The opinion of the court was delivered by: Scheindlin, District Judge.
This is an uncertified securities fraud class action brought by
plaintiff Richard L. Kalnit against MediaOne Group Inc.
("MediaOne") and its eleven directors.*fn1 Plaintiff alleges
that defendants violated section 10(b) of the Securities Exchange
Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule
10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, by
fraudulently failing to disclose material information in
connection with a proposed merger between MediaOne and Comcast
Corporation ("Comcast"). Plaintiff and the purported class
members seek money
damages claiming that, as a result of defendants' alleged fraud,
they sold shares of MediaOne at an artificially deflated price.
Plaintiff filed his original class action complaint on May 6,
1999. On October 7, defendants moved to dismiss the original
complaint pursuant to Federal Rules of Civil Procedure 12(b)(6)
and 9(b) and the Private Securities Litigation Reform Act of 1995
("PSLRA"), 15 U.S.C. § 78u-4. By opinion dated December 22, this
Court granted defendants' motion in its entirety, finding that
plaintiff failed to adequately allege the required element of
scienter. See Kalnit v. Eichler, 85 F. Supp.2d 232 (S.D.N Y
1999). Dismissal was granted with leave to amend. See id.
On January 13, 2000, plaintiff filed an amended class action
complaint ("Amended Complaint"). Defendants now move to dismiss
the Amended Complaint contending that plaintiff's allegations of
scienter are still inadequate to sustain a claim for relief under
the federal securities laws. For the reasons that follow,
defendants' motion is granted in its entirety.
Defendants' motion to dismiss the Amended Complaint, like its
motion to dismiss the original complaint, is brought pursuant to
Rule 12(b)(6), for failure to state a claim upon which relief may
be granted, and Rule 9(b) and the PSLRA, for failure to plead
fraud with particularity.
Dismissal of a complaint for failure to state a claim pursuant
to Rule 12(b)(6) is proper only where "it appears beyond doubt
that the plaintiff can prove no set of facts in support of his
claim that would entitle him to relief." Harris v. City of
N Y, 186 F.3d 243, 247 (2d Cir. 1999). "The task of the court
in ruling on a Rule 12(b)(6) motion is merely to assess the legal
feasibility of the complaint, not to assay the weight of the
evidence which might be offered in support thereof." Cooper v.
Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (internal quotations
omitted). Thus, to properly rule on such a motion, the court must
accept as true all material facts alleged in the complaint and
draw all reasonable inferences in the nonmovant's favor. See
Harris, 186 F.3d at 247. Nevertheless, "[a] complaint which
consists of conclusory allegations unsupported by factual
assertions fails even the liberal standard of Rule 12(b)(6)." De
Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996)
(internal quotations omitted). In deciding a Rule 12(b)(6)
motion, the district court must limit itself to facts stated in
the complaint, documents attached to the complaint as exhibits or
documents incorporated in the complaint by reference. See
Dangler v. New York City Off Track Betting Corp., 193 F.3d 130,
138 (2d Cir. 1999). However, in securities fraud actions, the
court "may review and consider public disclosure documents
required by law to be and which actually have been filed with the
SEC. . . ." Cortec Indus., Inc. v. Sum Holding L.P.,
949 F.2d 42, 47 (2d Cir. 1991).
Rule 9(b) sets forth additional pleading requirements with
respect to allegations of fraud. Rule 9(b) requires that "[i]n
all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity." But, under
Rule 9(b), "[m]alice, intent, knowledge and other condition of
mind of a person may be averred generally."
Securities fraud actions are subject to the requirements of
Rule 9(b). See Shields v. Citytrust Bancorp, Inc.,
25 F.3d 1124, 1127 (2d Cir. 1994). However, the PSLRA heightened that
Rule's requirement for pleading scienter. See
15 U.S.C. § 78u-4(b)(3)(A); see also Press v. Chemical Inv. Servs. Corp.,
166 F.3d 529, 537-38 (2d Cir. 1999). As a result, in securities
fraud actions, scienter may not be averred generally. Rather,
plaintiffs must "state with particularity facts giving rise to a
strong inference that the defendant acted with the required state
of mind." Press, 166 F.3d at 538 (quoting
15 U.S.C. § 78u4(b)(3)(A));
see also Chill v. General Elec. Co., 101 F.3d 263, 268-69 (2d
A. Factual Background*fn2
The facts set forth below are taken from the Amended Complaint.
