Pullos v. Akorn, Inc.

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

SHAUN A. HOUSE, individually and on

behalf of all other similarly situated,

Plaintiff, No. 17 C 5018

ROBERT CARLYLE,

Plaintiff, No. 17 C 5022

DEMETRIOS PULLOS, individually and

on behalf of all other similarly

situated,

Plaintiff, No. 17 C 5026

v. Judge Thomas M. Durkin

AKORN, INC.; JOHN N. KAPOOR;

KENNETH S. ABRAMOWITZ; ADRIENNE L.

GRAVES; RONALD M. JOHNSON; STEVEN

J. MEYER; TERRY A. RAPPUHN; BRIAN

TAMBI; and ALAN WEINSTEIN,

Defendants.

MEMORANDUM OPINION AND ORDER

As the Court has recounted in greater detail in previous opinions, Plaintiffs in

these cases sued Akorn and members of its board of directors seeking certain

disclosures regarding a proposed acquisition by Frensenius Kabi AG. See 17 C 5018,

R. 53 (House v. Akorn, Inc., 2018 WL 4579781 (N.D. Ill. Sept. 25, 2018)); 17 C 5016,

R. 81 (Berg v. Akorn, Inc., 2017 WL 5593349 (N.D. Ill. Nov. 21, 2017)). After Akorn

revised its proxy statement and issued a Form 8-K, Plaintiffs dismissed their lawsuits

and settled for attorney’s fees. Shortly thereafter, Theodore Frank, an owner of 1,000

Akorn shares, sought to intervene to object to the attorneys’ fee settlement. The Court

eventually denied Frank’s motion to intervene, but in light of Frank’s arguments,

ordered Defendants to file a brief addressing whether the Court should exercise its

inherent authority to abrogate the settlement agreements under the standard set

forth In re Walgreen Co. Stockholder Litigation, 832 F.3d 718, 725 (7th Cir. 2016).

The Court also invited Frank to file an opposition brief as an amicus curiae, which he

did. The parties then filed reply briefs, and briefs on supplemental authority. The

Court now addresses whether the settlements should be abrogated.

SEC Rule 14a-9 requires disclosure in proxy statements of all “material fact[s]

necessary in order to make the statements therein not false or misleading.” See 17

C.F.R. § 240.14a-9(a). The Supreme Court has held that “[a]n omitted fact is material

if 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, omitted information is material if there is

a substantial likelihood that, under all the circumstances,

the omitted fact would have assumed actual significance in

the deliberations of the reasonable shareholder. Put

another way, there must be a substantial likelihood that

the disclosure of the omitted fact would have been viewed

by the reasonable investor as having significantly altered

the ‘total mix’ of information made available.

Id. Accordingly, “[o]mitted facts are not material simply because they might be

helpful.” Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000); see also TSC

Indus., 426 U.S. at 449 n.10 (noting “the SEC’s view of the proper balance between

the need to insure adequate disclosure and the need to avoid the adverse

consequences of setting too low a threshold for civil liability”); Wieglos v. Com. Ed.

Co., 892 F.2d 509, 517 (7th Cir. 1989) (“Reasonable investors do not want to know

everything that could go wrong, without regard to probabilities; that would clutter

registration documents and obscure important information. Issuers must winnow

things to produce manageable, informative filings.”).

The Seventh Circuit heightened this standard in the context of reviewing

approval of a class settlement of claims for disclosures under Rule 14a-9. See

Walgreen, 832 F.3d at 723-24. Adopting a standard set by the Delaware Court of

Chancery in similar cases, the court held that disclosures must be “plainly material .

. . . mean[ing] that it should not be a close call that the . . . information is material.”

Id. at 725 (quoting In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 894 (Del. Ch.

Ct. 2016)).

Plaintiffs claim that their complaints caused Akorn to make additional

disclosures in the revised proxy and Form 8-K, which in turn precipitated their

settlement. The parties’ briefs focus on whether these additional disclosures are

plainly material justifying the settlement. This would be the appropriate perspective

if the Court was reviewing a class settlement. See Walgreen, 832 F.3d at 724 (“No

class action settlement that yields zero benefits for the class should be approved . . .

