Gray v. Wesco Aircraft Holdings, Inc.

• Decision Date: 16 April 2020
• Docket Number: 19-cv-8528 (LJL)
• Citation: 454 F.Supp.3d 366
• Parties: Jacob GRAY, individually and on behalf of all others similarly situated, Plaintiff, v. WESCO AIRCRAFT HOLDINGS, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

454 F.Supp.3d 366

Jacob GRAY, individually and on behalf of all others similarly situated, Plaintiff,

v.WESCO AIRCRAFT HOLDINGS, INC., et al., Defendants.

19-cv-8528 (LJL)

United States District Court, S.D. New York.

Signed April 16, 2020

Miles Dylan Schreiner, Juan Eneas Monteverde, Monteverde & Associates PC, New York, NY, for Plaintiff.

J. Christian Word, Latham & Watkins, LLP, Washington, DC, Kristin N. Murphy, Latham & Watkins LLP, Costa Mesa, CA, Sean Henry McMahon, Latham & Watkins LLP, New York, NY, for Defendants.

AMENDED OPINION & ORDER

LEWIS J. LIMAN, United States District Judge:

Plaintiff Jacob Gray brings a putative class action under Section 14(a) of the Exchange Act of 1934 and Rule 14a-9 promulgated thereunder against Defendants Wesco Aircraft Holdings, Inc. ("Wesco" or the "Company"), its former Chairman Randy J. Snyder ("Snyder"), former Chief Executive Officer Todd Renehan ("Renehan"), and former directors, Dayne A. Baird ("Baird"), Thomas M. Bancroft III ("Bancroft"), Paul E. Fuluchino ("Fulchino"), Jay L. Haberland ("Haberland"), Scott E. Kuechle ("Kuechle"), Adam J. Palmer ("Palmer"), Robert D. Paulson ("Paulson"), Jennifer M. Pollino ("Pollino"), and Norton A. Schwartz ("Schwartz"). Plaintiff filed the operative complaint, the Second Amended Complaint, on January 10, 2020. Dkt. No. 22 ("Second Amended Complaint" or "2d Am. Compl.").

Defendants move, pursuant to Fed. R. Civ. P. 12(b), for an order dismissing the Second Amended Complaint with prejudice. Plaintiff moves, pursuant to this Court's inherent powers, for an order striking exhibits A, B, C, D, E, and F from Defendants' motion to dismiss.¹ For the reasons stated, the Court GRANTS the motion to dismiss without prejudice, and GRANTS IN PART AND DENIES IN PART the motion to strike.

BACKGROUND

The following facts are set forth in the Second Amended Complaint, Dkt. No. 25 ("2d Am. Compl." or "Complaint") and Wesco's September 13, 2019 Definitive Proxy Statement, Dkt. No. 66, Ex. A ("Proxy" or "Proxy Statement"), the facts of which are assumed to be true for purposes of this motion.

A. The Platinum Merger

This case arises out of the August 2019 agreement of Wesco to be acquired by Platinum Equity Advisors, LLC and its affiliates ("Platinum") and the September 13, 2019 definitive proxy statement soliciting votes in favor of the merger.

Wesco, founded in 1953, is a distributor and provider of supply chain management services to the global aerospace industry. 2d Am. Compl. ¶ 43. The Company's products include Hardware, Chemicals, Electronic Components, Bearings and Other Products, while its services include Quality Assurance, Kitting and JIT Supply Chain Management. Wesco caters to commercial, military and general aviation sectors, including the original equipment manufacturers and their subcontractors, and also sells products to airline-affiliated and independent maintenance, repair and overhaul providers.

Individual defendant Snyder was Chairman of the Board of Wesco and Renehan was its Chief Executive Officer. Both were also directors. Baird, Bancroft, Fulchino, Haberland, Kuechle, Palmer, Paulson, Pollino, and Schwartz are all sued in their capacity as directors.

In November 2018, in the wake of a decline in Wesco's sales margins and a coincident drop in its stock price, the Company began a process to sell itself and Wesco's board engaged a financial advisor. At the time, the "Carlyle Group" ("Carlyle"), a large private equity firm, owned a significant portion of Wesco's shares; it had acquired a majority ownership position in the Company in July 2006 prior to Wesco's 2011 initial public offering and still held a 23.4% position at the time of the Merger. Id. ¶¶ 44-45. Wesco had received offers to purchase the Company for a sale price of $14 to $15 from one private equity buyer, id. ¶ 49, and had held a meeting with Platinum to discuss a combination of the two entities. Id. at 53.

On January 9, 2019, Wesco's Board established an ad hoc special committee (the "Strategic Alternatives Committee" or "SAC") to oversee and administer the sales process and hired two banks, Morgan Stanley & Co. LLP ("Morgan Stanley") and J.P. Morgan Securities LLC ("J.P. Morgan") (collectively, the "Financial Advisors"), to act as financial advisors with respect to the sale of the Company. Id. ¶ 57. Individual defendants Baird, Bancroft, Palmer, and Renehan were the members of the SAC. Id.