They are presumed true for purposes of this motion.
MediaOne is a Delaware corporation that provides
telecommunications services. Amended Complaint ¶ 29. In 1996,
MediaOne purchased a company called Continental Cablevision
("Continental"). Id. ¶ 49. As part of its acquisition of
Continental, MediaOne entered into a publicly-disclosed
shareholder's agreement with Continental's co-founder, Amos
Hostetter. Id. This agreement included a "standstill
restriction" which limited Hostetter's ability to propose mergers
involving MediaOne. Id. At all relevant times, Hostetter owned
approximately 56.32 million MediaOne shares (or 9.33% of all
outstanding MediaOne shares). Id. ¶ 50.
On March 22, 1999, MediaOne announced that it had entered into
a definitive merger agreement with Comcast whereby Comcast would
acquire MediaOne for approximately $48 billion in an all-stock
deal ("Comcast Agreement"). Id. ¶ 51. The Comcast Agreement
called for each MediaOne shareholder to receive 1.1 shares of
Comcast Class A Special Common Stock, or $80.16 per share. See
id. ¶ 2; MediaOne 3/22/99 Form 8-K, Ex. B to 2/28/00 Affidavit
of Dennis Block ("Block Aff."), at 99.1.
Under the Comcast Agreement, MediaOne had forty-five days
within which to accept a superior proposal, subject to the
payment of a $1.5 billion termination fee to Comcast. Id. ¶ 55.
The Comcast Agreement also included a "No Shop" provision which
prohibited MediaOne and its Directors from soliciting competing
merger proposals. Id. ¶¶ 52-53. The No Shop provision, set
forth in section 6.03 of the Comcast Agreement, stated:
From the date hereof until the termination hereof,
MediaOne will not, and will cause the MediaOne
Subsidiaries and the officers, directors, employees,
investment bankers, attorneys, accountants,
consultants or other agents or advisors of MediaOne
and the MediaOne Subsidiaries not to, directly or
indirectly: (i) take any action to solicit, initiate,
facilitate or encourage the submission of any
Acquisition Proposal; and (ii) other than in the
ordinary course of business and not related to an
Acquisition Proposal, engage in any discussions or
negotiations with, or disclose any non-public
information relating to MediaOne or any MediaOne
Subsidiary or afford access to the properties, books
or records of MediaOne or any MediaOne Subsidiary to,
any Person who is known by MediaOne to be considering
making[,] or has made, an Acquisition proposal.
Id. ¶ 52. Thus, although MediaOne could accept a superior
proposal within forty-five days of the scheduled closing of the
MediaOne/Comcast merger, it could not directly or indirectly
solicit such proposals. Section 10.1 of the Comcast Agreement
permitted Comcast to terminate the proposed merger in the event
MediaOne breached its No Shop obligations. Id. ¶ 54.
On March 25, 1999, Hostetter sent a letter to the Directors
sharply criticizing the terms of the Comcast Agreement and
seeking to be released from the 1996 standstill restriction so
that he could pursue and develop a superior merger proposal.
Id. ¶ 57. The text of Hostetter's March 25 letter reads in
pertinent part as follows:
It appears that the proposed acquisition of MediaOne
by Comcast will result in the Roberts family, with
less than a 1% economic interest in the combined
companies, controlling more than 80% of all voting
power. Because MediaOne stockholders would give up
voting stock for non-voting stock in an entity
controlled by the Roberts family, this transaction
constitutes a sale of control with the result that
your duty is to maximize the price for
stockholders, who under the proposed transaction
will lose any further opportunity to realize a
control premium for their shares.
As best I can determine, you have failed to secure
any protections to assure MediaOne stockholder
participation in any subsequent sale of control;
those in control of Comcast could turn around after
the proposed merger and auction off their voting
control of MediaOne or the combined entity at a huge
premium. . . .
