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Laborers' Local 231 Pension Fund v. Pharmerica Corp.

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

September 23, 2019

LABORERS’ LOCAL #231 PENSION FUND and DANIEL RIORDAN, Individually and on Behalf of All Others Similarly Situated, Plaintiffs


          Rebecca Grady Jennings, District Judge, United States District Court Judge.

         This matter is before the Court on two motions to dismiss. The first is filed by PharMerica Corporation and Kohlberg Kravis Roberts & Co. L.P. [DE 55]. The second is filed by PharMerica’s Board of Directors, Frank E. Collins, W. Robert Dahl, Jr, Marjorie W. Dorr, Patrick G. Lepore, Geoffrey G. Meyers, Robert A. Oakley, Gregory S. Weishar (collectively, the “Board of Directors”). [DE 56]. Plaintiffs, Laborer’s Local #231 Pension Fund and Daniel Riordan, on behalf of himself and those similarly situation, responded and request oral argument. [DE 59]. These issues have been extensively briefed. Thus, the Court finds oral argument unnecessary. Plaintiffs’ request for oral argument is DENIED, and for the reasons below, both motions to dismiss, [DE 55, 56], are GRANTED.

         I. BACKGROUND

         Plaintiffs, Laborer’s Local #231 Pension Fund and Daniel Riordan, were both shareholders of the PharMerica Corporation (“PharMerica” or the “Company”) before affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and Walgreen Boots Alliance, Inc. (“Walgreens”) acquired the Company through a cash-out merger. [DE 1, Complaint at 1, ¶1; 7, ¶23]. Plaintiffs bring this putative class action lawsuit, against PharMerica and its Board of Directors, KKR, and Walgreens, under the Securities Exchange Act Section 14(a) and SEC Rule 14a-9 promulgated thereunder alleging that the Proxy Statement (the “Proxy”) contained both affirmative material misleading statements and material omissions. [Id. at 35–37]. Plaintiffs also seek to hold PharMerica’s Board of Directors, KKR, and Walgreens, liable as control persons under the Securities Exchange Act Section 20(a). [Id. at 37–39].

         A. PharMerica’s Acquisitional Growth

         PharMerica was a publicly traded Fortune 1000 company. [Id. at 10, ¶44]. It was the second largest institutional pharmacy company in the United States. [Id.] PharMerica’s headquarters was in Louisville, Kentucky. [Id. at 7, ¶24]. PharMerica had a three-part growth plan. [Id. at 28, ¶135]. One of those parts was growth through acquisitions. [Id.]. PharMerica had successfully grown through acquisition before the merger and made many public statements about its intent to continue to grow in this way, including in its SEC filings. [Id. 10–20].

         B. Bank of America Merrill Lynch (“BAML”) and UBS Securities LLC (“UBS”) Facilitate PharMerica’s Merger with KKR and Walgreens

         PharMerica engaged BAML and UBS to explore potential business combinations and act as financial advisors. [Id. at 21, ¶95]. In January 2016, BAML and UBS began discussing with KKR and Walgreens the potential acquisition of PharMerica. [Id.]. Both BAML and UBS had previous relationships with KKR and Walgreens. [Id. at 21–23]. BAML earned roughly $74 million in fees from KKR and roughly $49 million in fees from Walgreens in the two years before the merger. [Id. at 21, ¶97]. Similarly, UBS earned roughly $125 million in fees from KKR and Walgreens in the two years before the merger. [Id. at 22, ¶103]. Both BAML and USB stood to earn far less money from the merger than the money they had earned from their relationships with KKR and Walgreens. [Id. at 22, ¶98; 23, ¶104].

         Along with their previous relationship, BAML also had an ongoing relationship with KKR and Walgreens during the merger. [Id. at 22, ¶99]. For example, a senior member of the BAML team working on the merger was also a member of the coverage team for Walgreens and a member of the financial advisory team advising Walgreens on other acquisitions. [Id. at 22, ¶100].

         On September 14, 2016, KKR and Walgreens submitted a tentative proposal to purchase PharMerica in a cash-out merger for $28.75 per share. [Id. at 24, ¶111]. Upon, receiving price feedback from UBS, KKR, and Walgreens orally increased their price to $29.25 per share on September 19, 2016. [Id. at 24, ¶¶112-13]. On April 27, 2017, KKR and Walgreens formalized the $29.25 per share offer. [Id. at 24, ¶117].

