Brown v. Papa Murphy's Holdings
| Decision Date | 20 May 2020 |
| Docket Number | CASE NO. 3:19-cv-05514-BHS-JRC |
| Court | U.S. District Court — Western District of Washington |
| Parties | EVAN BROWN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. PAPA MURPHY'S HOLDINGS INC. et al., Defendants. |
This matter has been referred to the undersigned by the District Court. See Dkt. 6.
In his amended complaint, plaintiff alleges that defendants Papa Murphy's Holdings, Inc. ("Papa Murphy's Holdings"), North Point Advisors LLC ("North Point"), and named members of Papa Murphy's Holdings' board of directors ("Individual defendants") violated Sections 14(e) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78n(e), 78(a). See Dkt. 22, at 1-2. Plaintiff alleges that these violations are based on allegedly misleading statements contained in a Recommendation Statement made in connection with a tender offer to acquire Papa Murphy's Holdings' issued and outstanding shares. See id. at 2.
Papa Murphy's Holdings and Individual defendants (collectively "Papa Murphy defendants") move to dismiss plaintiff's amended complaint (Dkt. 22) with prejudice and without leave to amend, pursuant to Fed. R. Civ. P. 12(b)(6). See Dkt. 25. Papa Murphy defendants concurrently request that the Court take judicial notice of documents filed in support of Papa Murphy defendants' motion to dismiss. Dkt. 28.
Defendant North Point Advisors LLC ("North Point") also moves to dismiss plaintiff's amended complaint (Dkt. 22) with prejudice and without leave to amend, pursuant to Fed. R. Civ. P. 12(b)(6). Dkt. 26.
Also pending before the Court is plaintiff's notice of dismissal of North Point from this action pursuant to Fed. R. Civ. P. 41(a)(1)(A). Dkt. 31.
Plaintiff alleges that Papa Murphy defendants were negligent in recommending and endorsing a fairness opinion prepared by North Point that contained allegedly untrue statements of material fact, thus violating Sections 14(e) and 20(a) of the Securities Exchange Act. See Dkt. 22, at 17, 19-22. Plaintiff further alleges that North Point violated Section 14(e) of the Securities Exchange Act because it illegitimately lowered Papa Murphy's Holdings' financial projections in order to reach the conclusion that a tender offer and merger were financially fair to Papa Murphy's Holdings' shareholders. See id. at 15, 22-23. Plaintiff alleges that Papa Murphy defendants' negligent endorsement of the North Point fairness opinion and North Point's manufactured financial projections were materially misleading and prompted Papa Murphy's Holdings' shareholders to accept the allegedly unfair, undervalued tender offer. See id. at 14, 18.
Having reviewed the parties' motions and briefs, the Court finds that plaintiff fails to state a claim under Section 14(e) against Papa Murphy defendants because he fails to plead sufficient facts to demonstrate a "strong inference" that Papa Murphy defendants acted withnegligence, as required by Ninth Circuit authority. The Court further finds that plaintiff fails to sufficiently plead with particularity that Papa Murphy defendants made a material misstatement of fact in the Recommendations Statement. Since plaintiff fails to state a Section 14(e) claim, his Section 20(a) claims against Individual defendants also necessarily fail. Nevertheless, plaintiff may be able to amend his pleadings to address these issues. Therefore, the Court recommends that Papa Murphy defendants' motion to dismiss (Dkt. 25) be granted without prejudice and that plaintiff be given leave to amend.
The Court further recommends that plaintiff's notice of dismissal of North Point without prejudice (Dkt. 30) be granted and that North Point's motion to dismiss (Dkt. 26) be denied as moot.
Pursuant to Fed. R. Civ. P. 201(b)(2), Papa Murphy defendants request judicial notice of the following documents, true and correct copies of which were submitted in support of its motion to dismiss:
Plaintiff does not object to the Court reviewing or considering these documents, so long as the Court does not "assume the truth of an incorporated document if such assumptions only serve to dispute facts stated in [the] well-pleaded complaint." Dkt. 30, at 2 (citing Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1003 (9th Cir. 2018)). In other words, plaintiff does not object to the Court's judicial notice of the actual documents, but objects to judicial notice of the truth of disputed facts in the amended complaint. See id.
