporate WPZ into its
structure. According to the Complaint, this absorption of a master limited partnership
and consolidation of its assets into a single operating entity has since been adopted by
several energy-infrastructure companies—but at the time only one company had done so
(about a year before Williams made its decision).
The next day, a joint press release announced the Williams-WPZ merger,
Defendants conducted a presentation to securities analysts (the Analysts Presentation),
and WPZ filed a Form 8-K with the SEC. The Form 8-K set forth the conditions for the
merger:
(i) the approval and adoption of the Merger Agreement and the Merger by
holders of at least a majority of the outstanding WPZ [limited-partnership
units]; (ii) [obtaining] all material required governmental consents . . . ;
(iii) the absence of legal injunctions or impediments . . . ; (iv) the
effectiveness of a registration statement on Form S-4. . . ; (v) approval of
the listing on the New York Stock Exchange . . . ; (vi) the affirmative vote
of the holders of the majority of the aggregate voting power present at the
[Williams] Stockholder Meeting . . . ; and (vii) the affirmative vote of the
holders of a majority of the outstanding shares of [Williams] Common
Stock . . . .
Id. at A134.
At the Analyst Presentation, representatives of Williams and WPZ discussed the
proposed merger and answered questions. Defendant Armstrong began his remarks with
enthusiasm:
Really glad to have everybody here today. And I have a very genuine smile
on my face today as we completed I think what is a fantastic transaction for
us, and really simplifying and really being—positioning us to extend the
duration of the great growth trajectory we’ve got in front of us.
6
Id. at A146. Defendant Chappel provided a detailed discussion of the proposed merger.
After describing the financial advantages of the merger and its financial projections, he
discussed the timing of the merger, stating:
We would expect to complete and file the initial S-4 filing with the SEC
during the month of June. We would then work through SEC comments.
That would go effective. We’d have a mailing to Williams shareholders
and then a shareholder vote and closing in the third quarter of 2015.
Id. at A151. He concluded by saying that there was one condition of the merger—the
approval of those holding WPZ units—that would not be problematic:
There’s no risk around the WPZ vote because Williams has [a] majority of
the votes, so the outcome of the WPZ vote is already known.
Id. Williams also gave a slide presentation providing supplemental information regarding
the merger. The slides made a number of cautionary remarks about the deal. Notably, a
list of “[s]pecific factors that could cause actual results to differ from results
contemplated by the forward-looking statements,” id. at A159, included “[s]atisfaction of
the conditions to the completion of the proposed merger, including approval by Williams
stockholders,” id. “Given the uncertainties and risk factors that could cause our actual
results to differ materially from those contained in any forward-looking statement,”
Williams advised investors “not to unduly rely on our forward-looking statement.” Id.
Less than a week after the public announcement, ETE presented a written offer to
acquire Williams. ETE included a condition to its offer that had never been brought up in
prior discussions: ETE would not merge with Williams if Williams merged with WPZ.
The Complaint alleges that this condition was unsurprising because ETE had never
7
strayed from holding its operating assets in master limited partnerships rather than
directly—an arrangement that allegedly provided various financial advantages.
After considering the offer for a month, Williams rejected it on Sunday, June 21,
sending ETE a letter explaining that ETE’s proposal undervalued Williams. Also that
day, Williams issued a press release announcing that it had authorized a process to
explore a range of strategic alternatives following an unsolicited acquisition offer. The
press release did not identify ETE as the offeror.
On Monday, ETE issued a press release disclosing its interest in merging with
Williams and stating that its proposal would be a better deal for Williams’ investors than
the merger of Williams with WPZ. The public announcement had a significant effect on
the value of WPZ units, which dropped 7.6% from the Friday close.
On September 25, Williams’ board of directors voted (with Defendant Armstrong
in the minority) to merge with ETE. (ETE’s S-4 revealed that the board vote was 8–5.)
To effectuate the merger, Williams terminated its agreement with WPZ. The Complaint
includes no allegations about how the board came to accept the ETE offer during the
three months from June 22 to September 25. According to a detailed and lengthy
discussion in the S-4, however, Williams’ board examined a variety of strategic
possibilities, including mergers with a number of other companies. It narrowed its
options to ETE and two other parties, both of which had proposed mergers with Williams
without requiring termination of the proposed merger of Williams and WPZ.
Plaintiff filed suit on March 7, 2016. It filed the amended complaint (the
Complaint) on August 31, 2016. The Complaint alleges that Defendants’ failure to
8
disclose the merger discussions with ETE violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17
C.F.R. § 240.10b-5.
II. DISCUSSION
A. Standard of Review and Legal Background
“We review de novo the grant of a Rule 12(b)(6) motion to dismiss for failure to
state a claim.” Gee, 627 F.3d at 1183. “To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to state a claim to relief that is
plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation
marks omitted). “A claim has facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id.
Because Plaintiff’s Complaint asserts a claim under the Securities Exchange Act,
it must also satisfy the requirements of the Private Securities Litigation Reform Act
(PSLRA), 15 U.S.C. § 78u-4. “The enactment of the PSLRA in 1995 marked a bipartisan
effort to curb abuse in private securities lawsuits, particularly the filing of strike suits.”
City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1258 (10th Cir. 2001) (internal
quotation marks omitted). The statute “was intended to eliminate some of the abuses
experienced in private securities litigation, such as the routine filing of lawsuits whenever
there is a significant change in an issuer’s stock price, the abuse of the discovery process
to impose costs so burdensome that it is often economical for the victimized party to
settle, and the manipulation by class action lawyers of the clients they purportedly
9
represent.” Id. at 1258–59 (ellipsis and internal quotation marks omitted). With respect
to pleading, the PSLRA requires that allegations of misrepresentation must satisfy a
heightened standard: “[T]he complaint must ‘specify each statement alleged to have been
misleading, the 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 [the plaintiff’s] belief is formed.’” In re Gold Res.
Corp. Sec. Litig., 776 F.3d 1103, 1108–09 (10th Cir. 2015) (quoting 15 U.S.C. § 78u-
4(b)(1)(B)).
Section 10(b) of the Securities Exchange Act prohibits “any manipulative or
deceptive device or contrivance in contravention of [SEC] rules and regulations.” 15
U.S.C. § 78j(b).1 “Rule 10b–5 implements this provision.” SEC v. Zandford, 535 U.S.
813, 819 (2002). The rule makes it unlawful “(a) [t]o employ any device, scheme, or
artifice to defraud, (b) [t]o make any untrue statement of a material fact or to omit to state
1
The complete language is as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of any
national securities exchange—
...
(b) To use or employ, in connection with the purchase or sale of any security
registered on a national securities exchange or any security not so registered, or
any securities-based swap agreement any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the protection of
investors.
15 U.S.C. § 78j.
10
a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or (c) [t]o engage in any act,
practice, or course of business which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any security.” 17 C.F.R.
§ 240.10b–5. To state a claim under Rule 10b–5, a plaintiff must allege: “(1) a
misleading statement or omission of a material fact; (2) made in connection with the
purchase or sale of securities; (3) with intent to defraud or recklessness; (4) reliance; and
(5) damages.” Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997). In
addition, when the claim is for omission of a material fact, the plaintiff must show that
the defendant had a duty to disclose the omitted information. See id. at 1125.
Liability under § 20(a) of the 1934 Securities Exchange Act is derivative of
another person’s liability under the Act. Section 20(a) provides that “a person who
controls a party that commits a violation of securities laws may be held jointly and
severally liable with the primary violator.” Maher v. Durango Metals, Inc., 144 F.3d
1302, 1304–05 (10th Cir. 1998) (“[T]o state a prima facie case of control person liability,
the plaintiff must establish (1) a primary violation of the securities laws and (2) ‘control’
over the primary violator by the alleged controlling person.”). Because Plaintiff’s claim
under § 20(a) is premised on the claim that Defendants violated § 10(b), our rejection of
the latter claim necessarily disposes of the former as well.
B. Plaintiff’s Claims
Plaintiff seeks to represent purchasers of WPZ stock from May 13, 2015, through
June 19, 2015. It alleges one misleading statement at the Analysts Presentation (on the
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first day of the class period) and one omission of a material fact at that time. The alleged
misleading statement was that the Williams-WPZ merger was a done deal, there being
“no risk” that it would not be consummated. The alleged omission was the failure to
disclose that Williams and ETE had been having discussions about a potential merger
that would prevent the WPZ merger. Plaintiff contends that as a result of Defendants’
alleged deception, the members of the putative class overpaid for units in WPZ, as shown
by the sharp drop in the value of those units when ETE’s merger discussions with
Williams were eventually announced on June 22 (the first business day after the class
period).
The district court properly dismissed the claim based on the alleged misleading
statement because the allegation is based on a mischaracterization of what Defendants
said. As for the alleged material omission, we affirm on three grounds: (1) Defendants
had no duty to disclose the merger discussions with ETE; (2) even if there was a duty to
disclose, Plaintiff failed to adequately allege that the discussions were material; and (3)
even if Defendants had a duty to disclose and the discussions were material, Plaintiff
failed to adequately allege that Defendants possessed the requisite scienter when failing
to disclose the merger discussions.
1) The Alleged No-Risk Statement
Plaintiff asserts that the prospect of a merger of Williams with ETE placed the
consummation of the Williams-WPZ merger in doubt, yet Defendants publicly
announced at the Analysts Presentation that the Williams-WPZ merger was a done deal,
even going so far as to say that the Williams-WPZ merger was a “no-risk” proposition.
12
In support of this contention, the Complaint alleges that Defendants referred to the
merger in the past tense, announcing that the merger was a “transaction [that Williams
and WPZ] just got done,” one that had already been “completed” and “finished.” Aplt
App. at A46–47. According to Plaintiff, “Reasonable investors would understand . . .
[these statements to mean that] the conditions for [completion of the Williams-WPZ
merger] were mere formalities . . . [and] that Defendants were unaware of any material
risk to consummation of the merger.” Aplt. Reply Br. at 13.
A reasonable person, however, would not interpret Defendants statements at the
Analysts Presentation as saying more had happened than had actually happened. After
all, a lot had happened. Those who ran the affairs of Williams and WPZ had agreed on a
detailed plan to merge the two entities. When Defendants spoke in the past tense, they
were clearly referring to what had been agreed upon. They were not saying, as Plaintiff
would have it, that the merger had been consummated. On the contrary, they made quite
explicit what further steps were necessary.