         Throughout the sales process PharMerica’s management periodically prepared financial forecasts for the Company (the “Projections”). [Id. at 29, ¶138]. Projections were created in 2015, April 2016, September 2016, April 2017, and July 2017. [Id. at 24, ¶119]. The Projections- except the July 2017 Projections-contained two scenarios: one scenario assumed future acquisitions, and one scenario assumed no future acquisitions. [Id.]. The July 2017 Projections, however, contained only the scenario assuming no future acquisitions. [Id.; Id. at 25, ¶125]. The July 2017 Projections included a footnote stating that they excluded acquisitions. [Id. at 27, ¶131].

         On August 1, 2017, PharMerica’s Board of Directors met with UBS and BAML to review the formal offer from KKR and Walgreens. [Id. at 26, ¶126]. While PharMerica included all five sets of projections in its Proxy statement, the Company only approved the July 2017 Projections for UBS and BAML to use for their fairness opinions. [Id. at 28, ¶132]. Based on the July 2017 Projections and other provided information, BAML and UBS issued fairness opinions, which stated that the $29.25 per share price was fair from a financial standpoint. [Id. at 26, ¶126]. Relying in part upon these fairness opinions, the Directors determined that the merger was “fair to and in the best interests” of the Company’s stockholders and voted to approve the merger and executed the Merger Agreement. [Id. at 26, ¶127].

         C. The Proxy

         On October 3, 2017, Defendants published the Proxy. [Id. at 27, ¶130]. Two lawsuits were filed, one of which alleged that “the Preliminary Proxy did not disclose sufficient information relating to (i) PharMerica’s financial projections, (ii) the analysis underlying UBS’s and BAML’s fairness opinions, and (iii) the potential conflicts of interest of PharMerica’s management” and another that “added allegations related to UBS’s potential conflicts of interest.” [DE 55, Def. Mot. to Dismiss, at 381]. On October 27, 2017, Defendants supplemented the Proxy. [Id. at 384]. After the additional disclosures, plaintiffs in the two lawsuits dismissed the suits. [Id.]. The approximately 100-page Proxy recommends that shareholders vote for adopting the Merger Agreement and states that the contemplated merger is “fair to and in the best interests of the Company and its Shareholders.” [DE 55-2, Proxy Statement, at 408]. The Proxy also states that the $29.25 per share price is fair to and in the best interest of PharMerica stockholders. [Id. at 444–45].

         1. The Projections

         The Proxy contains summaries of all five sets of projections. [Id. at 462–63]. It also discloses that the July 2017 Projections excluded acquisitions. [Id. at 463]. The Proxy also states that the financial advisors relied on the July 2017 Projections in their evaluation of the merger and the formation of their fairness opinions. [Id.]. Finally, the Proxy contains a long disclaimer stating that stockholders should not rely on the Projections as suggesting the occurrence of future events, and that the Projections may not be accurate. [Id. at 461].

         2. Conflicts of Interest

         The Proxy disclosed information about each financial advisor’s relationship with KKR and Walgreens and stated that those relationships were disclosed to the PharMerica Board of Directors before voting on the merger. [Id. at 454, 459–60]. The Proxy disclosed that UBS had provided services to, and received compensation from, Walgreens and KKR, respectively, on other matters and occasions, including multi-billion-dollar transactions. [Id. at 454]. The Proxy also stated that UBS collected $125 million in fees from KKR and Walgreens combined in roughly the past two years. [Id.]. Similarly, the Proxy stated that BAML had collected about $74 million from KKR and $49 million from Walgreens in fees over the past two years. [Id. at 460]. The Proxy also disclosed that members of the BAML team advising PharMerica had also worked for or sought to work for KKR and Walgreens. [Id. at 443]. Finally, the Proxy states that, with the aid of its outside counsel, the PharMerica Board of Directors specifically evaluated UBS’s and BAML’s potential conflicts of interest and determined that those potential conflicts would not prevent BAML and UBS from properly advising PharMerica about the merger. [Id. at 437–38, 445].