Generally, a district court may not consider material beyond the complaint in ruling on a Rule 12(b)(6) motion to dismiss. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). However, there are limited exceptions to this rule: (1) a court may consider material properly submitted as a part of the complaint; (2) a court may consider documents not physically attached to the pleading if the contents are alleged in the complaint and no party questions the authenticity; and (3) under Federal Rule of Evidence 201, a court may take judicial notice matters of public record. Id. at 688-89. Rule 201 provides, in pertinent part, "[a] judicially noticed fact must be one not subject to reasonable dispute in that it is . . . capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b)(2).
Having reviewed Papa Murphy defendants' request (Dkt. 28), proposed documents for judicial notice (Dkt. 27-1), and plaintiff's response to the request for judicial notice (Dkt. 30), the Court takes judicial notice of Exhibits A though E. To the extent that Papa Murphy defendants ask the Court to accept the truth of the factual assertions contained in Exhibit A (the Recommendation Statement), the Court will not "assume the truth" of the statements in Exhibit A "if such assumptions only serve to dispute facts stated" in the amended complaint. Khoja, 899 F.3d at 1003.
Plaintiff Evan Brown, a former Papa Murphy's Holdings' shareholder, initiated this putative class action in June 2019. See Dkt. 1. In his amended complaint, plaintiff alleges that Papa Murphy defendants and North Point allegedly violated Sections 14(e) and 20(a) of the Exchange Act. See id. at 1-2. Plaintiff alleges that his claims arise in connection with the tender offer by MTY Food Group Inc. ("MTY"), used to acquire all of the issued and outstanding Papa Murphy's Holdings' shares. Id. at 2.
Plaintiff alleges that on April 10, 2019, Papa Murphy's Holdings entered into an agreement and plan of merger with MTY, pursuant to which Papa Murphy's Holdings' shareholders would receive $6.45 in cash for each common stock share ("Merger Consideration"). Dkt. 22, at 2. Plaintiff alleges that on April 25, 2019, Papa Murphy defendants authorized the filing of the Recommendation Statement with the SEC. Id.; see also Dkt. 27-1, at 2-67. Plaintiff alleges that the purpose of the Recommendation Statement was to convince Papa Murphy's Holdings' shareholders to tender their shares. Dkt. 22, at 2.
Plaintiff alleges that Papa Murphy defendants engaged North Point as a financial advisor in connection with a potential strategic transaction. See Dkt. 22, at 5. Specifically, in connection with the MTY merger, plaintiff alleges that North Point prepared a fairness opinion letter, filed with the Recommendation Statement, that concluded that the Merger Consideration "was fair from a financial point of view to [] stockholders." See id. at 15; Dkt. 27, at 60-62. Plaintiff alleges that North Point "illegitimately" lowered Papa Murphy's Holdings management's "significantly higher" financial projections ("Management Case") for use in the valuation process. Dkt. 22, at 2. Instead of using the Management Case, plaintiff alleges that North Point created a "downwardly revised set of projections" ("Base Case") in order to justify an "otherwiseunjustifiable finding of fairness." Id. at 2-3. Plaintiff alleges that the Base Case "was not reflective of Papa Murphy's [Holdings] actual future business prospects" and was "not entirely consistent with the positive trend in same store sales growth announced in [Papa Murphy's Holdings'] earnings statements and press releases" leading up to the announcement of the MTY merger and tender offer. Id. at 13. Plaintiff further alleges that without the use of the "adulterated, manufactured Base Case projections," North Point "would not have been able to frame the Merger Consideration as 'fair' consideration for [] shareholders." Id. at 2, 14.
Plaintiff alleges that North Point's statements that the Merger Consideration was financially fair to Papa Murphy's Holdings' shareholders were "false and/or misleading," and that North Point "knew that the Merger Consideration was not actually fair" to shareholders. Id. at 15-16. Plaintiff also alleges that North Point's Base Case projections were material misrepresentations of Papa Murphy's Holdings' valuation and therefore, materially misleading to shareholders. Id. at 16.
Plaintiff alleges that Individual defendants "knew that North Point illegitimately lowered [Management Case] projections to fit the inadequate Merger Consideration" and that...
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