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March 24, 2000


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.

I. Legal Standard

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 Cir. 1996).

II. Background

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.

On April 5, 1999, MediaOne filed a Proxy Statement pursuant to section 14(a) of the Exchange Act. Id. ¶ 65. Although the April 5 Proxy Statement discussed the proposed Comcast merger, it made no reference to the March 25 and March 31 letters. Id. ¶ 66. Nor did the Proxy Statement disclose the Directors' release of Hostetter from the 1996 standstill restriction. Id.

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. ΒΆ 41. Similar to the original complaint, ...

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