         Along with disclosing the potential conflicts described above, the Proxy also disclosed that during the merger process, KKR and Walgreens had discussions with PharMerica’s executive officers. [Id. at 472]. The Proxy states that those discussions involved post-merger employment and retention agreements. [Id.]. The Proxy also states that these discussions were disclosed to the Board prior to the Board’s approval of the merger. [Id. at 443].

         3. The SEC Filings

         The Proxy incorporates by reference PharMerica’s SEC filings, including PharMerica’s 10-K filed on February 24, 2017 and PharMerica’s 10-Q filed on August 2, 2017. [Id. at 510]. The Proxy provided the stockholders with instructions on how to access these documents. [Id.]. The 2017 10-K states that PharMerica’s growth plan includes acquisitional growth. [DE 55-6, 2017 10-K, at 781, 808].

         II. STANDARD

         In considering a motion to dismiss, the Court must accept as true all factual allegations set forth in the complaint and make all reasonable inferences in favor of the non-moving party. Davis v. Prison Health Servs., 679 F.3d 433, 440 (6th Cir. 2012). To survive a motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Traverse Bay Area Intermediate Sch. Dist. v. Mich. Dep’t of Educ., 615 F.3d 622, 627 (6th Cir. 2010) (internal quotation marks omitted) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A claim becomes plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). A complaint will be dismissed “if no law supports the claim made, if the facts alleged are insufficient to state a claim, or if the face of the complaint presents an insurmountable bar to relief.” Southfield Educ. Ass’n v. Southfield Bd. of Educ., 570 Fed.Appx. 485, 487 (6th Cir. 2014) (citing Twombly, 550 U.S. at 561–64).

         Claims alleging that misleading statements have violated securities laws are subjected to a heightened pleading standard under the Private Securities Litigation Reform Act (the “PSLRA”). 15 U.S.C. § 78u-4(b)(1); see Kugelman v. PVF Capital Corp., 972 F.Supp.2d 993, 999 (N.D. Ohio 2013). Such complaints “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.” 15 U.S.C.A. § 78u-4(b)(1). The purpose of this heightened pleading standard is “to curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, (2007).


         PharMerica and KKR, move to dismiss the claims against them, arguing that Plaintiffs’ Section 14(a) claims should be dismissed for three reasons. First, Plaintiffs fail to identify a materially false or misleading statement or omission contained in or left out of the Proxy. [DE 55 at 388–96]. Second, Plaintiffs fails to allege scienter. [Id. at 396–98]. Third, Plaintiffs fail to sufficiently plead loss causation. [Id. at 398–99]. Arguing that there is no underlying Section 14(a) violation and that Plaintiffs fail to allege adequate control, KKR and also move to dismiss Plaintiffs’ Section 20(a) claims. [Id. at 399–401].

         The Individual Defendants filed a separate motion to dismiss in which they incorporate by reference PharMerica’s and KKR’s arguments described above, [DE 56 at 1215] and offered additional arguments on scienter [id. at 1216–19] and control person liability [id. at 1219–22]. As the Section 20(a) claims depend on the Section 14(a) claims, the Court will start with Section 14(a).

         A. Plaintiffs’ Section 14(a) Claim

         The Securities Exchange Act Section 14(a) grants the SEC power to promulgate rules and regulations for soliciting proxies with respect to any registered security. 15 U.S.C. § 78n(a). It also makes it unlawful to solicit any proxy in contravention of those rules and regulations. Id. “The purpose of § 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation, ” and provides a private right of action. J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). SEC Rule 14a-9 prohibits soliciting a proxy through materially false or misleading statements or omissions. 17 C.F.R. § 240.14a-9. A Section 14(a) claim for an SEC Rule 14a-9 violation has four basic elements: (i) the proxy statement contains a material misrepresentation or omission; (ii) defendants were at least negligent;[1] (iii) the misrepresentations or omissions caused plaintiffs alleged loss; and (iv) the proxy statement was an essential link in the completion of the transaction. Smith v. Robbins & Myers, Inc., 969 F.Supp.2d 850, 868 (S.D. Ohio 2013) (quoting Lane v. Page, 727 F.Supp.2d 1214, 1227–28 (D.N.M. 2010)).

         A misrepresentation or omission is material when there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. TSC Indus., Inc. v. Northway, Inc.,426 U.S. 438, 449 (1976). In other words, the fact at issue must significantly alter the “total mix” of information in the proxy statement. Id. Whether a statement ...

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