Apa Excelsior III L.P. v. Premiere Technologies

• Decision Date: 02 February 2007
• Docket Number: No. 05-15936.,05-15936.
• Citation: 476 F.3d 1261
• Parties: APA EXCELSIOR III L.P., APA Excelsior III Offshore L.P, et al., Plaintiffs-Appellants, v. PREMIERE TECHNOLOGIES, INC., Boland T. Jones, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

476 F.3d 1261

APA EXCELSIOR III L.P., APA Excelsior III Offshore L.P, et al., Plaintiffs-Appellants, v. PREMIERE TECHNOLOGIES, INC., Boland T. Jones, et al., Defendants-Appellees.

No. 05-15936.

United States Court of Appeals, Eleventh Circuit.

February 2, 2007.

John L. Taylor, Jr., Chorey, Taylor & Feil, Atlanta, GA, Lee A. Weiss, Milberg, Weiss, Bershad & Schulman, New York City, Arthur R. Miller, Harvard Law School, Cambridge, MA, for Plaintiffs-Appellants.

Ambreen A. Delawalla, Todd R. David, John A. Jordak, Jr., John L. Latham, Jessica Perry Corley, Alston & Bird, LLP, Atlanta, GA, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before ANDERSON and DUBINA, Circuit Judges, and VINSON,^* District Judge.

VINSON, District Judge:

The lawsuit underlying this appeal was filed in 1998. It arose from a stock-for-stock merger and acquisition between Xpedite Systems, Inc., and Premiere Technologies, Inc. The case is before us for a second time. As will be discussed in Part I infra, the claims and issues have been winnowed over the years and we are now faced with what is tantamount to a single question: Are sophisticated investors involved in an arms-length merger transaction entitled to recover under Section 11 of the Securities Act of 1933 if they make a legally binding investment commitment months before the issuance of a defective registration statement?

I. BACKGROUND

Plaintiffs are investment funds and individuals who are former shareholders of Xpedite Systems, Inc. ("Xpedite"). Xpedite, a Delaware corporation, was formed in 1988 to provide enhanced facsimile and messaging delivery services. Plaintiffs APA Excelsior III L.P., APA Excelsior III Offshore L.P., APA/Fostin Pennsylvania Venture Capital Fund, and CIN Venture Nominees Limited (collectively, "the Plaintiff Funds") are investment funds managed by Alan Patricof Associates ("APA"). Plaintiffs Stuart and David Epstein are brothers who invested in Xpedite as individual investors. Together, Plaintiffs held approximately 30 percent of the stock of Xpedite. Due to the Plaintiff Funds' substantial holdings in Xpedite, a representative from APA, Robert Chefitz, served as a member of Xpedite's board of directors ("the board"). Similarly, due to the Epsteins' holdings in Xpedite, David Epstein sat on the board.

In 1997, Xpedite began to consider strategic alternatives to provide an exit strategy for Xpedite's early investors, which included Plaintiffs. In February 1997, the board appointed a special committee to evaluate Xpedite's alternatives and to engage advisors. Members of the special committee included Chefitz (who testified at deposition that he may have actually been chair of the committee) and David Epstein, among others.

During this process, contact was made with Defendant Premiere Technologies, Inc. ("Premiere"), which expressed an interest in acquiring Xpedite. Premiere, now known as PTEK Holdings, Inc. or Premiere Global Services, Inc., is in the business of providing telecommunication services, including conference calling, voice messaging, and telephone calling card-related services. Premiere proposed a stock-for-stock merger and acquisition, which Xpedite felt was an attractive proposal. On October 31, 1997, Xpedite — through its senior officers, investment banker (Merrill Lynch), accountants (Ernst & Young), and legal counsel (Paul, Hastings, Janofsky & Walker LLP) — began its due diligence investigation of Premiere. The special committee on which Chefitz and David Epstein sat had oversight responsibility for this investigation.

As we noted in our prior opinion, and as recognized by the district court on remand (which has not been seriously challenged in this appeal), Plaintiffs were sophisticated investors with due diligence rights, but they failed to exercise them in any meaningful way. For example, Chefitz testified that he did not direct anyone to examine Premiere's key telephone calling card customers, he did not negotiate for specific warranties regarding the calling card business, and he did not direct anyone to perform due diligence as to the technical capacity of the calling card business's software platform. Roy Anderson, Xpedite's former CEO, told Chefitz that Premiere's contract and business dealings with a particular telephone calling card customer, DigiTEC 2000, Inc. ("DigiTEC"), were important to Premiere's revenues. However, Chefitz did not recall performing any examination of the DigiTEC account, other than reviewing some of the company's public materials, nor did he recall directing anyone to make contact with that company as part of the due diligence efforts. Further, although Chefitz believed Xpedite's due diligence team had access to Premiere's accounts receivable for the telephone calling card business, Chefitz did not review them personally or direct anyone else to do so.