.”) (emphasis added). But no class was certified here, nor were any class claims

released in the settlement. Thus, as the Court explained in its previous order, the

case is in the procedural posture suggested by the second half of the sentence from

Walgreen just quoted: “. . . a class action that seeks only worthless benefits for the

class should be dismissed out of hand.” Id. (emphasis added). To determine whether

Plaintiffs’ cases should have been “dismissed out of hand”—in which case the

settlement agreements should be abrogated—the Court must assess whether the

disclosures Plaintiffs’ sought in their complaints—not the disclosures Akorn made

after the complaints were filed in the revised proxy and Form 8-K—are plainly

material.1

1. GAAP Reconciliation

All three plaintiffs sought GAAP reconciliation of the proxy’s projections.2

Plaintiffs argue that such reconciliation was necessary because GAAP is the format

in which “Akorn traditionally disclosed its financial results.” R. 65 at 10. But while

such reconciliation might be helpful, the applicable SEC regulation requiring GAAP

reconciliation does “not apply to . . . a disclosure relating to a proposed business

combination.” 17 C.F.R. § 244.100(d); see also Securities Exchange Commission Discl.

5620589, Question 101.01 (Oct. 17, 2017), available online at:

https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm. Although this

regulation does not directly address materiality, the Court finds it highly persuasive

1 Frank questions whether Plaintiffs could have caused the disclosures because

plaintiffs Carlyle and Pullos filed their complaints after the revised proxy was issued,

and plaintiff House’s complaint was filed only days before. The parties dispute

whether the disclosures contained in the Form 8-K, which was filed after all three

complaints, were necessary to make settlement possible. But since the Court holds

that analysis of the materiality of the disclosures sought is the relevant issue, and

not the materiality of the disclosures actually made, these causation questions are

irrelevant.

2 See 17 C 5018 (House), R. 1 ¶¶ 36, 41; 17 C 5022 (Carlyle), R. 1 ¶ 51; 17 C 5026

(Pullos), R. 1 ¶ 36.

in that regard. Other district courts have reached a similar conclusion. See Assad v.

DigitalGlobe, Inc., 2017 WL 3129700, at *6 (D. Colo. Jul. 21, 2017); Bushansky v.

Remy Intl., Inc., 262 F. Supp. 3d 742, 748 (S.D. Ind. 2017).

Plaintiffs argue that GAAP reconciliation “revealed that the November 2016

Projections assumed steady increases in [Akorn’s] net income consistent with Akorn’s

past performance, while the lowered March 2017 Projections assumed a sudden drop

in Akorn’s near term performance, which was inconsistent with Akorn’s recent

financial performance.” R. 65 at 11. But it is obvious that a lower projection implies

lower net income. Disclosure of a lower projection already constitutes disclosure of

the company’s opinion that the company will earn lower net income. Plaintiffs do not

explain why the specific net income numbers were material to shareholders’ ability

to evaluate the merger. Therefore, the Court finds GAAP reconciliation is not plainly

material.

2. Components of J.P. Morgan’s Analysis

Plaintiffs House and Pullos also sought certain “components” of J.P. Morgan’s

analysis (J.P. Morgan was Akorn’s merger advisor): “(i) the inputs and assumptions

underlying the calculation of the discount rate range of 8.0% to 10.0%; (ii) the range

of terminal values to which the growth rate range was applied; and (iii) the inputs

and assumptions underlying the calculation of the terminal value growth rates.”3

Similarly, Plaintiff Carlyle sought “the basis” for the growth rate J.P. Morgan chose.4

3 See 17 C 5018 (House), R. 1 ¶ 43; 17 C 5026 (Pullos), R. 1 ¶ 43.

4 See 17 C 5022 (Carlyle), R. 1 ¶¶ 49.

But this information was already in the original proxy. As to (i), the proxy states that

the range of 8.0% to 10.0% “was chosen by J.P. Morgan based upon an analysis of the

weighted average costs of capital of the Company.” R. 65-1 at 54 (p. 44). As to (ii), the

proxy states that the range of terminal values was calculated by “applying terminal

value growth rates ranging from 0.0% to 2.0% to the unlevered free cash flows for the

Company during the final year of the ten-year period of the March 2017 Management

Case.” Id. As to (iii), growth rates are simply a choice. Shareholders can evaluate

Akorn’s valuation and merger price by making their own determination of whether a

growth rate range of 0-2% is reasonable in light of the company’s prior performance.

