The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge
Plaintiffs Hammerstone NV, Inc., LWP1, Inc., James Lissette on behalf of his IRA and his children Weston Lissette and Emerson Lissette, Hannah W. Lissette on behalf of her IRA, Matrix Capital Group, Stephen J. Shapiro, Assent, LLC, and Denk, Inc. (collectively "Plaintiffs") were shareholders in Constar International Inc. ("Constar"), a PET packaging manufacturer. They bring this action against senior executives at Constar, defendants Michael J. Hoffman ("Hoffman") and Walter S. Sobon ("Sobon") (collectively "Defendants"), for alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act"), and Rule 10b-5 promulgated thereunder, section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and for common law fraud. Plaintiffs claim that Defendants defrauded shareholders by misleading them about Constar's financial health, and with regard to an agreement on a plan to restructure Constar's capital structure by converting debt to equity through a pre-planned bankruptcy. Defendants moved to dismiss the Amended Complaint for failure to state a claim. Fed.R.Civ.P. 12(b)(6). For the reasons that follow, Defendants' motion is GRANTED and Plaintiffs' amended complaint is DISMISSED.
Parties and Events Relevant to the Action
Plaintiffs are all former shareholders of Constar who purchased stock between October 28, 2008, and December 29, 2008. Am. Compl. ("AC") ¶¶ 5-12. Constar is a Delaware corporation with its principal place of business in Philadelphia. AC ¶ 13. The corporation manufactures and sells polyethylene terephthalate ("PET") packaging products, i.e. the plastic bottles for soft drinks, condiments, and other groceries. AC ¶ 17. Constar was a publicly-traded company during the relevant time period. See AC ¶ 18; Constar International Inc., Annual Report (Form 10-K), at 3 (Mar. 31, 2008). Hoffman was Chief Executive Officer and President of Constar*fn2 and Sobon was Chief Financial Officer and Executive Vice President throughout the period in question. AC ¶¶ 14-16.
In 2008, Constar disclosed that it had serious financial difficulties with its business operations and capital structure. See AC ¶ 18. A May 15, 2008 quarterly report indicated that Constar was "highly leveraged," with around $400 million in outstanding long-term debt and only around $33 million in outstanding common stock as of March 31, 2008. See Quarterly Report (Form 10-Q), at 3 (May 15, 2008) ("May 15 10-Q") (indicating 12,717 million outstanding shares); Decl. of Robert J. Jossen in Supp. of Defs.' Mot. to Dismiss ("Jossen Decl."), Ex. C (historical prices of Constar stock, January-December 2008, indicating $2.62 per share closing price on March 31). Constar also suffered net losses over the previous three years, with a net loss of $7.5 million for that quarter. May 15 10-Q at 8, 10. Pepsi, the soft drink manufacturer, accounted for approximately 35% of Constar's 2007 revenue, and their contract was set to expire by the end of the year. Id. Constar issued similar warnings about the financial well-being of the company in August 2008: the company was still significantly leveraged, indicated that its unit volume had declined by over 20% due to movement towards self- manufacturing by water bottlers and other externalities, and predicted that this shift and the related "pricing pressure" would continue for the foreseeable future. Quarterly Report (Form 10-Q), at 30-31 (August 14, 2008). Constar was in the process of re-negotiating the Pepsi contract, but believed it would be at "significantly lower volumes" and "will result in lower sales." Id. On October 16, 2008, Constar issued a press release that confirmed a renewed contract with Pepsi. AC ¶ 19. The release stated, among other things, that the contract would be for less volume than the previous one, and that Constar's Board of Directors had approved a cost-saving restructuring plan in conjunction with the new contract that would close or reduce operations at certain facilities. Current Report (Form 8-K) (Oct. 16, 2008). It also stated, "Based upon the Company's current estimates, the Company believes that the impact of the New Agreement, when combined with the annual cash overhead savings from the restructuring plan, will result in higher cash flows from operating activities, net of investing activities as compared to those realized from the Pepsi cold fill business in 2008." Id.
Due to the imbalance between the company's debt and equity, as well as the other financial concerns, at some point in the latter half of 2008 Constar entered negotiations with its bondholders to consider a potential debt for equity conversion. See AC ¶¶ 20-21. On November 14, 2008, the company issued a quarterly report that stated:
The Company is currently engaged in preliminary discussions with holders of a majority of the Company's Subordinated Notes regarding a potential debt-for-equity exchange.If completed, such exchange will cause substantial dilution to, or the cancellation of, currently outstanding Common Stock.One potential outcome of these discussions could be a pre-arranged Chapter 11 filing in which subordinated notes would be converted to equity and all other creditors would be unimpaired.There can be no assurance that the Company's discussions with the holders of Subordinated Notes will result in this or any transaction.
AC ¶ 26; Quarterly Report (Form 10-Q) (Nov. 14, 2008). On the same day, Defendants participated in a conference call, and both made reference to the potential debt for equity exchange. AC ¶ 25. Hoffman stated that "[s]everal holders of our $175 million unsecured notes have expressed the desire to meet with management with an interest in a debt for equity swap" and noted that Constar hired a financial advisor to help evaluate the proposal, while Sobon stated "we are currently in discussion with more than a majority of the holders of our $175 million unsecured debt regarding a potential debt for equity swap." See AC ¶ 25; Jossen Decl., Ex. H (Constar Third Quarter Earnings Conference Call Transcript, Nov. 14, 2008). On December 12, 2008, Constar filed a "Bondholders Presentation" with the SEC that included bullet points on "the proposed debt to equity exchange" and a management recommendation for "the proposal for an unimpaired, pre-arranged debt for equity swap." See AC ¶ 31; Current Report (Form 8-K), Ex. 99.1 (Constar Bondholder's [sic] Presentation, Dec. 9, 2008). Finally, on December 30, 2008, Constar issued a press release that announced it had reached an agreement with the holders of a "majority in principal amount of the Company's Subordinated Notes regarding a debt-for-equity exchange." Jossen Decl., Ex. J (Constar Press Release, Dec. 30, 2008); see also AC ¶ 32. The exchange would be done through a pre-arranged Chapter 11 bankruptcy filing and, most critical to this action, the existing equity would be canceled out entirely in favor of the new equity provided to the converting bondholders. Id.
Allegations of Material Omissions and Misstatements
Precisely how and when Constar came to the debt-for-equity agreement and the decision to cancel existing equity is the primary source of this dispute. Plaintiffs' basic argument is that, by October 2008, Defendants already agreed to one particular debt for equity restructuring plan that would cancel out the equity of existing shareholders rather than dilute their value. As a result, they "had a duty to disclose their plans as a material event on or prior to October 28, 2008 in order to avoid making a prior public statement misleading." AC ¶ 1. The allegedly misleading "prior public statement" is the October 16, 2008 Constar press release regarding the new contract with Pepsi. "Plainly, any optimism garnered by the agreement with Pepsi and the restructuring of manufacturing facilities," Plaintiffs argue, "is misleading if equity holders were to be cancelled as of 2009." AC ¶ 24. Plaintiffs also allege that, since Defendants knew of the plan to cancel out the existing equity, the failure to disclose this plan until December 30, 2008 also made the November 14 and December 9 statements misleading. AC ¶¶ 27, 31. In other words, the statements about a "potential" plan and the different possible effects on existing equity were misleading because Defendants already had a deal in place, and therefore knew before November that there was no option of either a cancellation or dilution of equity, or any ongoing discussions about how to treat existing equity. As such, "[Defendants]'s statements intentionally or recklessly lulled plaintiffs into a false sense of security that the equity swap would benefit the entire company, including the current equity holders." AC ¶ 27.
Plaintiffs point to a February 3, 2009 bankruptcy disclosure statement submitted by Constar as evidence of Defendants' knowledge of a single plan by late October. The statement, listed under the header "Events Leading to the Chapter 11 Case" and sub-header "Debtors Begin Development of Proposed Plan" describes the events leading up to the debt for equity exchange as follows:
Constar and its representatives began discussions with certain holders of its Senior Subordinated Notes during October 2008 with respect to possible restructuring alternatives. These discussions led to the formation of an ad hoc committee of holders of the Senior Subordinated Notes (the "Ad Hoc Committee"). Upon information and belief, the members of the Ad Hoc Committee hold, in the aggregate, over 50% of the principal face amount of the Senior Subordinated Notes.The first meeting between Constar (or its representatives) and the Ad Hoc Committee (or its representatives) occurred on October 27, 2008. At that meeting and in subsequent discussions, the parties discussed the conversion of the Senior Subordinated Notes into new equity of Constar. Such a transaction would be highly beneficial to the Debtors as it would significantly de-lever Constar's balance sheet and materially reduces its annual debt service obligations.On or about December 15, 2008, Constar and a majority of the holders of the Senior Subordinated Notes reached an agreement in principle on the terms of a framework for a restructuring whereby Constar and certain of its subsidiaries would file chapter 11 petitions and, simultaneously, a pre-arranged plan of reorganization (a) providing for the conversion of the Senior Subordinated Notes into all of the equity of the reorganized entities, excluding those shares reserved for Constar's management, while (b) leaving the Debtors' trade vendors and the holders of the Senior Secured FRNs unimpaired. While the constituents of the Ad Hoc Committee are not legally bound to support the restructuring plan, the conversion of the Senior Subordinated Notes into equity, the payment of trade vendors in full and the reinstatement of the Senior Secured FRNs has the support of the holders of more than 50 percent of the outstanding Senior Subordinated Notes."
AC ¶ 22; Jossen Decl., Ex. M, at 6-7 (Second Am. Disclosure Statement for the Debtors' Second Am. Joint Plan of Reorganization) (the "Disclosure Statement"). According to Plaintiffs, the statement "refers just to one plan, which is the cancellation of the current equity and the issuance of new equity to the bondholders and management" and that if alternative plans were being considered they also would have been specifically mentioned. AC ¶ 22, 23. As additional evidence that Defendants knew and agreed upon a plan to cancel existing equity, Plaintiffs also allege that Defendants knowingly withheld this information "for the purpose of protecting their bonuses and expected share of equity in the reorganized Constar." AC ¶ 35. They further note that Sobon sold 100,000 shares of common stock on December 12, 2008 at 14 cents a share, allegedly because he already knew that they would be worthless once the plan to cancel the shares was revealed. AC ¶ 37. Plaintiffs' state that they were induced to purchase Constar stock at artificially inflated prices during the period in ...