7th Circuit upholds dismissal of Vectren shareholders’ suit against merger

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A panel of the 7th Circuit Court of Appeals has upheld a district court’s ruling that dismissed a shareholder lawsuit over the acquisition of one of Indiana’s major utility companies with an out-of-state public utility holding company in 2018.

Texas-based CenterPoint Energy, Inc. acquired all of Vectren Corporation’s stock for $72 per share and assumed the Indiana utility giant’s debt. But several Vectren shareholders sued for alleged violations of Securities Exchange Act of 1934, arguing that Vectren’s proxy statement failed to forecast cash flow projections from 2018 through 2027, in violation of Securities and Exchange Commission rules.

U.S. District Judge Richard L. Young in September 2019 turned away the shareholder lawsuit, likening the case to elementary school math requirements of “showing your work.” Young penned in his dismissal that the shareholders had not sufficiently alleged that the omissions “actually caused the harm for which they seek damages.”

The 7th Circuit agreed, affirming the district court in a Monday decision.

The court briefly parted ways from Young’s decision in one respect, disagreeing with his conclusion that the shareholder’s affidavit from financial expert M. Travis Keath was irrelevant in determining whether the plaintiffs had stated a claim. Rather, it concluded there was nothing improper in the plaintiffs’ inclusion of the Keath affidavit or their reliance upon it in opposing dismissal.

“While the Keath affidavit generally supports plaintiffs’ position that shareholders would have liked to have more information rather than less, it does not help plaintiffs explain why any shareholder was actually or likely to have been misled by the omission of the two additional metrics in light of all the other information provided to shareholders in the Proxy Statement,” Circuit Judge David Hamilton wrote for the federal appeals court.

Turning to the main issues alleged by the shareholders, the 7th Circuit affirmed that the omitted business segment projections and unlevered cash flow projections were immaterial as a matter of law in light of all the other information disclosed in the proxy statement.

Specifically, it noted the shareholders’ argument that the business segment projections were material because they were a key input in Merrill Lynch’s discounted cash flow analysis missed the point.

“Two indisputable facts make the point,” Hamilton wrote. “First, CenterPoint was offering to acquire Vectren as a whole enterprise: not in individual business segments. Second, plaintiffs owned shares in Vectren as a whole enterprise also: not individual business segments. The proposed merger did not give shareholders the option of selling separate interests in separate business lines.

“Plaintiffs thus failed to allege a substantial likelihood that a reasonable shareholder would have viewed the Business Segment Projections as significantly altering the total mix of available information material to whether to vote for or against the proposed merger.”

The 7th Circuit also found that the shareholders have not plausibly explained why Vectren’s omission of the unlevered cash flow projections rendered the proxy statement materially misleading in light of all the information made available to them.

“Further, plaintiffs, unlike the plaintiff in (Campbell v. Transgenomic, Inc., 916 F.3d 1121 (8th Cir. 2019), do not actually allege that the Consolidated Projections undervalued Vectren or that the company was worth more than the $72 per share paid in the merger. As persuasive as Campbell is on its facts, it is not apposite here,” it wrote.

On the issue of the shareholder’s failure to allege loss causation and its heavy reliance on the Supreme Court’s decision in Mills v. Electric AutoLite Co., 396 U.S. 375, 384– 85 (1970) to show that they made adequate allegations, the 7th Circuit concluded that the plaintiffs’ claim that Merrill Lynch used a flawed discount rate did not cross the line from “possible to plausible.”

Additionally, it found the allegations at most amounted to speculation that if the omitted metrics had been disclosed, they would have been able to determine that the value of their shares exceeded $72.

“Here, plaintiffs do not even allege the existence of a viable superior offer, making their allegations of economic loss even weaker than those in (Beck v. Dobrowski, 559 F.3d 680 (7th Cir. 2009)),” it wrote. “Because plaintiffs did not allege economic loss, the district court correctly determined that they failed to plead loss causation.”

The case is Michael Kuebler v. Vectren Corporation, 19-2973.

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