Regents of the Univ. of Cal. v. Willis Towers Watson PLC (In re Willis Towers Watson PLC Proxy Litig.)

• Decision Date: 30 August 2019
• Docket Number: No. 18-1874,18-1874
• Parties: IN RE: WILLIS TOWERS WATSON PLC PROXY LITIGATION. Regents of the University of California, on behalf of themselves and all others similarly situated, Plaintiffs - Appellants, v. Willis Towers Watson PLC; Towers Watson & Co.; Willis Group Holding PLC; Valueact Capital Management ; John J. Haley; Dominic Casserley; Jeffrey W. Ubben, Defendants – Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

937 F.3d 297

IN RE: WILLIS TOWERS WATSON PLC PROXY LITIGATION.

Regents of the University of California, on behalf of themselves and all others similarly situated, Plaintiffs - Appellants,

v.Willis Towers Watson PLC; Towers Watson & Co.; Willis Group Holding PLC; Valueact Capital Management ; John J. Haley; Dominic Casserley; Jeffrey W. Ubben, Defendants – Appellees.

No. 18-1874

United States Court of Appeals, Fourth Circuit.

Argued: May 8, 2019

Decided: August 30, 2019

ARGUED: Salvatore J. Graziano, BERNSTEIN, LITOWITZ, BERGER & GROSSMANN LLP, New York, New York, for Appellant. John A. Neuwirth, WEIL, GOTSHAL & MANGES LLP, New York, New York; Richard S. Horvath, Jr., ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP, San Francisco, California, for Appellees. ON BRIEF: John Rizio-Hamilton, Rebecca E. Boon, Julia K. Tebor, BERNSTEIN, LITOWITZ, BERGER & GROSSMANN LLP, New York, New York; Susan R. Podolsky, LAW OFFICES OF SUSAN R. PODOLSKY, Alexandria, Virginia, for Appellant. Edward J. Fuhr, Eric H. Feiler, Johnathon E. Schronce HUNTON ANDREWS KURTH LLP, Richmond, Virginia; Joshua S. Amsel, Amanda K. Pooler, WEIL, GOTSHAL & MANGES LLP, New York, New York, for Appellees Willis Towers Watson PLC, Towers Watson & Co., Willis Group Holding PLC, John J. Haley, and Dominic Casserley.

Before KING, DIAZ, and QUATTLEBAUM, Circuit Judges.

Vacated and remanded by published opinion. Judge Diaz wrote the majority opinion, in which Judge King joined. Judge Quattlebaum wrote a dissenting opinion.

DIAZ, Circuit Judge:

This appeal concerns a securities class action by a putative class of former shareholders in Towers, Watson & Co. The plaintiffs allege that several defendants violated the Securities Exchange Act by omitting material facts in proxy documents, rendering statements in those documents false or misleading. The district court dismissed the complaint because it was time barred or, in the alternative, because it failed to allege that the omitted facts were material. The putative class now appeals.

As explained below, we reject the district court’s grounds for dismissing the complaint. The defendants also present three alternative bases for affirming, but we decline to affirm on any of them. Therefore, we vacate the district court’s judgment and remand for further proceedings.

I.

A.

This case arises from the merger of Towers, Watson & Co. ("Towers") and Willis Group Holdings plc ("Willis") into Willis Towers Watson plc ("WTW"). John Haley and Dominic Casserley, the CEOs of Towers and Willis respectively, began discussions in January 2015 about a merger. Negotiations continued for several months. A major investor in Willis, ValueAct Capital Management, and its CEO Jeffrey Ubben were closely involved in the negotiations. ValueAct—which normally invests in companies for three to five years—had held shares in Willis for five years, and it sought to increase the value of its stake before it sold.

By May 2015, the merging companies agreed that Haley would be the CEO of WTW and Ubben would be a director and serve on the Compensation Committee. The merging companies also agreed that Willis shareholders would own 50.1% of WTW and Towers shareholders would own 49.9% and receive a dividend of $4.87 per share. Thus, Towers shareholders would own a minority of WTW even though Towers was a more valuable company than Willis.

The two companies announced the merger in June 2015. Following the announcement, Towers’ stock price dropped by 8.8% while shares in Willis rose by 3.3%. Several banks, analysts, and financial publications criticized the deal as unfair to Towers. But despite the criticism, Haley did not attempt to renegotiate the terms.

On September 10, 2015 (before a shareholder vote on the proposed merger), Haley met Ubben at a ValueAct conference. At the meeting, Ubben—who, as a future member of WTW’s Compensation Committee, would have influence over executive compensation—discussed a proposed compensation plan with Haley for his service as CEO of the combined company. Under the plan, Haley stood to receive up to $165 million in compensation over three years, depending on WTW’s performance. This represented a more than six-fold raise over the $25 million he stood to make as CEO of Towers. Haley didn’t disclose the pay plan to the Towers directors or shareholders.

