The opinion of the court was delivered by: LOUIS H. POLLAK
This consolidated litigation arises out of a tender offer made in the spring of 1994 by ValueVision International, Inc. ("ValueVision") to purchase National Media Corporation ("National Media"). The plaintiffs, individuals who claim to have bought or tendered shares of National Media stock between January 13 and April 21, 1994, purport to represent two classes: those who bought National Media stock in this period (the "Purchaser Class") and those who tendered their National Media stock pursuant to the tender offer (the "Tenderer Class").
The plaintiffs allege that ValueVision and its officers misled the investing public as to the likelihood that ValueVision would obtain the financing necessary to complete the merger. The plaintiffs claim that throughout the period of ValueVision's courtship of National Media, ValueVision made statements that gave the impression that financing was likely to be obtained when in fact it was ValueVision's undisclosed intention to finance the deal exclusively through a placement of high-yield, interest-sensitive debt securities -- junk bonds -- a form of financing that ValueVision considered unfeasible in an environment of rising interest rates. Plaintiffs allege that the price of National Media stock was inflated as a result of investors' false impression that ValueVision was likely to obtain financing and thus that the deal between ValueVision and National Media would be completed. Plaintiffs further allege that they relied on ValueVision's misrepresentations in purchasing and tendering National Media stock and that this reliance caused them injury because of the market's allegedly incorrect assessment of the value of National Media stock.
Based on these allegations, plaintiffs have filed a three-count complaint against ValueVision and individual officers of ValueVision. The first count asserts a claim by the Purchaser Class against ValueVision, Robert L. Johander, ValueVision's chief executive officer and chairman of the board, and Mark A. Payne, ValueVision's chief financial officer, under section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Securities and Exchange Commission rule 10b-5, 17 C.F.R. § 240.10b-5. The second count asserts a claim by the Tenderer Class against ValueVision, Johander, and Payne under section 14(e) of the Exchange Act. The third count asserts a claim under section 20 of the Exchange Act by both classes against all the individual defendants -- Johander and Payne, as well as Nicholas M. Jaksich, president and chief operating officer of ValueVision, and Allen G. Aaranson, vice-chairman of the board of directors of ValueVision.
ValueVision has moved to dismiss the complaint under F.R.C.P. 12(b)(6) for failure to state a claim. In considering a 12(b)(6) motion, this court must "accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the non-moving party." Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989). Such a motion should be granted only if plaintiffs have alleged no set of facts under which they could state a claim. I conclude that the 12(b)(6) motion should be denied with respect to Count I, granted with respect to Count II, and granted in part with respect to Count III.
I. Facts as Alleged in the Amended Complaint
ValueVision is a corporation engaged in the business of television home shopping sales. ValueVision markets consumer products through live television broadcasts on home shopping channels. Toward the end of 1993, ValueVision became interested in purchasing National Media, a corporation that markets "infomercials," thirty-minute blocks of television advertising that typically air between midnight and 9:00 a.m. As the infomercial industry had grown, so had National Media's revenues -- in 1993, National Media reported net revenues of $ 142 million, up 38.9% from its 1992 earnings.
On January 13, 1994, ValueVision announced a proposal to acquire a majority of National Media's stock at $ 10 per share. In a letter to National Media, ValueVision's CEO Johander stated, "We believe that combining our companies would create a leader in the interactive video shopping marketplace of the future." At the time of this announcement, 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.
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: