Baum v. Harman Int'l Indus., Inc.

Decision Date14 December 2021
Docket NumberCASE NO. 3:17-cv-246(RNC)
Citation575 F.Supp.3d 289
Parties Patricia B. BAUM, Individually and on behalf of all others similarly situated, Plaintiff, v. HARMAN INTERNATIONAL INDUSTRIES, INC., et al., Defendants.
CourtU.S. District Court — District of Connecticut

David A. Knotts, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, Brett Middleton, Johnson Fistel, LLP, San Diego, CA, Mathew P. Jasinski, William H. Narwold, Motley Rice LLC, Hartford, CT, for Plaintiff Patricia B. Baum.

David A. Knotts, Robbins Geller Rudman & Dowd LLP, San Diego, CA, for Plaintiff Laborers’ Local # 231 Pension Fund.

Caitlin A. Donovan, Pro Hac Vice, Ryan A. McLeod, Pro Hac Vice, Stephen R. DiPrima, Pro Hac Vice, Wilfred T. Beaye, Jr., Wachtell, Lipton, Rosen & Katz, New York, NY, Benjamin D. Klein, DOJ-USAO, White Plains, NY, Joseph C. Merschman, Tadhg Dooley, Wiggin & Dana, New Haven, CT, for Defendants Harman International Industries, Incorporated, Dinesh C. Paliwal, Adriane M. Brown, John W. Diercksen, Ann M. Korologos, Robert Nail, Abraham N. Reichental, Kenneth M. Reiss, Hellene S. Runtagh, Frank Sklarsky, Gary G. Steel.


Robert N. Chatigny, United States District Judge

This is an action under the federal securities laws brought by a former shareholder of Harman International Industries, Inc. ("Harman") individually and on behalf of a proposed class. The complaint alleges that Harman's senior management used a false and misleading proxy statement to solicit support for Harman's acquisition by Samsung Electronics Co., Ltd. ("Samsung"). Plaintiff seeks compensatory damages for defendants’ alleged violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and of Securities and Exchange Commission Rule 14a-9.

In 2019, a motion to dismiss the complaint under Rule 12(b)(6) was granted in part and denied in part. See Baum v. Harman Int'l Indus., Inc., 408 F. Supp. 3d 70 (D. Conn. 2019). Prior to that ruling, discovery had been stayed pursuant to the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(3)(B), which imposes an automatic stay of discovery during the pendency of a motion to dismiss. Before the stay was lifted, defendants renewed their request for dismissal of the remaining claims through the procedural vehicle of a Rule 12(c) motion for judgment on the pleadings, which has served to extend the stay. This memorandum addresses the issues presented in that motion.

The issues have been extensively briefed. Most significantly for present purposes, the parties have briefed the Second Circuit's summary order in Gray v. Wesco Aircraft Holdings, Inc., affirming the dismissal of a minority shareholder's complaint for failure to adequately plead that the allegedly misleading proxy caused the plaintiff to incur a "non-speculative economic loss." 847 F. App'x 35, 37 (2d Cir. 2021). The District Court's opinion in Wesco, see 454 F. Supp. 3d 366 (S.D.N.Y. 2020), has also been the subject of extensive briefing.

After careful consideration of the parties’ submissions, I am not persuaded that plaintiff's claim should be dismissed. For reasons discussed more fully below, I continue to believe that the allegations of the complaint, accepted as true and viewed most favorably to plaintiff, provide a sufficient basis for a plausible claim that the proxy was materially misleading. Plaintiff's complaint is similar in nature to the complaint in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991), where facts developed in discovery led to a plaintiff's verdict. The judgment was reversed by the Supreme Court on the issue of causation because the merger did not require the approval of the minority shareholders and, accordingly, any false statements in the proxy were not an "essential link in effectuating the transaction" under the causation test of Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). See Virginia Bankshares, 501 U.S. at 1102, 111 S.Ct. 2749. Importantly for the present case, the Supreme Court's opinion provides no reason to doubt that the judgment awarding damages to the plaintiff would have been sustained if the merger required the minority's approval.

Defendants contend that Wesco dooms plaintiff's claim because her theory of economic loss rests on allegations concerning the inherent value of her Harman shares at the time of the merger. Plaintiff responds that the Second Circuit affirmed the dismissal in Wesco, not because the damages theory pleaded here is untenable, but because the plaintiff's allegations in that case were insufficient to plead a non-speculative claim. I agree. Accordingly, the complaint will not be dismissed.1

I. Legal Standard

In support of the present motion, defendants repeat arguments that were made in support of the 12(b)(6) motion and add new arguments. Insofar as the motion relies on arguments previously considered and rejected, it constitutes, in substance, a motion for reconsideration and will be treated as such.2 To the extent it relies on new arguments, it must satisfy the usual standard for a motion for judgment on the pleadings.3 This two-pronged approach comports with that of other district courts in similar circumstances. See Estep v. City of Somerset, No. 10-286-ART, 2011 WL 845847, at *2 (E.D. Ky. Mar. 8, 2011) ; see also Aviles v. S&P Global, Inc., No. 17-CV-2987 (JPO), 2020 WL 1689405, at *3 (S.D.N.Y. Apr. 6, 2020).

II. Discussion
A. Proxy Statement Regarding Management Projections
1. The Complaint Sufficiently Alleges a Claim Based on Subjective Falsity

Plaintiff's Section 14(a) claim is based on a statement in the proxy concerning certain projections of Harman's future performance. The proxy stated: "senior management determined ... that the Management Projections ... reflected more downside risk ... than likely upside potential." To adequately plead a claim based on this statement, plaintiff must allege facts permitting an inference that the statement was both subjectively and objectively false. Baum, 408 F. Supp. 3d at 86-87 (quoting Montanio v. Keurig Green Mountain, Inc., 237 F. Supp. 3d 163, 170 (D. Vt. 2017) ). "In other words, the complaint must allege ‘that the [d]efendants did not actually hold the belief or opinion stated, and that the opinion stated was in fact incorrect.’ " Id. at 87 (quoting Montanio, 237 F. Supp. 3d at 171 ). I concluded at the motion to dismiss stage that the complaint sufficiently alleges both. Id.

Defendants challenge my holding as to subjective falsity.4 I again conclude that plaintiff has sufficiently alleged subjective falsity based, in part, on statements made by Harman's Chairman, CEO, and President, Dinesh C. Paliwal, before the proxy was issued, which conflict with the statement in the proxy quoted above. Prior to the issuance of the proxy, Paliwal commented on Harman's August 2016 Guidance, which defendants now concede was "virtually identical" to the Management Projections. In his comments, Paliwal stated that the projections contained in the 2016 Guidance "were ‘by far very conservative’ and ... reflected far more upside potential than downside risk." In addition, he stated that he was "very confident" in Harman's ability to "hit[ ] the numbers" contained in the 2016 Guidance. ECF. No. 16 at ¶¶ 10, 59, 70, 72.5

Defendants argue that Paliwal's prior statements are not inconsistent with the statement in the proxy. They assert that what Paliwal described as "by far very conservative" was not the Management Projections generally (or their August 2016 analogues) but rather a single assumption used in developing the projections, specifically, an assumption that industry take rates would grow by 3% a year. ECF No. 89-2 at 18-19. Relying on this premise, defendants urge that describing a single assumption as "conservative" is not inconsistent with management's subsequent determination that the overall guidance had more downside risk than upside potential. Id. at 19, 22.

Defendants’ interpretation of Paliwal's statements is unavailing at this juncture. Despite defendants’ assertions to the contrary,6 the complaint explicitly alleges that the "by far very conservative" language applied to the projections as a whole. See ECF No. 16 at ¶ 72 ("This ... statement [in the proxy] is both objectively and subjectively false and conflicts with Paliwal's repeated statements to analysts that the Organic Growth/Management Projections were by far very conservative and that those same projections reflected far more upside potential than downside risk."). In assessing the plausibility of this allegation, any ambiguities in Paliwal's statements must be construed in favor of the plaintiff. Shore v. Charlotte-Mecklenburg Hosp. Auth., 412 F. Supp. 3d 568, 573 (M.D.N.C. 2019) ("A court may consider facts and documents subject to judicial notice, provided that the court construe such facts in the light most favorable to the non-moving party."); accord USHA Holdings, LLC v. Franchise India Holdings Ltd., 11 F. Supp. 3d 244, 270 (E.D.N.Y. 2014) ("At this stage of the litigation, ‘documents are construed in the light most favorable to plaintiff and all doubts are resolved in its favor’ ....") (quoting CutCo Indus., Inc. v. Naughton, 806 F.2d 361, 365 (2d Cir. 1986) ). If the statement so construed can reasonably be read to refer to the Management Projections as a whole, that is sufficient.

I continue to think such an interpretation is reasonable. Paliwal's statement that "our guidance for 2017 or actually outlook for 2021 is by far very conservative" does not necessarily refer exclusively to take rates, given the broader context of the discussion, which involved a question about Harman's midterm guidance. Indeed, at the time of the 12(b)(6) motion, defendants described the subject of Paliwal's characterization more broadly; they noted that "backlog and take rates ... were the topics under discussion when Paliwal made his prior statements. C...

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