A month later, in October 2015, Towers filed a proxy statement with the SEC in anticipation of a shareholder vote on the merger. The proxy stated that the Towers board had considered all conflicts of interest, even though the board wasn’t aware of Haley and Ubben’s discussions about compensation.

After Towers filed the proxy, analysts and investors continued to criticize the merger. One major investor, Driehaus Capital Management, was particularly outspoken in its criticism, raising questions about Haley’s interest in the deal. Haley and the Towers board repeatedly denounced Driehaus (never shying away from profanity) and claimed it had made false accusations against Haley.

Soon after the proxy was filed, two investment advising firms recommended that Towers shareholders vote against the merger. Towers and ValueAct pressed for approval of the merger, but shareholders seemed poised to vote against it. So, Haley approached ValueAct and Willis about renegotiating the merger terms.

According to the plaintiffs, Haley never intended to negotiate the best deal for Towers shareholders. Instead, he sought only the minimum concession necessary to convince Towers shareholders to approve the merger. Haley thought a $10 dividend per share was the minimum Towers shareholders would accept, so he proposed raising the dividend for Towers shareholders from $4.87 per share to $10 per share. ValueAct agreed, and after some negotiation, Willis did too. Haley also agreed that the new company would buy back shares, which would increase share value. ValueAct, which stood to reap substantial benefits from a stock buyback, continued to lobby Towers shareholders to approve the deal.

In November 2015, Towers issued a press release and an update to the proxy statement detailing the revised merger terms. The proxy update said nothing about Haley’s compensation deal or Haley’s alleged choice not to negotiate the best deal for Towers shareholders. The following month, Towers shareholders approved the merger. WTW’s board subsequently initiated share buybacks and crafted a compensation plan for Haley that was substantially similar to what Ubben had proposed before the merger. WTW shareholders approved the compensation plan. Soon after, ValueAct sold its shares in WTW and Ubben resigned from WTW’s board.

B.

Following the merger, a group of Towers shareholders sued Towers in state court to vindicate their statutory appraisal rights. The state court suit proceeded to discovery. Between February and August of 2017, numerous documents and depositions became public. In the plaintiffs’ telling, those documents revealed (for the first time) the material facts of this class action. Armed with the documents from the state court suit, the plaintiffs filed suit in a Virginia federal district court in November 2017.¹

The amended class action complaint alleges two counts under the Securities Exchange Act of 1934. Count I alleges that WTW, Towers, Willis, Haley, and Casserley omitted facts from the proxy documents so as to render statements therein materially false or misleading, in violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9. See 15 U.S.C. § 78n(a) ; 17 C.F.R. § 240.14a-9. Count II alleges that Haley, Ubben, ValueAct, and Casserley are liable under Section 20(a) of the Exchange Act as control persons of the organizations that violated Section 14(a). See 15 U.S.C. § 78t(a).

The district court dismissed the Section 14(a) claim on two alternative grounds. First, the court held that the class complaint was barred by the Exchange Act’s statute of limitations because a reasonable plaintiff would have been on notice of the material facts more than one year before the complaint was filed. Second, it held that the complaint failed to allege that the facts omitted from proxy documents were material. The district court also dismissed the Section 20(a) claim because, without the Section 14(a) claim, the plaintiffs could not prove a required predicate securities violation.

This appeal followed.

II.

We review the dismissal of a complaint under Rule 12(b)(6) de novo. Wag More Dogs, Ltd. Liab. Corp. v. Cozart , 680 F.3d 359, 364 (4th Cir. 2012). We accept all well-pleaded allegations as true and construe the facts in the light most favorable to the plaintiffs. Id. at 364–65. As we explain, we vacate the district court’s dismissal of the complaint and remand for further proceedings.

We begin with the district court’s ruling that the Section 14(a) claim is barred by the statute of limitations.² The Exchange Act only allows Section 14(a) claims "brought within one year after the discovery of the facts constituting the violation and within three years after such violation." 15 U.S.C. § 78i(f). There is no dispute that the November 2017 class action complaint was filed within three years of the violation, which took place in 2015. With respect to the separate one-year "discovery" limitations period, the district court appeared to hold that it began running when the plaintiffs had inquiry notice. Under that standard, the statute of limitations begins running when the plaintiffs have "such knowledge as would put a reasonably prudent purchaser on notice to inquire, so long as that inquiry would reveal the facts on which the claim is ultimately based." Caviness v. Derand Res. Corp. , 983 F.2d 1295, 1303 (4th Cir. 1993).

The parties agree, however, that inquiry notice is the wrong standard. The right standard, in their view, is the Supreme Court’s discovery notice standard from Merck & Co., Inc. v. Reynolds , 559 U.S. 633, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010). In Merck , the Supreme Court construed a different securities law statute of...