The sales process lasted from April 2019 until approximately August 5, 2019. Id. ¶¶ 64, 76. In connection with the sales process, at a meeting on April 8, 2019, the Board authorized management to share with potential bidders a set of projections (the "Initial Management Projections" or "Initial Projections") that it had directed management to prepare as early as February 5, 2019, and which, even as of April 2019, the Board believed could be "subject to scrutiny" based on projection assumptions regarding growth, margins, and turnover rate. Proxy 40-41. Plaintiff's case centers on these projections and a later set of projections that management prepared and the Board approved in August 2019 toward the end of the sales process ("Updated Management Projections" or "Updated Projections").

Wesco's bankers initially cast a wide net in attempting to find a buyer for an all-cash transaction. Between April and May 2019, the Company entered into confidentiality agreements with 14 potential bidders. 2d Am. Compl. ¶ 64; Proxy 41. The cast of potential acquirors, however, rapidly narrowed. By June 2019, only four potential bidders remained. One of these was Platinum. The others are referred to in the SAC and in the Proxy as PE Bidder K, PE Bidder G, and PE Bidder B. PE Bidder K indicated its initial valuation of the Company at $10.50 per share, but never submitted a bid. 2d Am. Compl. ¶ 68; Proxy 44. PE Bidder G submitted a cash offer with a purchase price of $12 per share but by July 3, 2019, it informed the Financial Advisors that it would most likely not pursue an acquisition. 2d Am. Compl. ¶ 69; Proxy 43-44. That left essentially two bidders, Platinum and PE Bidder B, both of whom in June 2019 submitted cash offers with a purchase price of $11-12 per share, both subject to completing due diligence. Proxy 43, 45.

The deal between Wesco and Platinum solidified in late July-early August while the parties were conducting due diligence. Proxy 46. On July 28, 2019, Wesco management and the Financial Advisors held a call with Platinum to discuss valuation. 2d Am. Compl. ¶ 72; Proxy 45. A few days later, on July 31, 2019, PE Bidder B indicated that it would need additional time to complete due diligence and was removed from the sales process. 2d Am. Compl. ¶¶ 72-73; Proxy 46. For its part, Platinum, after "extensive due diligence," had "expressed concerns related to the Company's margins and inventory valuation reserves and fluctuations and the impact of these factors on the business." Proxy 45. On the July 28 call with the Company, Platinum said that it had "additional diligence concerns and questions ... including regarding the Company's financial performance for the first nine months of fiscal 2019, particularly as relates to future financial projections, sales margins and trends, fixed versus variable cost behavior and certain tax matters." Proxy 45-46. Nonetheless, on July 31, 2019, despite its concerns, Platinum submitted a revised bid of $10.42 per share. Id. ¶ 73; Proxy 46.

Over the course of the next week, the SAC negotiated with Platinum to improve the terms of its offer. Id. ¶ 76; Proxy 46-47.² On August 5, 2019, Platinum submitted its final offer of $11.05 per share, which the Board accepted. Id. ¶ 76; Proxy 47-48. On August 9, 2019, Wesco announced that it had entered into a definitive merger agreement (the "Merger Agreement") to be acquired by an affiliate of Platinum in an all-cash transaction ("the Merger"). 2d Am. Compl. ¶ 76; Proxy 49. Under the terms of the Merger Agreement, Wesco shareholders would receive $11.05 in cash for each share of Wesco they held (the "Merger Consideration"). The press release announcing the transaction indicated that the cash purchase price represented a premium of approximately 27.5 percent to the 90-day volume weighted average share price for the period ended May 24, 2019, which, the press release stated, was the last trading day prior to media speculation regarding a potential transaction involving Wesco. Id.

On August 29, 2019, pursuant to the Merger Agreement, Wesco filed a preliminary proxy statement on Schedule 14A. That proxy statement contained the opinions of the Financial Advisors that the proposed consideration was fair from a financial point of view and the recommendation of the Board that the shareholders vote in favor of the Merger. Proxy 55, 64.

On October 24, 2019, a majority of Wesco's stockholders voted to approve the Merger and, on January 9, 2020, the Merger closed.

B. Wesco's Reported Results From May 2018 to The Signing of The Merger Agreement

The Merger occurred against the backdrop of Wesco's declining performance. Both parties devote extensive attention to Wesco's reported financial results, particularly in the second and third quarters of 2019, and so the Court will describe those results in some detail. See Def. Br. at 5-8; Op. Br. at 2-3.

In May 2018, the Company announced the launch of its Wesco 2020 initiative, which was designed to broaden and institutionalize improvements already made to its business during fiscal 2018 and to improve the Company's performance and profitability. 2d Am. Compl. ¶ 48. That announcement did not improve Wesco's stock price. Between August 2018 and April 2019, Wesco's stock price dropped from $13.95 to approximately $8.25. Id. ¶ 50.

On August 16, 2018, Wesco's shares fell approximately 7% as UBS analyst Myles Walton issued a "sell" rating. Walton noted that since its IPO in July 2011, Wesco's margins had collapsed from 20% to a low of 6%. Id. ¶ 51.

On November 16, 2018, the Company announced its fourth...