Tse v. Ventana Med. Systems, Inc.

• Decision Date: 22 November 2000
• Docket Number: No. Civ.A. 97-37-GMS.,Civ.A. 97-37-GMS.
• Citation: 123 F.Supp.2d 213
• Parties: Alex TSE, et al., Plaintiffs, v. VENTANA MEDICAL SYSTEMS, INC., et al., Defendants.
• Court: U.S. District Court — District of Delaware

123 F.Supp.2d 213

Alex TSE, et al., Plaintiffs, v. VENTANA MEDICAL SYSTEMS, INC., et al., Defendants.

No. Civ.A. 97-37-GMS.

United States District Court, D. Delaware.

November 22, 2000.

COPYRIGHT MATERIAL OMITTED

Joel E. Friedlander, Bouchard Margules & Friedlander, Wilmington, DE, of counsel Emil Hirsch, Freedman, Levy Kroll & Simonds, Washington, DC, for plaintiffs.

Jesse A. Finkelstein, Raymond J. DiCamillo, Richards Layton & Finger, Wilmington, DE, of counsel Steven M. Schatz, David J. Berger, Elizabeth M. Saunders, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA, for defendants.

MEMORANDUM OPINION

SLEET, District Judge.

I. INTRODUCTION

This action arose out of a merger between Ventana Medical Systems, Inc. and Biotek, Inc. The plaintiffs, Alex Tse, Margaret Wai Lam Leung, Michelle Leung, and Ching-Shuang Shih, ("Tse plaintiffs") are former shareholders of Biotek. The defendants are Ventana Medical Systems, Inc., as well as two of its directors, Jack W. Schuler ("Schuler") and John Patience ("Patience"). The plaintiffs filed this action alleging violations of Rule 10b-5 promulgated under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. ("1934 Act"). Presently before the court is Ventana's motion for summary judgment. The court will grant Ventana's motion. Summary judgment is appropriate in this case because the plaintiffs have failed to establish that the defendants' conduct caused them any economic loss, and because the plaintiffs have failed to show that the defendants acted with the requisite scienter.¹

II. STANDARD OF REVIEW

In deciding a motion, the court may grant summary judgment only when the submissions in the record "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(c). An issue of material fact is "genuine" only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." In re Phillips Petroleum Sec. Litigation, 881 F.2d 1236, 1243 (3d Cir.1989); see also Kline v. First W. Gov't Sec., Inc., 24 F.3d 480, 485 (3d Cir.1994). Thus, the party opposing summary judgment cannot simply rest upon mere allegations, but rather must present "significant probative evidence tending to support the complaint." See In re Phillips, 881 F.2d at 1243; Kline, 24 F.3d at 485 (party opposing summary judgment "must do more than simply show that there is some metaphysical doubt as to material facts"). In determining whether there are any issues of material fact, the court must construe the facts and inferences in the light most favorable to the non-moving party. See Securities and Exchange Commission v. Adoni, 60 F.Supp.2d 401, 411 (D.N.J.1999) (citing Carnegie Mellon Univ. v. Schwartz, 105 F.3d 863, 865 (3d Cir.1997)). With these standards in mind, the court turns to a recitation of the relevant facts giving rise to this lawsuit.

III. BACKGROUND

A. Procedural History

Because the parties dispute rulings of a predecessor judge in this matter, the court will briefly describe the relevant procedural history. The plaintiffs filed their original complaint on January 17, 1997. The case was assigned to Judge Joseph J. Longobardi. Six months later it was reassigned to Judge Sue L. Robinson. On November 25, 1997, Judge Robinson denied the defendants' motion to transfer the case to the District of Arizona or the Central District of California. See Tse v. Ventana, No. C.A. 97-37 SLR, 1997 WL 811566 (D.Del. Nov. 25, 1997). Judge Robinson also denied the defendants' motion to dismiss on September 23, 1998. See Tse v. Ventana, No. C.A. 97-37 SLR, 1998 WL 743668 (D.Del. Sept.23, 1998). On September 28, 1998, the case was reassigned to this Judge.

Because the factual background of this litigation has already been discussed in detail in previous opinions, it will be summarized briefly here.