Generally, with respect to data underlying a financial advisor’s opinion, courts find

that only a “fair summary” must be disclosed, meaning that the company “does not

need to provide sufficient data to allow the stockholders to perform their own

independent valuation.” Trulia, 129 A.3d at 901. The data sought by House and

Pullos was not material to evaluating the merger proposal. Carlyle’s more general

demand for “certain internal financial analyses and forecasts prepared by the

management of the Company relating to its business,” is even less material.

3. J.P. Morgan’s Compensation from Akorn

All three plaintiffs sought disclosures regarding J.P. Morgan’s compensation

from Akorn and Fresenius. As to J.P. Morgan’s “specific compensation figures,”5

Akorn disclosed that information in the original proxy:

5 17 C 5018 (House), R. 1 ¶ 45; 17 C 5022 (Carlyle), R. 1 ¶ 56; 17 C 5026 (Pullos), R.

¶ 44; see also 17 C 5022 (Carlyle), R. 1 ¶ 54.

J.P. Morgan received a fee from the Company of $3 million,

paid upon the public announcement of the merger, which

will be credited against any Services Fee (as defined

below). For services rendered in connection with the

merger, the Company has agreed to pay J.P. Morgan an

additional fee equal to 1.0% of the total amount of cash paid

to the Company’s common stockholders . . . immediately

prior to the consummation of the merger (the “Service

Fee”), which in this case amounts to approximately $47

million.

R. 65-1 at 55 (p. 45). Plaintiffs argue that this quote is taken out of context and does

not specifically indicate whether the fee is contingent on the consummation of the

merger. See R. 65 at 14 & n. 13. The Court has reviewed the context of this quote and

finds that it does not change its meaning. The amount of potential compensation ($47

million) is abundantly clear.

The revised proxy added language expressly stating that J.P. Morgan’s fee was

“contingent and payable upon the closing of the merger.” R. 85-2 (17 C 5016) at 22 (p.

45). But Plaintiffs did not seek this information in their complaint. And in any case,

although the fact that J.P. Morgan’s fee is contingent on consummation was not

expressly stated in the original proxy, such an arrangement is certainly customary,

and can be inferred from the fact that the amount of the fee will ultimately be

measured only “immediately prior to consummation” and is defined as a percentage

of the amount to be paid in the transaction. Even if Plaintiff had sought this

information in their complaint, it is not plainly material.

4. J.P. Morgan’s Compensation from Fresenius

Although Plaintiffs do not address it in their current briefing, they also sought

disclosure of “the exact amount of money J.P. Morgan received and may continue to

receive from [Fresenius] while acting as Akorn’s financial advisor.”6 The Court finds

the exact historical payments are not material. See Bushansky, 262 F. Supp. 3d at

753 (“Additionally, Plaintiffs have not presented any evidence or case law

establishing that the inclusion of historical fees in similar situations is material.”).

And the proxy does not indicate that J.P. Morgan was “continuing” to receive

payments from Fresenius in any event.

5. “Upside” of the “Stand-Alone Strategic Plan”

Plaintiff Carlyle sought four additional disclosures not sought by Plaintiffs

House or Pullos. First, Carlyle sought the following disclosure:

The Proxy also refers to “the potential upside in the

Company’s stand-alone strategic plan,” which the Board

purportedly considered in determining to recommend

approval of the Proposed Transaction. Proxy at 39. Yet, the

Proxy fails to disclose any further information concerning

that “stand-alone strategic plan” or its “potential upside”

or exactly why the Board determined it would be in the best

interest of the Company and its shareholders to pursue

potential strategic alternatives rather than a stand-alone

strategic plan.

17 C 5022, R. 1 ¶ 46; see also id. ¶ 45. It is apparent from context that “stand-alone”

means Akorn not merging with another company. The “upside” of that scenario is also

readily apparent, in that avoiding merger means avoiding the costs and the

relinquishment of control inherent to the merger. The proxy explains that the Board

believed “that the Company’s stand-alone strategic plan involved significant risks in

light of the industry and competitive pressures the Company was facing and the

6 See 17 C 5018 (House), R. 1 ¶ 46; 17 C 5022 (Carlyle), R. 1 ¶ 55; 17 C 5026 (Pullos),

R. 1 ¶ 46.

Board’s concerns with respect to the risks relating to the Company’s ability to execute

on its strategic plan including the possibility that the strategic plan may not produce

the intended results on the targeted timing or at all.” R. 65-1 at 47 (p. 37). Although

the proxy does not detail what “industry risks” and “competitive pressures” the

company faced, it is sufficient for the Board to express such concerns generally.

