Grossman v. Novell, Inc.

Decision Date08 August 1997
Docket NumberNo. 96-4011,96-4011
Citation120 F.3d 1112
PartiesFed. Sec. L. Rep. P 99,507, 97 CJ C.A.R. 1616 Brad GROSSMAN, Plaintiff-Appellant, v. NOVELL, INC., Robert J. Frankenberg, Raymond J. Noorda, Stephen C. Wise, and Adriaan Rietveld, Defendants-Appellees.
CourtU.S. Court of Appeals — Tenth Circuit

Andrew D. Friedman, Berman Gaufin & Tomsic, Salt Lake City, UT (Stuart D. Wechsler, Jay D. Gurmankin, Wechsler Harwood Halebian & Feffer LLP, New York City, and Lawrence G. Soicher, New York City, with him on the briefs), for Plaintiff-Appellant.

Boris Feldman, Wilson, Sonsini, Goodrich & Rosati, P.C., Palo Alto, CA (Nina F. Locker, Keith E. Eggleton, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA, and Max D. Wheeler, Stephen J. Hill, Snow, Christensen & Martineau, Salt Lake City, UT, with him on the briefs), for Defendants-Appellees.

Before EBEL, KELLY, and BRISCOE, Circuit Judges.

EBEL, Circuit Judge.

Plaintiff-Appellant Brad Grossman brought this putative shareholder class action in the District of Utah based on alleged statements by Novell, Inc. ("Novell"), a Utah-based company and leading provider of computer network operating software, and by some of its officers, regarding Novell's merger with WordPerfect Corp. ("WordPerfect"), another Utah company and the producer of a leading word processing application. Grossman alleged violations of §§ 10(b) and 20(a) of the Securities Exchange Act and common law fraud arising out of a seven percent decline in the price of Novell stock after the company announced disappointing earnings for the third quarter of its 1994 fiscal year. The District Court granted Novell's motion to dismiss, ruling that Plaintiff had failed to allege a materially misleading statement or omission, that Novell had disclosed the risks of the merger, and that Plaintiff had not pled fraud with sufficient particularity. Additionally, the district court denied Plaintiff's request to amend his complaint pursuant to Fed.R.Civ.P. 15(a). Plaintiff now appeals pursuant to 28 U.S.C. § 1291. We affirm.


This case concerns statements made by defendants, Novell, Inc. and several of its present and past officers and directors, 1 relating to the merger between Novell and WordPerfect and the effect of the merger on Novell's business prospects. Novell, a public company headquartered in Provo, Utah, was the world's leading provider of network operating software. In March 1994, Novell announced it would acquire and merge with WordPerfect, a privately held company based in Orem, Utah. WordPerfect developed and sold software applications, including a leading word processing program. To complete the WordPerfect merger, Novell issued stock, which it exchanged for the outstanding WordPerfect shares. In connection with the issuance of this stock, Novell filed a registration statement with the Securities and Exchange Commission ("SEC") on April 22, 1994, and filed three amendments to the registration statement in June 1994. During this same time Novell purchased the Quattro Pro spreadsheet program from Borland, Inc. for approximately $145 million in cash.

The registration statement included a warning that the integration of Novell and WordPerfect could be difficult due to intense competition in WordPerfect's market sector and the company's declining financial performance, and cautioned that Novell's earnings and stock price could fluctuate in the quarters following the merger. The registration statement further cautioned that the acquisitions of WordPerfect and Quattro Pro could be difficult because they were large acquisitions in new markets where Novell did not have management or marketing experience. The registration statement warned that no assurance could be given that the various businesses could be successfully integrated. Also, the dominant competition expected from Microsoft was stressed. In addition, Novell warned that the merger and acquisition would lead to higher expenditures in sales, marketing and support, and higher other costs. Novell predicted that its future earnings and stock prices could be subject to "significant volatility, particularly on a quarterly basis" and warned that WordPerfect's market was "characterized by severe competitive pressure" that could "materially adversely affect Novell." 2

In the first amendment to the registration statement, which was filed on June 10, 1994, Novell amended its pro forma financial statements to reflect that WordPerfect's first quarter results were significantly worse than projected, and that if the merger had been completed by the end of the second quarter, Novell's net income per share would have been diluted by $.09 per share. This amendment, as well as the later amendments filed on June 20 and June 23, 1994, reiterated the warnings included in the initial registration statement. In addition, further disclosures were made. For example, the June 10 amendment to the Registration Statement advised that "disruptions associated with the merger and the acquisition of Quattro Pro have resulted in declines in sales of Quattro Pro in recent periods." Also, significant deteriorations in the sales and profitability of WordPerfect were disclosed.