In addition, the proposed sale of control at an
uncollared value has been advantaged prematurely and
excessively by defensive deal protections such as the
no solicitation provisions and the $1.5 billion
termination fee payable to Comcast. These might have
been sustainable as post-auction measures if needed
to preserve maximized value, but they are entirely
inappropriate as pre-auction measures, given their
deterrent effect on other offers and the
dollar-for-dollar reduction in benefit to
stockholders if a topping offer were to be made.
I am advised that, as the Delaware Supreme Court
stated in its Revlon decision and reiterated in its
Paramount/QVC ruling, once you took steps to sell
control of MediaOne and to protect that sale rather
than to maximize value for shareholders, all
defensive measures became moot. Your duty was and is
to be especially active and diligent to get the best
price for MediaOne stockholders.
Accordingly, I request that the board of directors
on behalf of the Company agree that any and all
standstill restrictions in the Shareholders Agreement
dated February 27, 1996 . . . are now null and void
and of no further effect, and that the board on
behalf of the Company consent to the waiver of all
such terms in order to permit me to publicly express
my view that this sale of control is inadvisable and
work with others to develop a superior proposal. I am
prepared to enter into a confidentiality agreement
with the Company on terms no less favorable to the
Company than those previously agreed to by Comcast.
Although time is limited, I believe that you have
a duty under these circumstances to permit me to seek
superior value and terms. . . .
Id. ¶ 57 (quoting text of 3/25/99 letter from Hostetter to
Directors) (emphasis added).
Defendant Eichler, MediaOne's President, Legal Counsel and
Secretary, responded to Hostetter's request on behalf of the
Directors in a letter dated March 31, 1999. Id. ¶¶ 31, 63. In
their March 31 letter, the Directors agreed to release Hostetter
from the 1996 standstill restriction. Id. ¶ 63. The Directors
also acknowledged and accepted Hostetter's agreement "`not to
make any public announcement of [his] efforts to develop a
superior proposal without the Directors' written consent, and to
respond with `no comment' if a press inquiry is made.'" Id.
(quoting 3/31/99 letter from Eichler to Hostetter). Following his
release from the standstill restriction, Hostetter immediately
entered into discussions with third parties regarding the
acquisition of MediaOne. Id. ¶ 69.
Plaintiff sold 1,820 shares of MediaOne stock at $65 7/16 per
share on April 16, 1999. Id. 68. On April 22, AT & T
Corporation ("AT & T") publicly proposed an acquisition of
MediaOne for approximately $58 billion; the AT & T proposal was
$9 billion more than the Comcast proposal. Id. ¶ 70. That same
day, Hostetter filed a Schedule 13D with the Securities and
Exchange Commission disclosing the March 25 and March 31 letters.
Id. ¶ 71. The Schedule 13D also states that the AT & T merger
proposal was a direct result of Hostetter's efforts to procure a
superior offer for MediaOne. Id. ¶ 72.
On April 22, the date of both the AT & T announcement and the
disclosure of the Hostetter letters, MediaOne's stock was valued
at $69.50 per share. Id. ¶ 74. The following day, April 23,
MediaOne's stock closed at $77.375 per share. Id. Four days
later, on April 27, MediaOne's stock closed at $81.8125 per
share. Id. ¶ 75.
On May 1, the individual defendants unanimously agreed to
terminate the Comcast Agreement and to accept the AT & T
proposal. Id. ¶ 76. Because of its decision to accept a
superior offer, MediaOne was obligated to pay Comcast $1.5
billion. Id. ¶ 77. In addition, AT & T and Comcast reached a
separate agreement pursuant to which Comcast agreed not to
interfere with the AT & T/MediaOne merger in exchange for certain
valuable cable properties. Id. ¶ 78. MediaOne officially
terminated the Comcast Agreement on May 6, the same day Kalnit
filed his original class action complaint. Id. ¶ 80.
B. Allegations of the Amended Complaint
The original complaint asserted violations of section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder. I
dismissed the original complaint because plaintiff failed to
sufficiently allege a required element of securities fraud,
namely that defendants acted with scienter.*fn3 On January 13,
2000, plaintiff filed the Amended Complaint. In the Amended
Complaint, plaintiff seeks to represent a class of persons who
sold MediaOne shares between March 31 and April 22, 1999. Id. ¶
41. Similar to the original complaint, ...