Moreover, the Board translated those concerns into financial projections that were

provided in the proxy. While it may have been helpful or interesting for shareholders

to learn greater detail about how management perceived the industry landscape, such

information was not necessary for shareholders to evaluate the merger. Furthermore,

Carlyle settled the case without receiving this information. That fact casts significant

doubt on whether this information was truly material.

6. “Substance” of the March 2017 Projections

Carlyle also sought disclosure of “complete information concerning the

substance of the March 2017 [projections] or the assumptions, analysis, projections,

or conclusions reflected therein,” 17 C 5022, R. 1 ¶ 48, and the “financial analyses

and forecasts” J.P. Morgan reviewed, id. ¶ 50. But “completeness” is not the standard.

See Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002)

(“incomplete” statements are not necessarily “misleading”). Further, there is

presumably a great deal of information underlying the March 2017 projection on

which the proxies rely. Carlyle does not identify what information in particular was

necessary for shareholders to be able to evaluate the merger. And again, Carlyle

settled without receiving this information, casting doubt on its materiality.

7. Other Potential Buyers

Carlyle contends that the proxy should have detailed the other potential

buyers the Board considered and why the Board determined that “it was highly

unlikely that any of those counterparties would be interested in an acquisition of the

Company at that time due to competing strategic priorities and recent acquisitions

in the industry.” 17 C 5022, R. 1 ¶¶ 58-59. But this statement speaks for itself

regarding why the Board rejected other companies in the industry as potential

buyers. And as Carlyle notes, the proxy gives much greater detail regarding the one

other company (“Company E”) Akorn actually considered. Detailed information about

potential buyers Akorn did not actually consider is not material.

8. Pending Litigation

Finally, Plaintiff Pullos alleges that “the Board may be using the Proposed

Merger as a vehicle to salvage their professional reputations and potentially absolve

themselves of liability arising from federal securities and related derivative litigation

currently pending in the Northern District of Illinois.” 17 C 5026, R. 1 ¶ 47. Pullos

claims that the proxy improperly “fails to disclose whether these lawsuits were

discussed by the Board and whether the Board took them into account when deciding

to undertake the sales process and enter into the Merger Agreement.” Id. But the

lawsuits were public record prior to issuance of the original proxy, and Pullos’s

allegation that the Board had ulterior motives for the merger related to the lawsuits

is unfounded and does not seek “information” relevant to the merger. To the extent

the Board might have had ulterior motives, that is not information that is

“disclosable” in the sense required here. The proxy in its entirety is a refutation of

Pullos’s allegation in that the proxy gives reasons unrelated to the lawsuits for

supporting the merger. Pullos’s unfounded speculation about the Board’s motives

does not constitute an information request. And similar to Carlyle’s claims, the fact

that Pullos settled without provision of information related to this claim indicates

that it was not material.

Conclusion

Therefore, the Court finds that the disclosures sought in the three complaints

at issue were not “plainly material” and were worthless to the shareholders. Yet,

Plaintiffs’ attorneys were rewarded for suggesting immaterial changes to the proxy

statement. Akorn paid Plaintiffs’ attorney’s fees to avoid the nuisance of ultimately

frivolous lawsuits disrupting the transaction with Frensenius. The settlements

provided Akorn’s shareholders nothing of value, and instead caused the company in

which they hold an interest to lose money. The quick settlements obviously took place

in an effort to avoid the judicial review this decision imposes. This is the “racket”

described in Walgreen, which stands the purpose of Rule 23’s class mechanism on its

head; this sharp practice “must end.” 832 F.3d at 724.

Plaintiffs’ cases should have been “dismissed out of hand.” See id. at 724. Since

the Court failed to take that action, the Court exercises its inherent authority to

rectify the injustice that occurred as a result. See Dale M., ex rel. Alice M. v. Bd. of

Educ. of Bradley-Bourbonnais High Sch. Dist. No. 307, 282 F.3d 984, 986 (7th Cir.

2002). The settlement agreements are abrogated and the Court orders Plaintiffs’

counsel to return to Akorn the attorney’s fees provided by the settlement agreements.

Plaintiffs’ counsel should file a status report by July 8, 2019 certifying that the fees

have been returned.

ENTERED:

Amis. 0 Bushey

Honorable Thomas M. Durkin

United States District Judge

Dated: June 24, 2019

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