District Of Maryland Dismisses Post-Merger Securities Class Action, Finding Omission Of Public Information Relating To Financial Advisor’s Analysis Did Not Render Proxy Materially Misleading
On December 4, 2019, Judge Ellen L. Hollander of the United States District Court for the District of Maryland dismissed with prejudice a stockholder class action suit against Gramercy Property Trust (“Gramercy” or the “Company”), a real estate investment trust (“REIT”), and its financial advisor for failure to state a claim under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Hurtado v. Gramercy Property Trust, No. ELH-18-2711 (D. Md. Dec. 4, 2019). Following Gramercy’s August 2018 sale to an affiliate of the Blackstone Group L.P. (“Blackstone”), plaintiff filed suit against the financial advisor (which was represented by Shearman & Sterling), Gramercy, and certain of its officers and directors, alleging that defendants materially misled Gramercy’s stockholders by issuing a proxy statement that omitted information plaintiff claimed was relevant to Gramercy’s market value at the time of the merger. Specifically, plaintiff claimed that the comparable public company analysis (“CPC Analysis”) underlying the fairness opinion was flawed because it failed to list the REIT classifications of the five comparable companies included in the analysis. According to plaintiff, this allegedly flawed analysis, which formed the basis for the fairness opinion cited in the proxy, rendered the proxy materially misleading. In dismissing all claims as to all defendants, the Court concluded that the omitted REIT classifications were not material in light of the proxy’s “thorough and accurate” summary of the financial advisor’s seven financial analyses, the proxy’s explicit, cautionary language, and the fact that the omitted REIT classifications were “easily accessible in the public domain.” The Court further held that, even assuming these omissions were material, they still did not render the fairness opinion misleading because the proxy specifically explained how the comparable REITs were selected and disclosed that they “were not identical to Gramercy.”
Shortly before the merger, Gramercy had taken steps to get itself reclassified from a diversified REIT to an industrial REIT based on changes to the composition of its real estate portfolio, which had shifted from a mix of industrial and office properties to a majority of industrial properties. This change was notable because, at that time, “industrial REITs were outperforming diversified REITs.” Accordingly, plaintiff argued that the CPC Analysis rendered the proxy misleading because only two of the five comparable REITs included in the analysis were industrial (the other three were diversified), and the financial advisor had not specifically identified the REIT classification of each of these five comparable companies.
The Court flatly rejected this argument, concluding that the absence of the comparable companies’ REIT classifications was not an actionable omission under the securities laws. The Court first stressed that the question of whether omitted information is material must be considered in the context of all information available to a reasonable investor. Applying that standard, the Court held that omitted information was not material because other portions of the proxy provided investors with exhaustive and accurate summaries of all seven of the financial advisor’s financial analyses (including the CPC Analysis), all of which supported the fairness of Blackstone’s proposed price to acquire Gramercy. The Court similarly concluded that the omission was also rendered immaterial by the proxy’s warnings, which “expressly disavowed any representation that the comparator companies used in the CPC Analysis were a perfect match to Gramercy.” The Court further emphasized that the public nature of REIT classifications rendered their absence immaterial because “an interested shareholder had the option of researching the comparators and determining for herself whether the comparators were good ones.”
Even assuming the REIT classifications were material, the Court concluded that these omissions did not render misleading the financial advisor’s opinion that the merger was financially fair to Gramercy’s stockholders. In so holding, the Court again emphasized the plethora of other information provided in the proxy, including the portions explaining that all of the REITs used in the CPC Analysis were selected based on having “similar business characteristics” to Gramercy, not based on having the same market classifications. Thus, it would have been “untenable” for a shareholder to conclude that the fairness opinion was founded upon “a CPC Analysis that compared Gramercy only against other industrial REITs,” given the proxy’s specific and extensive disclosures to the contrary.
Accordingly, the Court dismissed the complaint with prejudice, noting that any amendment would be futile because the omitted information was rendered immaterial by “the information contained in the Proxy, the Proxy’s tailored warnings, and facts in the public domain.”