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Stein v. Almost Family, Inc.

United States District Court, W.D. Kentucky, Louisville

March 21, 2018

LEONARD STEIN, Individually and on Behalf of All Others Similarly Situated PLAINTIFF
v.
ALMOST FAMILY, INC., et al., DEFENDANTS

          MEMORANDUM OPINION & ORDER

          Thomas B. Russell, Senior Judge United States District Court.

         This matter comes before the Court upon Motion by Plaintiff Leonard Stein, (“Plaintiff”), to preliminarily enjoin the stockholder vote on the proposed acquisition, (“Proposed Merger”), of Almost Family, Inc. by a subsidiary of LHC Group, Inc. [DN 3.] Defendants have responded, [1][DN 48], and Plaintiff has replied. [DN 51.] Further, a hearing was conducted in this matter on March 19, 2018.[2] This matter is ripe for adjudication and, for the following reasons, IT IS HEREBY ORDERED that Plaintiff's Motion [DN 3] is DENIED.

         I. Background

         A.

         “Almost Family is a provider of home health nursing, rehabilitation and personal care services, with over 340 locations in 26 states.” [DN 1, at 7.] On November 15, 2017, the Board of Directors for Almost Family “caused the Company to enter into an agreement and plan of merger…with a subsidiary of LHC Group, Inc. (“LHC”). Pursuant to [its] terms…, [Almost Family's] shareholders will receive 0.9150 shares of LHC common stock for each share of Almost Family they own.” [DN 4, at 7.] According to Plaintiff's Complaint, this “represent[s] approximately $2.4 billion in implied transaction value.” [DN 1, at 2.] Pursuant to a press release laid out in Plaintiff's Complaint, “[u]pon closing of the transaction, LHC…shareholders will own 58.5% and Almost Family shareholders will own 41.5% of the combined company, ” and the “combined company will continue to trade on NASDAQ under the ticker symbol, ‘LHCG.'” [Id. at 7-8.] In their Response to the instant Motion, Defendants contend that the transaction will “represent[] a premium of 15.6% to Almost Family stockholders.” [DN 48, at 8.]

         “On December 21, 2017, in order to convince Almost Family shareholders to vote in favor of the Proposed Merger, the Board authorized the filing of a…Form S-4 Registration Statement (the “S-4”) with the Securities and Exchange Commission (“SEC”)….” [DN 1, at 2.] In his Complaint, Plaintiff alleges that the Registration Statement was “materially incomplete and misleading, ” and that it therefore violated Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934 (the “Securities Exchange Act”). [Id. at 1-2.] It is further Plaintiff's contention that “[t]he materially incomplete and misleading S-4 independently violates both Regulation G (17 C.F.R. § 244.100) and SEC Rule 14a-9 (17 C.F.R. § 240.14a-9), each of which constitutes a violation of Section 14(a) and 20(a) of the Exchange Act.” [Id. at 2.]

         According to Plaintiff, “[t]he Merger Consideration appears inadequate in light of…[Almost Family's] recent financial performance and prospects for future growth.” [Id. at 8-9.] As an example, Plaintiff notes that Almost Family “has reported positive sales growth since 2013 and positive gross income growth since 2014, with double-digit gross income growth in 2016….” [Id. at 9.] Additionally, Almost Family's Earnings Before Interest, Taxes, Depreciation, and Amortization, (“EBITDA”), “has increased by double-digits since 2014.” [Id.] In Plaintiff's view, then, “Almost Family is well-positioned for financial growth, and…the Merger Consideration fails to adequately compensate…[Almost Family's] shareholders.” [Id.]

         B.

         “A Form S-4 is a Registration Statement filed with the SEC when a company is issuing shares of its stock in connection with a business combination transaction, such as an acquisition or a merger.” In re World Access, Inc., 310 F.Supp.2d 1281, 1294 n.7 (N.D.Ga. 2004). The Form S-4 “combines the disclosure requirements applicable to registrations under the Securities Act of 1933 with the requirements applicable to proxy statements of information statements under the Securities Exchange Act.” 69 Am. Jur. 2d Securities Regulation § 263 (2018). As explained in American Jurisprudence Securities Regulation, “[t]he types of transactions to which SEC Form S-4 relate include those generally requiring shareholder action at the corporate level. In these types of transactions, a decision is required to be made on what is in substance a new investment, i.e., whether to accept a new or different security in exchange for existing securities held by shareholders.” Id.[3]

         “On December 21, 2017, the Defendants caused the S-4 [in question] to be filed with the SEC in connection with the Proposed Merger.” [DN 1, at 9.] According to Plaintiff, “[t]he S-4 solicits [Almost Family's] shareholders to vote in favor of the Proposed Merger.” However, Plaintiff alleges that “the S-4 misrepresents and/or omits material information that is necessary for [Almost Family's] shareholders to make an informed decision concerning whether to vote in favor of the Proposed Merger, in violation of Sections 14(a) and 20(a) of the [Securities] Exchange Act.” [Id.] At base, Plaintiff argues that “[t]he S-4 fails to provide material information concerning [Almost Family's] financial projections, which [he contends] were developed by the company's management and relied upon by the Board in recommending that the shareholders vote in favor of the Proposed Merger, ” and that the S-4 “also fails to provide material information concerning LHC's financial projections which were distributed by Almost Family's management to its shareholders in connection with the Proposed Merger.” [Id. at 9-10.] “These financial projections were relied upon by [Almost Family's] financial advisor, Guggenheim, in rendering its fairness opinion.” [Id. at 10.]