And, contrary to Plaintiff’s assertion, no one said that “there existed no present
facts—‘no risk’—that posed a danger of an adverse result.” Aplt. Br. at 47. Defendants
noted a number of factors that could prevent their predictions from coming true and
cautioned investors “not to unduly rely on our forward-looking statement.” Aplt. App. at
A159. Plaintiff misleadingly extracts the “no risk” comment from a statement Defendant
Chappel made about the steps that needed to be taken to effectuate the merger. Chappel
closed his remarks at the Analysts Presentation by stating that Williams was expecting to
(1) “complete and file the initial S-4 filing with the SEC during the month of June”;
13
(2) “work through SEC comments”; and then (3) “have a mailing to Williams
shareholders and then a shareholder vote and closing in the third quarter of 2015.” Id. at
A151. He then stated: “There’s no risk around the WPZ vote because Williams has [a]
majority of the votes, so the outcome of the WPZ vote is already known.” Id. (emphasis
added). Chappel did not state that any other element of the merger was guaranteed.
Indeed, by pointing out that one element was “no risk,” he was implying that there was a
risk with respect to each of the other elements.
In short, the Complaint does not adequately allege that Defendants falsely
communicated that the WPZ merger would certainly take place.
2) Failure to Disclose Merger Discussions with ETE
Among the elements of a claim under Rule 10b-5 for failure to disclose are
(1) that the defendant had a duty to disclose the information, (2) that the undisclosed
information was material, and (3) that the defendant acted with the requisite scienter. See
Grossman, 120 F.3d at 1118, 1125. In our view, the Complaint failed on each of these
elements. It did not adequately allege that Defendants had a duty to disclose the merger
discussions, that the discussions were material, or that Defendants acted with the requisite
scienter. We start with duty.
a. Duty to Disclose at Time of Announcement of WPZ
Merger
Defendants had no duty under the securities laws to disclose the merger talks with
ETE when it announced the planned Williams-WPZ merger, even if the existence of such
talks was material information. Rule 10b–5 does “not create an affirmative duty to
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disclose any and all material information. Disclosure is required under [the Rule] only
when necessary to make statements made, in the light of the circumstances in which they
were made, not misleading.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44
(2011) (ellipsis and internal quotation marks omitted); see McDonald v. Kinder-Morgan,
Inc., 287 F.3d 992, 998 (10th Cir. 2002) (“[A] duty to disclose arises only where both the
statement made is material, and the omitted fact is material to the statement in that it
alters the meaning of the statement.” (emphasis added) (brackets and internal quotation
marks omitted)). “[S]ilence, absent a duty to disclose[,] cannot serve as the basis for
liability under Rule 10b–5.” Grossman, 120 F.3d at 1125 (internal quotation marks
omitted). And “a duty to disclose under § 10(b) does not arise from the mere possession
of nonpublic market information.” Chiarella v. United States, 445 U.S. 222, 235 (1980).
Defendants made no statement about the prospects of Williams merging with any
other companies when the Williams-WPZ merger was announced. There was therefore
no need to disclose the discussions with ETE “to make . . . statements made, in the light
of the circumstances in which they were made, not misleading.” Matrixx, 563 U.S. at 44.
Two opinions of other circuits support, and illustrate, the proposition.
In Brody v. Transitional Hospitals Corp., 280 F.3d 997 (9th Cir. 2002), the
plaintiffs had sold shares in the defendant company after the company issued a press
release describing its plans to buy back hundreds of thousands of its shares. The
plaintiffs complained that the press release had not also disclosed that other companies
had submitted proposals to acquire the defendant (which presumably would have
increased the value of the shares). See id. at 999, 1006–07. The Ninth Circuit rejected
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the plaintiffs’ contention that “once a disclosure is made, there is a duty to make it
complete and accurate.” Id. at 1006 (internal quotation marks omitted). “This
proposition,” said the court, “has no support in the case law.” Id. Rule 10b–5
“prohibit[s] only misleading and untrue statements, not statements that are incomplete.”
Id. “To be actionable under the securities laws, an omission must be misleading; in other
words it must affirmatively create an impression of a state of affairs that differs in a
material way from the one that actually exists.” Id. To require that statements be
“complete” would be to impose an excessive burden since “[n]o matter how detailed and
accurate disclosure statements are, there are likely to be additional details that could have
been disclosed but were not.” Id. The court concluded that plaintiffs had no claim: “If
the press release had affirmatively intimated that no merger was imminent, it may well
have been misleading. The actual press release, however, neither stated nor implied
anything regarding a merger.” Id.