Despite this apparently superficial due diligence, on November 13, 1997, the board entered into a merger agreement with Premiere (agreeing to the stock-for-stock transaction) and unanimously voted to recommend the merger to Xpedite's shareholders. As a condition of entering into the merger agreement, and in order to have some assurance of a favorable merger vote by the shareholders, Premiere required all Plaintiffs and some of the other shareholders to execute stockholder agreements. Under these stockholder agreements, Plaintiffs granted irrevocable proxies to Premiere to vote their Xpedite stock in favor of the merger:

SECTION 1.01 VOTING AGREEMENT. The Stockholder hereby agrees that . . . the Stockholder shall vote (or cause to be voted) the Shares and the Other Securities [in Xpedite] in favor of the Merger [with Premiere]. . . .

* * *

SECTION 1.02 IRREVOCABLE PROXY. The Stockholder hereby irrevocably appoints [Premiere] and each of its officers . . . to vote and otherwise act (by written consent or otherwise) with respect to the Shares and Other Securities, which the Stockholder is entitled to vote at any meeting of stockholders of the Company. . . .

The stockholder agreements were terminable/voidable only upon the termination of the merger agreement or at the effective time of the merger itself, whichever occurred first. Premiere also required Plaintiffs (except Stuart Epstein) and others to execute affiliate letters, setting forth potential limitations on the transferability of the Premiere securities they would receive upon consummation of the merger. By executing the affiliate letters, Plaintiffs acknowledged that a restrictive legend would be placed on the Premiere common stock they were to receive in the merger. Notably, Plaintiffs warranted in the affiliate letters that they understood Premiere was "under no obligation to file a registration statement with the [Securities and Exchange Commission (`SEC')] covering the disposition of [their] shares." (Emphasis in original).

More than two months later, on January 28, 1998, Premiere's registration statement for the Xpedite merger became effective. On February 27, 1998, a majority of both Xpedite's and Premiere's shareholders voted to approve the merger. Upon consummation of the merger, all Xpedite shareholders received 1.165 shares of Premiere common stock for each share of Xpedite stock they owned. Pursuant to the merger agreement, the exchange ratio was determined by reference to the average closing price of Premiere stock for a predetermined period of time.

On June 9 and 10, 1998, Premiere announced that it would have a shortfall in its revenues, and that it would be taking a charge against its bad debt reserves. This was a development not mentioned in the registration statement. On June 10, 1998, the price of Premiere stock dropped from $14.4375 per share to $10.375 per share, a one-day decline of 28 percent and an overall decline of 69 percent from the merger price.¹

In November 1998, within months after the Premiere stock price dropped and before it rebounded, Plaintiffs filed the underlying lawsuit and named Premiere and certain of its directors and officers as Defendants. In their complaint, Plaintiffs asserted claims for breach of contract, negligent misrepresentation, and violations of several different provisions of the Securities Act of 1933 ("the Securities Act"). As is relevant for the Securities Act claims and this appeal, Plaintiffs contended that the decline in stock price was the result of numerous material defects in the registration statement. These allegedly false and misleading statements or omissions generally concerned Premiere's financial condition and expected growth. Specifically, Plaintiffs alleged that Premiere had overstated its prior acquisitions of and attempts to integrate two voice messaging businesses (Voice-Tel Enterprises and VoiceCom Holdings, Inc.); it misrepresented the status and viability of a particular product, "Orchestrate" (a comprehensive suite of integrated communication services, such as universal messaging with voice mail, facsimile and email, and conference calling); it failed to disclose that Premiere was experiencing dramatic declines in revenue from its business relationship with two other entities (DigiTEC and Amway Corporation); and it touted that Premiere had a "strategy" to become "the world's leading provider of network-based enhanced personal communication services," yet Premiere lacked sufficient internal controls and management capability to manage its growth and integrate its acquisitions, as well as to properly assess customer credit risk. Plaintiffs alleged that these misstatements and omissions were material and that they violated Section 11 of the Securities Act [15 U.S.C. § 77k] ("Section 11").²

The district court dismissed the contract claim and certain of Plaintiffs' Securities Act allegations, after which the parties engaged in discovery. Thereafter, the district court granted summary judgment to Defendants on Plaintiffs' remaining Securities Act ...