The opinion of the court was delivered by: JOYNER
This action, brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78(a) et seq., and 17 C.F.R. § 240.10b-5 ("Rule 10b-5") promulgated thereunder, concerns Defendant Wonderware Corp.'s ("Wonderware") purchase of Soft Systems Engineering, Inc. ("SSE"). Plaintiff claims that Defendants' failure to disclose changes in business operations and personnel resulted in inflated values of the Wonderware stock used to purchase SSE. Before the Court is Defendants' motion to dismiss, which we deny for the reasons stated below.
Defendants are Wonderware, a company that develops and markets production management software, and four individuals who are or were executives at Wonderware, Dennis R. Morin, Roy H. Slavin, Norman Farquhar, and Philip J. Huber. Plaintiff Otto W. Voit, III, is a former executive at SSE, a company that Wonderware acquired in August 1995 in exchange for shares of Wonderware stock. Plaintiff alleges the following facts which we accept as true for present purposes.
In June 1995, Wonderware sent SSE a "Letter of Intent for Proposed Acquisition by Wonderware of Soft Systems Engineering, Inc." ("the Letter of Intent"). The Letter of Intent confirmed Wonderware's intention to acquire SSE with cash and approximately $ 7 million in Wonderware stock. Also in June 1995, Wonderware hired Defendant Slavin as its President and Chief Operating Officer, effective July 1, 1995. In a press release announcing Slavin's hiring, Wonderware quoted Slavin as stating, "I'm really looking forward to working with Dennis [Morin] and the entire Wonderware team." Compl. P21. The press release further stated: "Dennis R. Morin continues as Chairman of the Board and Chief Executive Officer." Id.
During July 1995, Wonderware and SSE negotiated the terms of an "Agreement and Plan of Negotiation" ("the Reorganization Agreement"). At that time Wonderware provided SSE with copies of its Annual Report on Form 10-K for the year ended December 31, 1994; its Quarterly Report on Form 10-Q for the three months ended March 31, 1995; its Proxy Statement for the Annual Meeting of Stockholders on April 17, 1995; and its 1994 Annual Report to Stockholders. Wonderware represented that these documents contained neither untrue statements of material facts nor omissions of material facts necessary to prevent misrepresentation.
The Reorganization Agreement also required Wonderware to advise SSE of "any change that has or had a material adverse effect" on Wonderware and "the occurrence of any event which causes the representations of warranties made by [Wonderware]... in this Agreement to be incomplete or inaccurate in any material respect." Compl. P27. The Reorganization Agreement defined the term "material" as "anything which upon public disclosure... would be viewed by a reasonable investor as significantly altering the total mix of information then available concerning [Wonderware] ..." Id. The non-occurrence of any change having a "material adverse effect" was a condition precedent to SSE's obligation to complete the transaction with Wonderware. Id. At no time did Defendants reveal the existence of any changes to SSE.
The Reorganization Agreement provided that Wonderware would use shares of its own stock to buy shares of SSE common stock. Each share of SSE common stock would be converted into that number of shares of Wonderware common stock equal to the Net Aggregate Purchase Price (set at $ 7 million less certain liabilities of SSE) divided by the average closing price of Wonderware common stock on the Nasdaq National Market System during the twenty trading days immediately prior to the closing date of the merger. Thus, the higher the valuation of Wonderware stock for purposes of the purchase, the better deal Wonderware would achieve in acquiring SSE. SSE and certain of its principal shareholders entered into the Reorganization Agreement with Wonderware.
After entering into the Reorganization Agreement, Wonderware provided SSE shareholders with an "Information Statement for the Special Meeting of SSE Shareholders to be held on August 24, 1995" ("the Information Statement"), as well as its Annual Report on Form 10-K, Quarterly Reports, Annual Report to Stockholders, and Proxy Statement for its Annual Meeting of Shareholders. These documents stated that net income as a percent of revenue was over 20% for 1994 and for the first six months of 1995. Wonderware's documents also contained warning statements regarding the retention of key personnel and regarding potential changes in operations:
Wonderware's continued success will depend upon its ability to retain a number of key employees .... The loss of certain key employees could have a material adverse effect on Wonderware's business.
There can be no assurance that .... Wonderware's operating margins can be sustained in the future.... Compl. PP29, 31.
On August 24, 1995, SSE shareholders unanimously approved the Reorganization Agreement. On August 30, 1995, Wonderware's acquisition of SSE closed, and SSE became a subsidiary of Wonderware. In exchange for their SSE common stock, SSE shareholders were issued an aggregate of 172,598 shares of Wonderware common stock. Additionally, holders of options to purchase SSE common stock were issued options to purchase an aggregate of 8,887 shares of Wonderware common stock. According to the terms of the Reorganization Agreement, Wonderware's stock was valued at $ 37.075 per share for purposes of the acquisition.
After the acquisition, a number of Wonderware announcements led Plaintiff to bring this action. On October 12, 1995, Wonderware issued a press release reporting that net income as a percentage of revenue for the Third Quarter of 1995 was down to 18.6%. On November 29, 1995, Wonderware announced Morin's resignation and his replacement by Slavin. Within three trading days of this announcement, Wonderware's stock fell from $ 30.375 to $ 22.75. On December 6, 1995, Wonderware advised the investment community at a technology conference that changes in the company's operations could substantially decrease the firms profit margins. On December 6th, Wonderware's stock closed near $ 20 per share. After the conference, Defendant Slavin revealed in a December 8, 1995 press release:
In July we began taking appropriate steps in our operations to accommodate the transition of the company ... Recently we have culminated that strategy with the planned departure of certain corporate officers and the announcement of aggressive plans for increasing our internal investment in corporate infrastructure ... This was a transition that had been planned many months ago and was formally launched last summer when I joined the Company as Dennis's hand-picked successor... At the same time we began changing our operations ... At the December 6th conference we advised that in 1996, reflecting this tactical spending, operating expenses could increase to a level that could change the historical earnings model of the company ... [Net income, as a percentage of revenue, typically has been around the 20% level ... This could decrease to the 13% to 17% level.
Plaintiff commenced this action on November 26, 1996. The complaint includes six counts. Count I alleges securities fraud pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. Counts II through VI assert various state securities and common law claims. Plaintiff contends that Defendants made, or caused to be made, materially false and misleading statements and concealed material information. Specifically, Plaintiff alleges that Defendants knew as early as July 1, 1995, that Slavin would replace Morin as CEO and that net income as a percent of revenue would decrease. Plaintiff claims that Defendants had a duty to disclose this information.
Defendants filed this Fed. R. Civ. P. 12(b)(6) motion to dismiss the complaint in its entirety. Defendants argue that Count I of the complaint should be dismissed because Plaintiff fails to meet the heightened securities fraud pleading standards required under Fed. R. Civ. P. 9(b) and under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b)(2). Defendants further assert that dismissal of Count I removes this Court's supplemental jurisdiction over Counts II through VI. See 28 U.S.C. § 1367. Thus, we need only address Plaintiff's claims in Count I to determine if the complaint must be dismissed.
When considering a motion to dismiss a complaint under Rule 12(b)(6), a court must primarily consider the allegations contained in the complaint, although matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint may also be taken into account. See Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3rd Cir. 1993). The court must accept as true all allegations in the complaint and must give the plaintiff the benefit of every favorable inference that can be drawn from those allegations. See J/H Real Estate, Inc. v. Abramson, 901 F. Supp. 952, 955 (E.D. Pa. 1995); Schrob v. Catterson, 948 F.2d 1402, 1405 (3rd Cir. 1991). A complaint is properly dismissed only ...