The merger was completed on June 24, 1994, five weeks before the end of the third quarter. On August 19, 1994, Novell announced that its consolidated third quarter earnings would fall between 15 and 20 percent below estimates previously published by financial analysts, and that the company would recognize a $120 million charge against earnings for the quarter. 3 The next business day, August 22, 1994, Novell's stock price fell from $15.12 per share to $14 per share, a 7% drop.

Following the decline in the Novell stock price, Grossman, a Novell shareholder, brought this action, seeking to certify a class of all purchasers of Novell stock during the period between April 27, 1994, and August 19, 1994 (the "Class Period"). The central allegation in the complaint is that beginning on April 27, 1994, Novell issued a series of false and misleading statements and omissions of material fact to the press and to financial analysts regarding the effect of the merger on Novell's then existing operations and near term earnings potential. Significantly, Grossman does not claim false or misleading statements in the registration statement or amendments thereto. The allegedly false and misleading statements and omissions to the press allegedly inflated the price of Novell stock during the period. The specific statements alleged by Grossman to have been false and misleading are the following:

(1) a statement by defendant Wise on April 27, 1994, that there were "indications" that WordPerfect was "gaining market share ... from less than 20% in 1992 to more than 40% today" and that "the combination wouldn't dilute future earnings;" (2) a statement by defendant Frankenberg, on June 27, 1994, that Novell had experienced substantial success in the integration of the sales forces and operations of WordPerfect and that the merger process had been moving "faster than we thought it would;" Frankenberg also stated in the same June 27, 1994, publication that "we have not slowed down the effort to create new products, we've accelerated it" and that he believed there was "a compelling set of opportunities" available to the new Novell;

(3) Rietveld's statement on June 28, 1994, that the merger had been "perhaps the smoothest of mergers in recent history;"

(4) Frankenberg's statement on June 28, 1994, that "he was pleased with the accelerating pace of product development since the acquisition was completed in March;" and,

(5) Novell's statement on July 20, 1994, that "[b]y moving rapidly to a fully integrated sales force, we are leveraging our combined knowledge of the expanding scope of network solutions," ... "Novell expects that network applications will quickly reshape customer expectations and expand the role of our channel partners in supporting end-user network solutions."

Grossman argues not only that these statements were misleading, but that they gave rise to a duty on behalf of Novell to disclose that WordPerfect had continued to experience declines in sales and revenues and increases in expenses; that it had expended excessive amounts on its new spreadsheet research and development; that it would be required to take $120 million in charges against third quarter earnings; and that earnings projections for the third quarter of 1994 published by market analysts would not be achieved.

These statements and omissions were alleged to have given rise to three causes of action: (1) violation of § 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; (2) violation of Exchange Act § 20(a), 15 U.S.C. § 78t(a); and (3) common law fraud. Grossman alleges that this series of misstatements and omissions created a "fraud on the market" which both falsely inflated Novell's stock price and gave rise to a duty to disclose accurate third quarter earnings projections.

According to Grossman, financial analysts were initially pessimistic about the near-term benefits of the WordPerfect merger, leading to a 25% decline in the value of Novell stock in the weeks prior to the Class Period. However, because of the statements, various analysts upgraded their evaluation of Novell to "buy." Additionally, by falsely inflating the price of Novell stock, defendants were able to ensure the merger would be completed, and that 90% of shareholders would vote to approve the merger, thus enabling Novell to use the Pooling Method in accounting for the merger. Finally, the fraud allegedly enabled defendants to raise capital by inducing option holders to exercise their stock options. The fraud was allegedly exposed on August 19, 1994, when Novell announced its third quarter earnings.

In response to the complaint, Defendants filed a motion to dismiss under ...

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