         In his three-count Complaint, filed January 23, 2018, Plaintiff alleges claims of (1) violations of Section 14(a) of the Securities Exchange Act and 17 C.F.R. § 244.100 against all Defendants; (2) violations of Section 14(a) of the Securities Exchange Act and Rule 14a-9 against all Defendants; and (3) violations of Section 20(a) of the Securities Exchange Act against all Defendants individually. [See generally id.] By way of relief, Plaintiff seeks the certification of this matter as a class action with Plaintiff himself as Class Representative, an injunction preventing the shareholder vote on the Proposed Merger of Almost Family and LHC unless adequate information is disclosed, an accounting to Plaintiff and to his proposed class, an award of costs and disbursements to Plaintiff including attorney fees, and any other relief this Court would deem to be proper. [Id. at 22-23.]

         C.

         As a final piece of background information, the Court makes note of the fact that, in the instant Motion for Preliminary Injunction, the memorandum in support thereof, the Response, and the Reply, there are inconsistent references to the “Registration Statement, ” as well as the “Definitive Proxy.” These, of course, are separate documents. As Almost Family notes in its Response, “Plaintiff claims that ‘the Amended Registration Statement did not address the disclosure violations which are the basis for this Motion for Preliminary Injunction' and apparently has chosen to refer to all of these filings simply as the ‘Registration Statement.'” [DN 48, at 9 n.2 (quoting DN 4, at 7 n.1).] Thus, Almost Family used the term “Registration Statement” “in reference to the definitive proxy” in its Response. [Id.] Thereafter, in the Reply, Plaintiff makes specific references to the “Proxy” as the Definitive Proxy, “filed by Defendants on February 13, 2018, ” [DN 51, at 7 n.6], as well as to the Registration Statement. Irrespective of these inconsistencies, the substantive arguments from both sides are clear. For the sake of clarity though, the Court will refer to the documents collectively as the Registration Documents, and will differentiate between the two documents where necessary.

         II. Legal Standard

         “A preliminary injunction is an extraordinary remedy which should be granted only if the movant carries his or her burden of proving that the circumstances clearly demand it.” Overstreet v. Lexington-Fayette Urban Cnty. Gov't, 305 F.3d 566, 573 (6th Cir. 2002). In reaching a decision as to whether a preliminary injunction should be granted, there are four factors of particular import: “(1) the likelihood of the plaintiff's success on the merits; (2) whether the injunction will save the plaintiff from irreparable injury; (3) whether the injunction would harm others; and (4) whether the public interest would be served.” Int'l Longshoremen's Ass'n, AFL-CIO, Loc. Union No. 1937 v. Norfolk S. Corp., 927 F.2d 900, 903 (6th Cir. 1991). The Court examines each factor separately and balances them, “mak[ing] specific findings concerning each of the four factors, unless fewer are dispositive of the issue.” Id.

         In examining the first two factors, the Sixth Circuit has held that “the probability of success that must be demonstrated is inversely proportional to the amount of irreparable injury the movant[] will suffer absent the stay.” Ne. Ohio Coal. for Homeless and Serv. Emp. Int'l Union, Local 1199 v. Blackwell, 467 F.3d 999, 1009 (6th Cir. 2006) (citing Michigan Coal. of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150, 153 (6th Cir. 1991)). Notably though, “the proof required for the plaintiff to obtain a preliminary injunction is much more stringent than the proof required to survive a summary judgment motion.” Leary v. Daeschner, 228 F.3d 729, 739 (6th Cir. 2000).

         III. Discussion

         The impetus of Plaintiff's claim is that (1) the Registration Documents omit information required by Regulation G to be included, and (2) that the Registration Documents omit “material” information, as that term is defined and explained by the Supreme Court in TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). [See generally DN 4.] According to Plaintiff, such material omissions manifest themselves in two key places in the Registration Documents: (1) Almost Family's financial projections, and (2) the financial analysis performed by Almost Family's financial advisor, Guggenheim. [Id.]

         With respect to the alleged omission in Almost Family's financial projections, Plaintiff argues that the Registration Documents do not “provid[e] any information that would permit reconciliation of” the non-GAAP[4] metrics utilized in the Registration Statement with actual GAAP metrics. The two non-GAAP financial projection equations at issue are:

(1) Adjusted EBITDA less non-controlling interest, commonly referred to as “Adjusted EBITDA - (NCI);” and
(2) Adjusted EBITDA less NCI plus stock-based compensation, commonly referred to as “Adjusted EBITDA - (NCI) ...

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