The Second Circuit reached the same conclusion in Glazer v. Formica Corp., 964
F.2d 149 (2d Cir. 1992). The defendant corporation issued two press releases on the
same day, announcing that it was rejecting the offer of a leveraged buyout from the
plaintiffs but would consider “any legitimate acquisition proposal.” Id. at 152. Not
mentioned in the releases was that the company had already begun meeting with other
companies and investment banks to discuss being acquired. See id. at 151–52. One of
these discussions ripened into a leveraged-buyout (LBO) agreement. See id. By that
time, however, the plaintiffs had already sold their shares in the defendant at a
substantially lower price than the ultimate acquisition price. They filed suit, claiming
16
that the defendant corporation intentionally withheld information about buyout
negotiations in order to depress its stock and to deter other acquirers. See id. at 153. The
Second Circuit concluded that the corporation did not have a duty to disclose its
negotiations with the investment banks and other companies. See id. at 157. “[T]he mere
fact that exploration of merger or LBO possibilities may have reached a stage where that
information may be considered material does not, of itself, mean that the companies have
a duty to disclose.” Id. Other than its two press releases, the corporation made no other
public statements about its merger discussions. See id. Its conduct was entirely
consistent with the press releases it did issue. It alerted the public that it would consider
any serious merger proposal, and its private negotiations with an investment bank were
consistent with that announcement. See id.
Likewise, none of the Defendants in this case said anything at the Analysts
Presentation that was inconsistent with Williams having received overtures from ETE.
They spoke only about the merger in which Williams would absorb WPZ. They did not
mention other potential transactions that might occur—or that it had conducted, or had
not conducted, merger discussions with other firms. In particular, they did not state that
the Williams-WPZ deal would be exclusive of any other merger. What they did say did
not create a duty to disclose conversations with ETE. Disclosing that Defendants had
engaged in talks with ETE would not “alter[] the meaning” of any of the statements made
about the Williams-WPZ deal. McDonald, 287 F.3d at 998.
Plaintiff contends that our decision in Hassig v. Pearson, 565 F.2d 644, 646 (10th
Cir. 1977), establishes that Defendants had a duty to disclose the possibility of a merger.
17
The plaintiff in Hassig owned stock in a local bank whose shares were closely held. See
id. at 645. He apparently had sought business counseling on occasion from the
defendant, who was president of the bank and, with his wife, owned about half the shares.
See id. Over the course of several years, he had discussions about the possibility of
selling his shares with the defendant. See id. at 645–46. In May or June of 1972, when
the plaintiff told the defendant that he wished to sell his stock for $125 a share, the
defendant expressed no opinion on the value but said that he was not interested “because
he had control, and was giving consideration to retiring and selling his own stock.” Id. at
646. A few months later the plaintiff asked the defendant if he knew of a buyer and said
he was anxious to sell his stock. See id. In November the defendant, who again
mentioned that he was considering selling his interest in the bank, said he knew of a
buyer, and the plaintiff sold his shares. See id. The defendant suffered some medical
problems the next month, precipitating his agreement to seriously consider selling the
shares. See id. The sale was consummated in March 1973, shortly after the parties
settled on the details of the transaction, including the price of $243 per share. See id.
Our opinion describes as an “essential fact” that the defendant was considering whether
or not to sell his shares in the bank when the plaintiff had a conversation with him about
selling the plaintiff’s shares. Id. at 649 (internal quotation marks omitted). But Plaintiff
reads too much into that statement. Our opinion says nothing about duties to disclose;
and there was no need to determine whether the defendant had a duty to disclose his
intent to sell (or even the materiality of that intent), because there was no dispute that this
had in fact been disclosed. Moreover, we affirmed a judgment in favor of the defendant.
18
See id. at 650. Thus, the language of Hassig relied on by Plaintiff is, at best, dictum
confined to a specific, unusual fact situation. It would be a stretch too far to say that
Hassig stands for the proposition that there is always a freestanding duty to disclose the
possibility of a merger (or other disposition of the controlling interest of a company).
Plaintiff alternatively contends that Defendants had a duty to disclose the ETE
discussions because their assertion at the Analysts Presentation that the WPZ merger was
a done deal was a material statement that was misleading in the absence of disclosure of
the merger conversations with ETE. But as already explained above, Defendants made
no such assertion. On the contrary, they described a number of conditions that had to be
satisfied for the merger to take place and they made several cautionary statements. The
only condition of the merger described as “no risk” was the vote of approval by WPZ,
which was controlled by Williams.
The case before us is readily distinguishable from another case relied upon by
Plaintiff, Nakkhumpun v. Taylor, 782 F.3d 1142 (10th Cir. 2015). The defendants in that
case misled investors regarding the value of a company when it was announced that a
deal to purchase a large share of the company’s core asset had fallen through. The
announcement said that “[w]hile [the other company] was unable to arrange financing for
the transaction on terms acceptable to us, we remain confident in the value of our . . .
asset.” Id. at 1147 (internal quotation marks omitted). Omitted from the announcement
was that the reason the purchaser had backed out was that it had decided that the asset
was worth far less than the purchase price. See id. at 1148. Thus, the announcement
gave a misleading account of why the deal had not been consummated. This is in stark
19
contrast to the case before us, where nothing was communicated by Defendants at the
Analysts Presentation that was inconsistent with there having been merger conversations
between Williams and ETE.
b. Duty to Update Defendants’ Statements
Plaintiff argues in the alternative that even if Defendants were not required to
disclose any information about Williams’ discussions with ETE during the mid-May
Analysts Presentation, they were required to update their disclosures a few days later
when ETE made a formal proposal to Williams. Whether there is ever such a duty to
update is uncertain. We suggested the possibility when we once stated that if a
defendant’s statement “later turns out to be false, the defendant may be under a duty to
correct any misleading impression left by the statement.” Grossman, 120 F.3d at 1125.