B. Factual Background

The Tse plaintiffs were investors in Biotek Solutions, Inc., ("Biotek"), which agreed to merge with defendant Ventana Medical Systems, Inc. ("Ventana") on January 19, 1996. Up until that time, Ventana and Biotek were competitors in the biomedical technology field. In return for investments made between 1992 and 1995, the Tse plaintiffs received Biotek common stock and Biotek promissory notes. Tse v. Ventana, No. C.A. 97-37 SLR, 1998 WL 743668, at *1 (D.Del. Sept.23, 1998). At the time of the merger, the Tse plaintiffs owned a little over 9% of Biotek stock and promissory notes. Id. at *3. Under the terms of the Merger, Biotek stock would be surrendered without payment, and Biotek promissory notes would be exchanged for convertible debt securities to be issued by Ventana called "Ventana Exchange Notes." Plaintiff's Brief, at 11. The Ventana Exchange Notes were convertible within 30 days of the merger into Ventana common stock at a rate of $5.00 per share. Id.

On January 16, 1996, just three days before the merger agreements were signed, the Ventana board approved in principle a compensation package for directors, Schuler and Patience. On February 23, 1996, the Ventana board officially approved a compensation package that called for Ventana to issue Schuler and Patience 1.75 million shares of Ventana Common Stock at $.60 a share. According to the plaintiffs, the sale of Ventana common stock at $.60 a share was specifically conditioned upon the merger between Ventana and Biotek being completed in accordance with the terms of the agreement reached in January of 1996. Pl's Brf., at 10.

In early February, Biotek's board sent a letter to all holders of Biotek securities soliciting their approval of the planned Merger and explaining the benefits of the merger as well as the risks, if not approved. The Biotek letter also included a joint Ventana/Biotek Information Statement that contained a detailed description of the merger terms. The Merger Agreement and a Plan of Reorganization were included as exhibits to the Information Statement. None of these documents disclosed to Biotek investors information about the Ventana compensation package that had been approved in principle on January 16th. This information was disclosed, however, to Ventana stockholders on February 2, 1996 in a proxy statement for the upcoming annual Ventana shareholders meeting. On February 23, 1996, the Biotek investors voted to approve the merger, which became effective three days later.

The Tse plaintiffs claim that Ventana and its directors, Schuler and Patience, committed securities fraud by 1) failing to disclose information about the compensation package to Biotek investors; and 2) misrepresenting or fraudulently implying that the $5.00 conversion price offered for Ventana Exchange Notes was the fair market value of Ventana stock.

IV. DISCUSSION

The Tse plaintiffs contend that the alleged omissions and misrepresentations regarding the compensation package subject Ventana to liability under section 10(b) of the 1934 Act, which makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security, ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C.A. § 78j(b) (1997). Rule 10b-5, in turn, makes it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading ... in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b). These provisions create a private right of action for plaintiffs to recover damages for "false or misleading statements or omissions of material fact that affect trading on the secondary market." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir.1999); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir.1997).

To state a claim for securities fraud under Rule 10b-5, a plaintiff must demonstrate that a defendant (1) made a misstatement or an omission of a material fact (2) with scienter (3) in connection with the purchase or the sale of a security (4) upon which the plaintiff reasonably relied and (5) that the plaintiff's reliance was the proximate cause of his or her injury. Semerenko v. Cendant Corp., 223 F.3d 165, 174 (3d Cir.2000); see also Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269 (3d Cir.1998) (citing Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 296 (3d Cir.1991)). If the plaintiff fails to allege any of these elements, the court must grant summary judgment in favor of the defendant. See EP Medsystems v. Echocath, 30 F.Supp.2d 726, 743 (D.N.J.1998) (citing In re Donald Trump Sec. Litig., 7 F.3d 357, 368 n. 10 (3d Cir. 1993).

Also, because a Rule 10b-5 claim sounds in fraud, the circumstances constituting the fraud must be stated with particularity. In re Westinghouse Sec. Litig., 90 F.3d 696, 710 (3d Cir.1996). Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). In order to satisfy Rule 9(b), a plaintiff must plead "(1) a specific false representation of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage." In re Westinghouse, 90 F.3d at 710.

A. Alleged Misstatements or Omissions of Material Fact

The Tse plaintiffs claim that Ventana and its directors, Schuler and Patience,² committed securities fraud first, by misrepresenting or fraudulently implying that the $5.00 conversion price offered for Ventana Exchange Notes was the fair market value of Ventana stock; and second, by failing to disclose information about the compensation package to Biotek investors. Each alleged violation...