In re U.S. West, Inc. Securities Litigation

• Decision Date: 02 May 2002
• Docket Number: No. 00-188-RRM.,00-188-RRM.
• Citation: 201 F.Supp.2d 302
• Parties: In re U.S. WEST, INC. SECURITIES LITIGATION
• Court: U.S. District Court — District of Delaware

Page 302

201 F.Supp.2d 302

In re U.S. WEST, INC. SECURITIES LITIGATION

No. 00-188-RRM.

United States District Court, D. Delaware.

May 2, 2002.

Norman M. Monhait, Carmella P. Keener, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware, Robert A. Wallner, U. Seth Ottensoser, Milberg Weiss Bershad Hynes & Lerach LLP, New York, New York, Joseph H. Weiss, Mark D. Smilow, Weiss & Yourman, New York, New York, for plaintiffs.

Anne C. Foster, Richards, Layton & Finger, Wilmington, Delaware, Rory O. Millson, Sandra C. Goldstein, Cravath, Swaine & Moore, New York, New York, for defendants.

MEMORANDUM OPINION

McKELVIE, District Judge.

These are securities class actions arising out the merger of U.S. West, Inc. and Qwest Communications International Inc. Plaintiffs are two classes of shareholders of U.S. West. The defendants are Qwest and its Chief Executive Officer and Chairman, Joseph P. Naccio. Defendant Qwest is a Delaware corporation that provides telecommunications services. Its principal place of business is in Denver, Colorado.

Plaintiffs claim that the defendants made false and misleading statements in a September 17, 1999 Proxy Statement that detailed the terms of the U.S. West — Qwest Merger Agreement and solicited shareholder approval. The Merger Agreement included a "no solicitation" provision limiting the defendants' freedom to entertain third-party bids for Qwest. According to the plaintiffs, the Proxy Statement was false and misleading because it failed to disclose that Qwest and its representatives, including Nacchio, intended to breach the "no solicitation" provision before the merger closed. To support this assertion, plaintiffs cite news reports appearing on March 1, 2000 that Qwest was negotiating a merger with Deutsche Telekom AG, despite Qwest's earlier agreement to merge with U.S. West. Plaintiffs allege that the share price of U.S. West plummeted on the news of the Qwest — Deutsche Telekom negotiations.

The first class of plaintiffs is comprised of shareholders solicited by the Proxy Statement to vote on the proposed merger and who held their shares on March 1, 2000. This class seeks relief pursuant to Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a). The second class of plaintiffs, comprised of shareholders who held their shares on March 1, 2000, assert that the Proxy Statement was a promise to shareholders that the defendants would not breach the Merger Agreement. The second class seeks to recover for that promise on a theory of promissory estoppel.

On January 2, 2002, the defendants moved to dismiss the plaintiffs' Consolidated Amended Complaint for failure to state a claim, pursuant to Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The primary question presented by the defendants' motion is whether a Proxy Statement that discloses the terms of a merger agreement and solicits its approval can be false and misleading if one of the parties, at the time of the Proxy Statement, intended to breach that agreement at a later point.

I. FACTUAL AND PROCEDURAL BACKGROUND

The following facts, which are assumed to be true for purposes of this motion to dismiss, are taken from the plaintiffs' complaint and the Proxy Statement discussed therein.

On July 18, 1999, U.S. West and Qwest announced a proposed Merger Agreement in which U.S. West shareholders would receive Qwest shares valued at $69 for each share of U.S. West. The share price was conditioned upon Qwest's average trading price remaining between $28.26 and $39.90 during a period preceding the closing of the merger. The two companies issued a joint Proxy Statement to their shareholders on September 17, 1999. The Proxy Statement summarized the terms of the merger and attached the Merger Agreement. The shareholders of both companies approved the merger on November 2, 1999.

Page I-40 of the Proxy Statement contained the following disclosure summarizing the "no solicitation" covenant of the Merger Agreement.

NO SOLICITATION. U S WEST and Qwest have agreed that they and their subsidiaries and their officers, directors, employees and advisers will not take action to solicit or encourage an offer for an alternative acquisition transaction involving U S West or Qwest of a nature defined in the merger agreement.