Other circuits are divided. Compare Finnerty v. Stiefel Labs., Inc., 756 F.3d 1310, 1317–
18 (11th Cir. 2014) (defendant, which had a 162-year history as a private firm and had
previously made statements that it would “continue to be privately held,” had a duty to
update by disclosing that it had begun merger negotiations), and United States v. Schiff,
602 F.3d 152, 170 (3d Cir. 2010) (concluding that a “narrow” duty to update may arise
when a company makes an initial statement that concerns “fundamental changes” in the
nature of the company and “subsequent events produce an extreme or radical change in
the continuing validity of that initial statement” (emphasis, brackets, and internal
quotation marks omitted)), with Gallagher v. Abbott Labs., 269 F.3d 806, 808 (7th Cir.
2001) (“We do not have a system of continuous disclosure.” ); id. at 810 (“[A] statement
may be ‘corrected’ only if it was incorrect when made . . . .”).
20
We need not decide this issue today. Even if there is a duty to update in some
circumstances, there was no duty here. Defendants would have a duty to disclose ETE’s
formal proposal only if they had said something at the Analysts Presentation that was
rendered false by the ETE proposal. But they had not. Their statements were consistent
with the possibility that the WPZ merger would have to be cancelled because of a future
event, such as a merger with an outside entity. That this possibility was now more likely
would affect the materiality analysis, but not the existence of a duty.
c. Materiality of Williams’ Early Discussions with
ETE
We also hold that the existence of the early merger discussions was not material
information. Information is material “only if a reasonable investor would consider it
important in determining whether to buy or sell stock.” Slater, 719 F.3d at 1197 (internal
quotation marks omitted).
Whether the prospect of a merger is material information has been an important
recurring issue in federal court. The Supreme Court addressed the issue in Basic Inc. v.
Levinson, 485 U.S. 224 (1988). Although the defendant, Basic, had been in merger
discussions with a competitor for two years, it had made three public statements during
that period in which it denied that it was engaged in merger negotiations. See id. at 227.
It then suspended trading in its shares, issued a public announcement that it had been
approached by another company concerning a merger, and accepted the competitor’s
merger offer the next day. See id. at 227–28. The plaintiffs, who had sold their stock
during the two-year period in which Basic had denied engaging in merger discussions,
21
accused Basic of making misleading statements to depress its stock price. See id. at 228–
29.
The Supreme Court noted that the “application of [the] materiality standard to
preliminary merger discussions is not self-evident.” Id. at 232. It said that when an
“event is contingent or speculative in nature, it is difficult to ascertain whether the
‘reasonable investor’ would have considered the omitted information significant at the
time,” and that “[m]erger negotiations, because of the ever-present possibility that the
contemplated transaction will not be effectuated, fall into [that] category.” Id.
Before presenting the proper approach, the Court rejected two bright-line tests for
evaluating the materiality of merger discussions. One was the “agreement in principle”
test, which limited disclosures by holding that merger negotiations “by definition” could
not be material if the parties had not agreed on the price and structure of the transaction.
Id. at 233. The test had three policy justifications: avoiding overwhelming investors
with excessive information, preserving confidentiality of merger discussions, and
providing a clear rule for determining when disclosure is appropriate. Id. The Court was
not persuaded. It rejected the notion that merger discussions were so inherently tentative
and risky that requiring disclosure of any preliminary discussions could mislead
investors. See id. at 234. The materiality requirement was designed to “filter out
essentially useless information,” not to assume that investors have a “child-like
simplicity” and are unable to grasp the “probabilistic significance of negotiations.” Id.
As for a corporation’s need to keep preliminary discussions confidential, “[t]he ‘secrecy’
rationale is simply inapposite to the definition of materiality,” and is “more properly
22
considered under the rubric of an issuer’s duty to disclose.” Id. at 235. Finally, the Court
stressed that while any bright-line rule for materiality would be easier to follow, “ease of
application alone is not an excuse for ignoring the purposes of the Securities Acts.” Id. at
236. Determining materiality “requires delicate assessments of the inferences a
reasonable shareholder would draw from a given set of facts and the significance of those
inferences.” Id. (citations and internal quotation marks omitted). Any rule “that
designates a single fact or occurrence as always determinative of an inherently fact-
specific finding such as materiality, must necessarily be overinclusive or underinclusive.”
Id.
The second bright-line test rejected by the court was that merger discussions are
automatically material if the company has denied their existence. See id. at 237. But that
test fails to recognize that materiality is an element of the claim in addition to falsity. To
be actionable under Rule 10b-5, a statement must be “misleading as to a material fact. It
is not enough that a statement is false or incomplete, if the misrepresented fact is
otherwise insignificant.” Id. at 238.
After rejecting these bright-line rules, the Supreme Court adopted the
“probability/magnitude” test for determining when preliminary merger discussions are
material. Id. Under this test the courts analyze the probability that a merger will succeed
and the magnitude of the transaction. See id. at 240. The inquiry is fact-specific. See id.
