Vermont District Court Dismisses Shareholder Lawsuit Asserting Section 14 Claims Premised On Forward-Looking Projections
On February 16, 2017, Judge Geoffrey W. Crawford of the United States District Court for the District of Vermont dismissed a putative shareholder class action against Keurig Green Mountain, Inc. (“Keurig”), Keurig’s former CEO and directors and corporate investors that acquired Keurig, alleging that the proxy disseminated to Keurig shareholders in connection with the buyout was materially false and misleading in violation of Sections 14(a) and 20(a) of the Securities Exchange Act. Montanio v. Keurig Green Mountain, Inc., Case No. 5:16-cv-19. The Court concluded that plaintiff’s primary allegation—that the board knowingly relied on depressed projections from management to justify accepting a low-value offer—failed to state a claim because plaintiff could not plead that the projections were objectively false.
JAB Holdings, Inc. (“JAB”) acquired Keurig in a deal that closed on February 24, 2016 for $92 per share, following rejection of lower offers by JAB and a $129 per share offer made in January 2015 by an undisclosed third party, which later lost interest in Keurig. The deal was negotiated during Keurig’s development of a new product line about which Keurig was optimistic but which was untested. During the same time, Keurig reported weaker-than-expected revenue from existing product lines. In evaluating JAB’s final offer, the board directed its financial advisors to weight the future success of the new product line at 50% probability, effectively lowering the future value of the company. Plaintiff alleged that the board’s decision to apply the weighting probability was driven by a desire to lower the value of the company to meet JAB’s final offer and, as evidence, pointed out that the board determined to use the 50% probability after agreeing to the deal price and claimed that the probability was objectively false. Plaintiff asserted that the proxy disclosures regarding the financial projections misrepresented both the board’s opinion and the value of the company and also challenged other aspects of the disclosures.
The Court emphasized that to prove a Section 14(a) claim premised on statements of opinion, plaintiff had to plead both objective falsity—meaning that the board did not actually believe the weighting was correct—and subjective falsity, i.e., that the weighting was demonstrably untrue. The Court found the allegations regarding the timing of the board’s decision to use the weighting probability sufficient to allege subjective falsity, but ultimately rejected the claim because the Court found plaintiff could not establish subjective falsity. In so holding, the Court concluded that the company’s earlier and more optimistic projections for the new product line included in quarterly financial reports were not provable facts that showed the subsequent probability weighting was objectively false. The Court emphasized that those projections were accompanied by cautionary language about forward-looking statements and warnings regarding Keurig’s decreased revenue. More importantly, the Court noted that the absence of “specific, provable facts” that contradicted the accuracy of the weighting doomed plaintiff’s claim. Because the Court determined that the complaint failed to allege a primary violation under Section 14(a), the Section 20(a) claim was dismissed as well.
The ruling reflects that, even though federal courts do not employ the “business judgment rule” standard of review when evaluating board conduct in a Section 14(a) claim, the board’s determinations are still afforded a modicum of protection absent specific, contradictory evidence.