Restricted actions include engaging in any discussions with or furnishing any information to a potential bidder, or knowingly taking any other action designed to facilitate an alternative transaction. Qwest or U S WEST, as the case may be, is permitted to take these actions in response to an unsolicited offer, however, if the unsolicited offer is made prior to the time that the U S WEST or Qwest shareholder approval, as the case may be, is obtained and ....

Consolidated Am. Compl. at ¶ 19. This provision was based upon Section 5.03 of the Merger Agreement, which detailed the limitations on solicitation of, and negotiation with, third parties.

On March 1, 2000, the Bloomberg news service reported that Qwest and Deutsche Telekom were in merger talks. Following that report, Qwest's shares rose $12 13/16 to a closing price of $59 3/16 a share, while U.S. West's shares dropped 8% in price to close at $72 a share. On March 3, 2000, The Denver Post reported that Nacchio made statements explaining how Qwest could break off its merger with U.S. West. According to the report, Nacchio said "[e]very merger can be intervened on; it only costs money." He also allegedly stated "this [merger] is not like at any costs. At the end of the day, I have an obligation to Qwest shareholders to make this deal really worthwhile .... I want the merger to go through, but I'm not going to get blackmailed to do dumb business things to make it go through." On March 8, 2000, Deutsche Telekom announced it had ended negotiations with Qwest. Following the termination of those negotiations, the Wall Street Journal and The Denver Post reported statements by persons opining that Qwest's talks with Deutsche Telekom breached the Merger Agreement with U.S. West.

Plaintiffs filed their first action against Nacchio and Qwest, entitled Mizzaro v. Nacchio, 00-188-RRM, on March 17, 2000. Plaintiffs filed a second action, Brody v. Nacchio, 00-198-RRM, on March 20, 2000. The plaintiffs allege that "had [U.S. West shareholders] known of Nacchio's intent not to abide by and not to be bound by the terms of the Merger Agreement, they would not have voted to approve the Merger." Plaintiffs also allege that they would have "required that the merger consideration be substantially more favorable for U.S. West shareholders than set forth in the Merger Agreement."

In June of 2000, the merger of U.S. West and Qwest closed. With the consent of the parties, the court ordered the two actions consolidated and appointed lead plaintiffs and lead counsel on September 14, 2001. The defendants brought this motion to dismiss on January 2, 2002. This is the court's decision on the defendants' motion.

II. DISCUSSION

A. Legal Standard on Motions to Dismiss

In evaluating the defendants' motion to dismiss the plaintiffs' Consolidated Amended Complaint, the court must "accept as true the allegations in the complaint and its attachments, as well as reasonable inferences construed in the light most favorable to the plaintiffs." U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir.2002). In considering the Consolidated Amended Complaint, the court need not, however, accept unwarranted inferences and legal conclusions set forth in the Complaint. Doug Grant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 183-84 (3d Cir.2000). "In appraising the sufficiency of the complaint [the court] follow[s], of course, the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

Although generally limited to the Complaint and inferences reasonably drawn therefrom, the court may also consider documents integral to the pleadings without converting the motion into one for summary judgment under Rule 56. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir.1997).

B. Does the Pleading Standard of the PSLRA Apply to Plaintiffs' Claims Under § 14(a) of the Securities Exchange Act?

In support of their motion to dismiss, the defendants argue that plaintiffs' complaint fails to allege facts demonstrating an actionable omission in the challenged proxy statement. The defendants charge that the relevant standard for measuring the adequacy of the plaintiffs' complaint is § 21D(b)(1) of the Exchange Act, as modified by the PSLRA, 15 U.S.C. § 78u-4(b)(1), which states:

(1) Misleading statements and omissions In any private action arising under this chapter in which the plaintiff alleges that the defendant —

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

Id. It is uncontested that the plaintiffs' complaint alleges the defendants made an untrue statement of material fact or omitted to state a material fact necessary to make other statements not misleading. Plaintiffs argue, however, that the PSLRA's heightened pleading standard is inapplicable to claims seeking relief based on § 14(a) of the Securities Exchange Act because claims under that provision may be proven under a standard of negligence. See Herskowitz...