“[T]o assess the probability that the event will occur, a factfinder will need to look to
indicia of interest in the transaction at the highest corporate levels,” such as “board
resolutions, instructions to investment bankers, and actual negotiations between
23
principals or their intermediaries.” Id. at 239. The magnitude of a transaction may be
indicated by “the size of the two corporate entities” and “the potential premiums over
market value.” Id. The Court stressed that “[n]o particular event or factor short of
closing the transaction need be either necessary or sufficient by itself to render merger
discussions material.” Id. The Court remanded the case for reconsideration under the
proper materiality standard.
Two decisions by fellow circuits illustrate that merger discussions are generally
not material in the absence of a serious commitment to consummate the transaction. In
Jackvony v. RIHT Financial Corp., 873 F.2d 411, 415 (1st Cir. 1989) (Breyer, J.), the
First Circuit affirmed a directed verdict because no reasonable juror could conclude that
the preliminary merger plans and negotiations were material. The defendant, Hospital
Trust, had begun considering a merger with a competitor. Senior management had
described the Trust as an attractive “takeover candidate,” it received at least two
expressions of interest from other banks, some of its officials had expressed the view that
it needed four times its present assets to survive, and its general counsel had prepared a
position paper and recommended acquiring outside services relating to a possible merger.
Id. at 413–14. But those facts did not make the discussions material. “For one thing,”
said the court, “the evidence shows no more than the type of concern about possible
acquisition that many large companies frequently express; it reveals no concrete offers,
specific discussions, or anything more than vague expressions of interest.” Id. at 415
(emphasis added). The court explained: “For large corporations to make public
announcements every time directors discuss any such matter in terms as vague as those
24
presented in this evidence or receive ‘tentative feelers’ of the general sort revealed by this
evidence would more likely confuse, than inform, the marketplace.” Id. (citations
omitted).
A similar analysis and conclusion appears in Taylor v. First Union Corp. of S.C.,
857 F.2d 240, 244 (4th Cir. 1988). Two banks in separate states discussed the possibility
of a merger across state lines if such mergers became lawful. See id. at 242. At the time,
the Supreme Court was considering in Northeast Bancorp, Inc., v. Board of Governors of
the Federal Reserve System, 472 U.S. 159, 178 (1985), whether interstate banking was
legal. See Taylor, 857 F.2d at 242–43. The Fourth Circuit concluded that the merger
discussions were too “preliminary, contingent, and speculative” to be considered
material. Id. at 244. The parties had not agreed to the price or structure of the merger,
and there was “no evidence of board resolutions, actual negotiations, or instructions to
investment bankers to facilitate a merger.” Id. at 244–45. The court cautioned that
“[t]hose in business routinely discuss and exchange information on matters which may or
may not eventuate in some future agreement,” and “[n]ot every such business
conversation gives rise to legal obligations.” Id. at 244 (citations omitted). “The
materiality of information concerning a proposed merger is directly related to the
likelihood the merger will be accomplished; the more tentative the discussions the less
useful such information will be to a reasonable investor in reaching a decision.” Id. at
244–45. “To hold otherwise would result in endless and bewildering guesses as to the
need for disclosure, operate as a deterrent to the legitimate conduct of corporate
operations, and threaten to bury the shareholders in an avalanche of trivial information;
25
the very perils that the limit on disclosure imposed by the materiality requirement serves
to avoid.” Id. at 245 (internal quotation marks omitted).
Guided by these decisions, we readily conclude that Williams’ talks with ETE
before May 12 were not material. Plaintiff must allege facts showing the likelihood of
both a Williams-ETE merger and a substantial impact on WPZ unitholders resulting from
a merger. The Complaint fails in both respects.
First, the Complaint does not plausibly allege that a Williams-ETE merger was
likely when the Analysts Presentation statements were made. It mentions conversations
and the willingness of Williams’ executives to convey offers to its board. But it fails to
allege any “concrete offers, specific discussions, or anything more than vague
expressions of interest.” Jackvony, 873 F.2d at 415. Although it alleges that the
Williams’ board began examining strategic opportunities, it does not allege that this
examination focused on just ETE or even just mergers. Nothing alleged in the Complaint
contradicts, or is even inconsistent with, (1) the assertion in the S-4 that Armstrong’s
statement in response to the first overture in early 2014 was that “he did not believe
[Williams] was interested in a combination,” Aplt. App. at A105; (2) Armstrong’s
repetition of that statement on February 13 and March 2, 2015—telling ETE that
Williams “was not seeking a combination,” id. at A106; (3) the statement in the S-4 that
the dinner meeting in May 2015 ended without any offer being made by ETE or any
request for an offer made by Williams, see id.; or (4) the statement in ETE’s press release
of June 22, 2015, that up until then “Williams’ management has inexplicably ignored
ETE’s efforts to engage in a discussion with Williams regarding a transaction that
26
presents a compelling value proposition for its stockholders,” id. at A177–78.2 It is not
enough that the allegations of the Complaint are “merely consistent with” there being a
serious commitment to merge the two companies. Iqbal, 556 U.S. at 678 (internal
quotation marks omitted). The allegations here are fully consistent with there being no
commitment whatsoever.
