and throughout the period of ValueVision's courtship of National Media, it was ValueVision's undisclosed intention to finance the deal exclusively through the issuance of junk bonds -- high-yield, interest-sensitive debt securities. In the letter to National Media, Johander nonetheless stated that financing would not impede ValueVision's ability to complete the transaction: "ValueVision currently has over $ 50 million in cash on hand and a debt-free balance sheet. Therefore, we are confident that the financing required to effect the combination of our two companies could be arranged on a prompt basis." In this letter, Johander proposed to enter into negotiations with National Media to "conclude a definitive merger agreement."
The announcement of ValueVision's proposal brought on a rise in the price of National Media stock. Prior to the announcement, National Media's stock had been trading in the range of $ 6 to $ 7. The day before ValueVision's announcement, National Media stock closed at $ 7.75. The day after ValueVision's announcement, National Media's stock rose to a high of $ 8.25 per share.
ValueVision commenced a formal tender offer on February 7, 1994. Under this offer, ValueVision sought a majority of National Media stock, for which it would pay $ 10.50 per share. ValueVision filed with the SEC schedules 14D-1 and 13D, which stated that "based upon its total assets, shareholders' equity and minimum debt," it would "be able to raise the necessary funds" to complete the offer. ValueVision further stated that it had retained Salomon Brothers, Inc. "as its financial advisor and to assist it in raising such funds through the public or private issuance of debt or equity securities."
National Media and ValueVision signed a merger agreement on March 6, 1994. Under this agreement, ValueVision amended its tender offer to $ 11.50 per share. The merger agreement included a best-efforts clause, under which National Media and ValueVision agreed to use their "reasonable best efforts to take or cause to be taken all actions and to do or cause to be done all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement." The merger agreement also included a financing condition, under which ValueVision was not required to proceed with the offer if it could not obtain sufficient financing to purchase the number of shares necessary to gain a majority. If the financing condition was not satisfied by April 24, 1994 -- or if the time for obtaining financing was not extended to June 6, 1994 -- either National Media or ValueVision was entitled to terminate the merger agreement. The agreement provided that if either party terminated the agreement due to the financing condition, ValueVision was required to pay National Media a $ 7 million "break-up fee."
ValueVision issued a press release on March 7, 1994, announcing the merger agreement. In this press release, ValueVision proposed to obtain the necessary financing through "a private placement of straight debt securities."
During the week of April 15, 1994, Johander explained to National Media's Chairman, John J. Turchi, that unfavorable market conditions had increased the projected cost of financing and proposed a 90-day extension of the financing condition. During March and April 1994, interest rates had risen sharply, causing a correspondingly sharp increase in the projected costs to ValueVision of financing through interest-sensitive debt securities. Although alternative means of financing the deal were available -- at perhaps an even greater cost to ValueVision -- ValueVision never considered obtaining such financing. On April 15, 1994, ValueVision announced that it had postponed the private placement of high-yield, interest-sensitive debt securities, explaining that "market conditions" had led to "increased high-yield bond interest rates." ValueVision further stated that it was "exploring alternative financing for the acquisition."
Following this announcement, the price of National Media stock dropped to $ 7.00. Two days earlier, National Media stock had closed at $ 9.625 a share.
On April 21, 1994, ValueVision announced that it was terminating its tender offer for National Media. ValueVision's stated reason for the termination was that National Media had failed to satisfy the terms of the merger agreement. ValueVision stated that there were inaccuracies in National Media's representations and warranties in the merger agreement, and that there had also been "adverse regulatory developments" regarding National Media. In explaining its reasons for the termination, ValueVision made no mention of any difficulties in obtaining financing.
The following day, National Media stock closed at $ 5.25 a share.
On April 25, 1994, National Media stated that it terminated the merger agreement and demanded that ValueVision pay the $ 7 million break-up fee. ValueVision has since refused to make this payment; in a separate proceeding, National Media now seeks the $ 7 million.
II. Count I -- Violation of Section 10(b) of the 1934 Exchange Act and SEC Rule 10b-5
Section 10(b) of the 1934 Securities Exchange Act provides a broad prohibition on the use of "manipulative or deceptive devices" in connection with the purchase or sale of a security.
Pursuant to its authority under section 10(b), the Securities and Exchange Commission issued rule 10b-5, which prohibits material misrepresentations and omissions in connection with the purchase or sale of a security.
Rule 10b-5 has been interpreted to establish an implied private cause of action to purchasers or sellers of securities. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975); Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1970).
To state a claim under rule 10b-5, a plaintiff must allege "that the defendant (1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." Kline v. First Western Government Securities, Inc., 24 F.3d 480, 487 (3d Cir. 1994). The defendants challenge the sufficiency of the complaint with regard to materiality, scienter, and causation. I will examine each of these elements in turn.
A. Misstatements or Omissions of Material Facts
Defendants argue that they made no actionable misstatements or omissions of material facts because (1) the statements and omissions plaintiffs allege were not misleading as a matter of law, (2) any possible way that investors were misled is immaterial, and (3) the statements and omissions plaintiffs allege are not sufficiently factual to support liability. I find these arguments unpersuasive.
