The United States District Court for the District of New Jersey recently held that statements made by an acquiring corporation about itself during the pendency of a failed tender offer were not made in connection with purchases of the target corporation's stock, and thus could not support securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder.
Plaintiffs were arbitrageurs who purchased shares of American Bankers Insurance Group Inc. ("ABI") on the open market after Cendant Corporation ("Cendant") publicly announced that it would purchase ABI. Prior to Cendant's announcement, American International Group, Inc. ("AIG") had announced that it would purchase ABI for $47 per share. Cendant subsequently filed a Schedule 14D-1 with the Securities and Exchange Commission (the "SEC") which included an offer to purchase ABI for $58 per share and financial information about Cendant. After AIG matched Cendant's offer, Cendant entered into an agreement with ABI to acquire it for $67 per share, or approximately $3.1 billion (the "ABI Merger Agreement"). Cendant also filed an amended Schedule 14D-1 incorporating the revised offer. The ABI Merger Agreement expressly provided that it could be terminated by mutual consent of the parties.
Shortly thereafter, Cendant announced that it had discovered potential accounting irregularities and expected to restate its earnings. Cendant then made additional announcements that the accounting irregularities would have a larger impact on its financial statements than previously anticipated. With each of these announcements, the share price of ABI dropped. During the period of these announcements, Cendant also repeatedly reaffirmed its commitment to purchase ABI. Six months later, Cendant and ABI agreed to terminate the ABI Merger Agreement in exchange for a $400 million break-up fee paid by Cendant and mutual releases.
Plaintiffs thereafter filed suit against Cendant, several of its former officers and directors, and its former independent public accountant for violations for Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder, Section 14(e) of the Williams Act, and Section 20(a) of 1934 Act. The plaintiffs alleged that the financial information contained in the Schedule 14D-1s Cendant filed with the SEC and the other public announcements made by Cendant during the pendency of the aborted tender offer were materially false and misleading and artificially inflated the price of ABI stock. The plaintiffs also alleged that they purchased the ABI shares in the belief that they would receive either $58 or $67 per ABI share from Cendant.
On consolidated motions to dismiss by Cendant and its current and former officers and directors, the Court began by noting that imposition of liability under Section 10(b) requires "a high degree of proximity of the securities transaction to the claimed fraud." The Court then held that the alleged misrepresentations about Cendant were "too many steps removed" from the plaintiffs' purchases of ABI, and the degree of proximity therefore too attenuated, to satisfy the "in connection with" requirement of Section 10(b). Among the "plethora of intermediate steps" noted by the Court were the effect AIG's offer had on the price of ABI stock, the conditional nature of the ABI Merger Agreement, and the agreement by mutual consent to terminate the proposed merger with no further liability.
The Court further held that the expressly conditional nature of the ABI Merger Agreement bespoke caution, and thus, the plaintiffs could not reasonably rely on statements that the proposed acquisition of ABI would occur. In addition, the Court held that the statements made about Cendant's intention to consummate the acquisition were forward-looking statements protected by the safe harbor provisions of the Private Securities Litigation Reform Act, and thus could not support a Section 10(b) claim.
The Court also held that the plaintiffs had failed to show the requisite causation because the proximate cause of their losses was the termination of the ABI Merger Agreement rather than any of the misstatements alleged. The Court further ruled that the plaintiffs were not saved by pleading "fraud on the market" because that doctrine only provides a rebuttable presumption of reliance and causation, and those presumptions were inherently rebutted by the facts alleged.
The Court also deemed the plaintiffs' Section 14(e) and 20(a) claims to be deficient. The Court held that as a matter of law the plaintiffs could not establish the reliance element of their Section 14(e) claim because the proposed tender offer was withdrawn before it was completed. Finally, the Court held that because the plaintiffs' underlying Section 10(b) and 14(e) claims were deficient, their derivative Section 20(a) claim for control person liability necessarily also failed. *
P. Schoenfeld Asset Management LLC v. Cendant Corp., -- F. Supp. 2d --, 1999 WL 254467 (D.N.J. Apr. 30, 1999), appeal pending.
Cadwalader, Wickersham & Taft represents former Cedent officers and directors in this action.