In addition, merger discussions between Williams and ETE would be material
information to WPZ investors only if they thought that the merger would substantially
affect the value of WPZ units. The Complaint suggests that investors would be
concerned about an ETE merger because it would require termination of the merger
between Williams and WPZ. But it does not allege that ETE had ever indicated before
the Analysts Presentation that it could not tolerate the WPZ merger. The Complaint
simply notes some advantages of retaining WPZ as a master limited partnership and
points out that only one major energy company had chosen to consolidate in that manner,
having done so in 2014. But as Williams pointed out at the Analysts Presentation, there
can also be advantages to consolidation, the advantages and disadvantages depend on the
particular circumstances of the master limited partnership, consolidation of WPZ with
Williams looked advantageous at that time, and Williams might create or acquire other
2
The second sentence of the Complaint states: “Lead Plaintiff’s information and belief
is based upon counsel’s investigation, which includes review and analysis of:
(a) regulatory filings with the [SEC]; (b) press releases and media reports; (c) securities
analyst reports; (e) [sic] other public information; and (f) analysis of the foregoing by a
consulting expert.” Aplt. App. at A22. It appears that the Plaintiff’s allegations
regarding the discussions between ETE and Williams are founded on the S-4 and ETE’s
press release. We think it ironic that Plaintiff has built its failure-to-disclose-material-
information allegations on statements cherry-picked from these documents, which present
a quite different picture when read in their entirety.
27
master limited partnerships in the future. Although the Complaint suggests reasons why
ETE might look unfavorably on the WPZ merger if it were to combine with Williams, it
only speculates that WPZ investors would reasonably view such a combination as fatal to
the WPZ merger.
In short, under the probability/magnitude test the allegations of the Complaint do
not present a plausible claim that the existence of merger conversations between
Williams and ETE before the Analysts Presentation was a material fact to WPZ
unitholders.
Plaintiff cites Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (2d Cir. 2001),
in support of its materiality argument. But that case is distinguishable on two grounds.
First, the merger discussions in Castellano were significantly further advanced than in
our case. Second, and perhaps more importantly, what was material in that case was that
there had been any serious efforts to restructure the closely held company, whereas in this
case Plaintiff was not concerned about any old merger but only a merger with ETE–
because that was the only merger that could undercut the WPZ merger.
In Castellano the plaintiff was an executive and one of the largest shareholders of
the defendant, a privately held advertising agency. See id. at 174–75. The other shares
were held only by a select group of employees, and no one could sell or transfer shares
without first offering them to the company. See id. at 175. The company had a falling out
with the plaintiff. See id. at 174–75. It could force his ouster but only on one year’s
notice, so it was trying to persuade him to resign. See id. at 175, 180. If a shareholder’s
employment ended, the company could purchase the shares for their book value at the
28
end of the prior year, which was approximately the company’s net income per share for
that year. See id. at 175. The final sticking point in the departure negotiations was
settling on the terms for buying the plaintiff’s stock. See id. One of his concerns was
that his retirement would cause him to “lose the opportunity to profit as an equity holder
if [the company] went public.” Id. In response, the company “assured him [it] was not
going to go public and that nothing was going to change in the near future.” Id. (internal
quotation marks omitted). But he still insisted, and received, some protection if the
company went public in the next 20 months and the value of the shares increased above
book value. See id. Plaintiff resigned on April 1, 1996. See id.
What plaintiff was not told is that the company had been engaged in serious
negotiations to restructure the company. In August 1995 the company had commenced
merger negotiations with a publicly traded competitor. See id. at 176. The company
hired an investment banker to assist, but the two companies were unable to come to
terms, and negotiations ended in late 1995. See id. During this same period the company
was also consulting with the same investment banker to evaluate the possibility of having
an initial public offering (IPO) to become a publicly traded company. See id. In mid-
December the investment banker advised against an IPO but suggested a leveraged
recapitalization and arranged a meeting in early 1996 with an LBO firm. See id. The
firm and the company entered into a confidentiality agreement, and they retained outside
accountants and lawyers to conduct due diligence. See id. at 184. Executives of the
company had daily meetings for several weeks to discuss the transaction. See id. In
March 1996 the LBO firm told the company it was “considering a transaction that would
29
price [the company’s] equity at double its current book value”; but the investment banker
reported on March 31 (the day before the plaintiff resigned) that its analysis suggested
that the shares should be worth even more. Id. at 176. When the LBO firm formally
offered the proposal, the company rejected it as inadequate. See id. Negotiations with
another LBO firm began in June, and in August 1996 the company reached an agreement
with that firm that gave the company’s shareholders 2.4 times the book value per share
received by the plaintiff. See id.
The Second Circuit held that a jury could properly determine that these prior
negotiations, even though unsuccessful, were material. The discussions about a merger
could be found to demonstrate that the “company’s intention to merge or undertake other
restructuring has moved beyond its incipient stages and ripened into purposeful action,
and that the company has been a plausible merger candidate in the judgment of at least
one potential partner,” which would “significantly alter[] the total mix of information
available,” particularly when this would have been the first occasion that the company
“had ever considered transferring equity to an outsider.” Id. at 182. As for the
discussions with the leveraged-buyout firm, they were also material given the magnitude
of the transaction (“potentially leading to a doubling or tripling of the value of
[shareholders’] holdings”) and the seriousness of the company’s involvement, including
the “intense attention” of the company’s executives, its “engagement of law firms and
investment bankers, and the parties’ entrance into a confidentiality agreement and
extensive due diligence.” Id. at 185.