1. Whether the Alleged Statements and Omissions Could Be Construed as Misleading
Plaintiffs assert that the following alleged statements by the defendants created the impression among investors that there was a strong likelihood that ValueVision would obtain the financing necessary to complete its merger with National Media:
1. On January 13, ValueVision's chairman Johander wrote to National Media that "we are confident that the financing required to effect the combination of our two companies could be arranged on a prompt basis."
2. On February 7, ValueVision issued a statement that "based upon its total assets, shareholders' equity and minimum debt," ValueVision would "be able to raise the necessary funds" to complete the deal.
3. Under the March 6 merger agreement, ValueVision stated that it had "retained Salomon Brothers, Inc. to assist in placing the Company's debt or equity instruments, the proceeds of which will be sufficient together with other funds on hand" to consummate the offer.
4. The merger agreement further provided that ValueVision agreed to use its reasonable best efforts to take all necessary steps to consummate the deal, including obtaining necessary financing.
The plaintiffs assert that these statements created a false impression due to the defendants' alleged failure to disclose that the only method of financing ValueVision considered was an offering of high-yield, interest-sensitive debt securities and that defendants were only willing to employ such a financing method in an environment of stable interest rates. The defendants contend that these statements could not have created a false impression of ValueVision's willingness to obtain financing. Defendants argue that the first two statements suggest nothing more than what the plaintiffs acknowledge to have been true -- that ValueVision could have obtained financing at any time. The defendants similarly contend that the third statement also merely reflects the truth, that ValueVision had retained Salomon Brothers to assist in the financing.
A reasonable investor, however, may have understood these statements as an expression of ValueVision's willingness to accept the available financing, and thus as an indication of the likelihood that ValueVision would obtain financing. See McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir. 1990) ("Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors."). In the context of ValueVision's merger offer, the statement that ValueVision was confident it could obtain financing might well have suggested that ValueVision was confident that financing would be available on reasonable terms and that ValueVision would accept these terms. Moreover, ValueVision made it known that it had retained Salomon Brothers for the very purpose of making financing arrangements, further indicating the strength of ValueVision's willingness to obtain financing. The suggestion that ValueVision was strongly willing to accept available financing is bolstered by the fourth statement, the obligation ValueVision incurred in the merger agreement to use its best efforts to obtain financing. The defendants contend that plaintiffs should not be allowed to rely on this statement because the plaintiffs were not a party to the merger agreement, and the agreement explicitly states that it confers no rights on any third parties. Plaintiffs, however, do not bring a breach-of-contract claim based on the "best efforts" clause. Rather, they assert that they were materially misled by a variety of statements, including the defendants' public acceptance of an obligation to use their best efforts to obtain financing. Read together, the statements to which plaintiffs point can be read to suggest a strong willingness to conclude financing arrangements without imposing any limitations on the type of financing.
a. The Applicability of the "Bespeaks Caution" Doctrine
Defendants argue that even if the statements discussed above can be read as misleading in isolation, ValueVision issued other cautionary statements that fully disclosed the risk that the deal would fall through for lack of satisfactory financing. Defendants point to three statements to support this argument. First, defendants Point to a statement emblazoned in enlarged, bold, and capitalized lettering, on the first page of the offer to purchase, that stated: "THE OFFER IS CONDITIONED UPON . . . THE PURCHASER HAVING OBTAINED SUFFICIENT FINANCING TO ENABLE IT TO CONSUMMATE THE OFFER AND TO PAY THE RELATED FEES AND TO CONSUMMATE THE OFFER AND TO PAY THE RELATED FEES AND EXPENSES." Defendants' Ex. 1, at 1.
This statement also appears in the offer's financing condition. Id., at 8. Defendants point to a second statement in the offer, a statement that the determination of whether the financing condition was satisfied was "in the sole judgment of the Purchaser," i.e., the sole judgment of ValueVision. Id.. Third, defendants point out that the offer provides that ValueVision "reserved the right, in its sole discretion, . . . to . . . amend the Offer," including by "termination." Id.
Defendants assert that these three statements "bespoke caution," so as to negate the materiality of any alleged misrepresentation or omission regarding the likelihood that ValueVision would obtain financing. As the Third Circuit has stated, the "bespeaks caution" doctrine captures the common-sense notion that statements or omissions which in isolation could be seen as misleading should be considered in the context of accompanying cautionary statements. See In re Donald J. Trump Casino Securities Litigation, 7 F.3d 357, 364 (3d Cir. 1993) ("As we see it, 'bespeaks caution' is essentially shorthand for the considered in context, so that accompanying statements may render it immaterial as a matter of law."). Thus, the court stated:
When an offering document's forecasts, opinions or projections are accompanied by meaningful cautionary statements, the forward-looking statements will not form the basis for a securities fraud claim if those statements did not affect the "total mix" of information the document provided investors.