30
Castellano is at best a distant relative of this case. The merger and leveraged-
buyout discussions in Castellano were much more advanced than the brief, informal
conversations and communications between ETE and Williams before the Analysts
Presentation, which involved no confidentiality agreements, no exchanges of financial
information, and no offers. And even Williams’ general interest in hearing proposals for
strategic opportunities was of little relevance to Plaintiff. Plaintiff’s concern was having
the WPZ merger consummated, and the only threat to consummation that it has identified
among the possible strategic opportunities was a merger with ETE.
We also quickly dispose of Plaintiff’s contention that our opinion in Hassig, 565
F.2d 644, supports its materiality argument. Our analysis of duty earlier in this opinion
discussed Hassig at some length. We repeat that one should not read too much into
dictum in that case, particularly when we conducted no probability/magnitude analysis.
Suffice it to say that Hassig does not require us to depart from the above analysis of
materiality in this case.
d. Scienter
Even if there was a duty to disclose and the challenged statements were material,
the Complaint suffers from another fatal defect: it fails to adequately allege that
Defendants acted with the requisite scienter—“intent to defraud or recklessness.”
Grossman, 120 F.3d at 1118. We have defined recklessness in this context as “conduct
that is an extreme departure from the standards of ordinary care, and which presents a
danger of misleading buyers or sellers that is either known to the defendant or is so
obvious that the actor must have been aware of it.” Fleming, 264 F.3d at 1260.
31
The PSLRA imposes a heightened pleading standard for scienter. “It is not
sufficient for a plaintiff to allege generally that the defendant acted with scienter
. . . . Rather, the plaintiff must, ‘with respect to each act or omission . . . , state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.’” Gold Res. Corp., 776 F.3d at 1109 (quoting 15 U.S.C. § 78u–
4(b)(2)(A)) (emphasis added). We consider “not only inferences urged by the plaintiff
. . . but also competing inferences rationally drawn from the facts alleged.” Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). “[A]n inference of scienter
must be more than merely plausible or reasonable—it must be cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Id.
In assessing Defendants’ scienter we look only to material facts “reasonably
available” to them by the time of the Analysts Presentation. Fleming, 264 F.3d at 1260.
“Securities fraud cases often involve some more or less catastrophic event occurring
between the time the complained-of statement was made and the time a more sobering
truth is revealed (precipitating a drop in stock price).” Id. (internal quotation marks
omitted). “In the face of such intervening events, a plaintiff must set forth, as part of the
circumstances constituting fraud, an explanation as to why the disputed statement was
untrue or misleading when made.” Id. (internal quotation marks omitted).
Plaintiff claims that Defendants acted with scienter when they failed to disclose
ETE’s overtures because they knew or recklessly disregarded the risk that (1) the
Williams-ETE merger would be approved and (2) a Williams-ETE deal would gravely
endanger the Williams-WPZ deal. We are not persuaded.
32
First, as explained above in the discussion of materiality, Plaintiff’s allegations fall
far short of establishing that it was likely that a merger with ETE would occur and would
put a kibosh on the WPZ merger. Given the small likelihood that the ETE contacts posed
a risk to the WPZ merger, one can hardly draw a “strong inference” that Defendants
intended to deceive investors by failing to disclose those contacts publicly or that
Defendants knew or must have been aware (because the conclusion was so obvious) that
a failure to disclose would mislead investors.
Second, Plaintiff’s allegations of scienter are unpersuasive because the Complaint
fails to allege any plausible motive why Defendants would wish to mislead investors
about the prospects of the Williams-WPZ deal. Although the absence of an apparent
motive does not necessarily defeat a finding of scienter, it does make such a finding more
difficult to sustain. See In re Level 3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1347
(10th Cir. 2012). The Complaint suggests no reason (other than a desire not to waste
everybody’s time) why Williams would not wish to disclose at the Analysts Presentation
that ETE had made overtures to Williams about a merger and that the WPZ merger would
be inconsistent with ETE’s business model at the time. Indeed, if Williams thought there
was a substantial likelihood that the WPZ merger would not go through, what would be
its motive to press forward on the transaction? The fact that it did press forward creates a
“strong inference” that it did not think the ETE overtures would lead to termination of the
consolidation, not a strong inference of the scienter that Plaintiff needs to establish.
Plaintiff’s opening brief suggests that the Williams executives had a motive to
conceal the Williams-ETE merger discussions because their own jobs were at stake. But
33
this self-interest is not alleged in the Complaint, so we decline to address the suggestion,
which probably lacks merit anyway. See Fleming, 264 F.3d at 1270 (“Allegations that
merely charge that executives aim to prolong the benefits they hold are, standing alone,
insufficient to demonstrate the necessary strong inference of scienter. For this reason
assertions that a corporate officer or director committed fraud in order to retain an
executive position simply do not, in themselves, adequately plead motive.” (ellipsis and
internal quotation marks omitted)).
We hold that the Complaint fails to adequately allege scienter.
III. CONCLUSION
We AFFIRM the district court’s judgment.
34