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Morrison v. Eminence Capital, LLC

United States District Court, S.D. New York

March 1, 2017


          OPINION & ORDER

          RONNIE ABRAMS, United States District Judge.

         Plaintiff Larry Morrison brings this action under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") against Defendants Eminence Capital[1], John Doe, and Tailored Brands, Inc. ("Tailored Brands"). Defendants now move for dismissal under Federal Rules of Civil Procedure 9(b), 12(b)(1), and 12(b)(6). Because Plaintiff has failed to state a claim under Section 16(b), the Court grants Defendants' motion and dismisses the action.[2]


         Plaintiff and Eminence Capital are former shareholders of The Men's Wearhouse, Inc. ("Men's Wearhouse"), a retailer specializing in menswear. See Am. Compl. ¶¶ 2, 3, 12, 17, 29-33, Ex. A. On September 8, 2013, Jos. A. Bank Clothiers, Inc. ("JOSB"), one of Men's Wearhouse's competitors, publicly expressed an interest in acquiring Men's Wearhouse at a price of $48 per share. Id. ¶¶ 10, 17. Men's Wearhouse rejected JOSB's proposal as inadequate on October 9, 2013. Id. ¶ 11. On November 7, 2013, Eminence Capital filed a Schedule 13D with the Securities and Exchange Commission (the "SEC"), which, among other things, disclosed Eminence Capital's status as the beneficial owner of 4, 684, 200 shares of Men's Wearhouse's common stock-roughly 9.8% of the shares outstanding at the time. Id. ¶ 12(a). The Schedule 13D also disclosed that Eminence Capital had sent a letter to the board of directors of Men's Wearhouse (the "MW Board") expressing disappointment with the MW Board's response to JOSB's proposal and exhorting the MW Board to enter into a "dialogue" with JOSB regarding a possible merger. Id. ¶ 12(a)-(b). On November 15, 2013, JOSB announced that it was terminating its offer to purchase Men's Wearhouse. Id. ¶ 13.

         Eminence Capital continued to campaign for a merger and pressure the MW Board. On November 15, 2013, Eminence Capital announced that it had filed a preliminary solicitation statement (the "Proxy Solicitation") with the SEC seeking to call a special meeting of Men's Wearhouse shareholders to vote on bylaw amendments that would allow shareholders to remove directors without cause before the next annual shareholder meeting. Id. ¶ 14. On November 20, 2013, Eminence Capital announced the release of a presentation that purported to describe "why [the MW Board] should engage in merger discussions with [JOSB]." Id. ¶ 15. During the same period, Eminence Capital also appears to have made a demand to inspect Men's Wearhouse's stockholder list and books and records. See Id. ¶ 25(a).

         The MW Board eventually acquiesced and tendered an offer to purchase JOSB at a price of $55 per share on November 26, 2013. Id. ¶ 18. JOSB rejected this initial bid and, in response, Men's Wearhouse raised its bid to $57.50 per share on January 6, 2014. Id. ¶ 20. One week later, Eminence Capital filed an action in the Delaware Court of Chancery against the board of directors of JOSB, claiming that the JOSB board had breached its fiduciary duty by failing to negotiate with Men's Wearhouse in good faith. See Id. ¶ 22.

         On February 24, 2014, Men's Wearhouse increased the tender offer price to $63.50 per share, and announced a willingness to further increase the price to $65 per share. Id. ¶ 23. According to the Amended Complaint, this new offer was induced by a Standstill Agreement entered into by Eminence Capital and Men's Wearhouse. Id. ¶ 24. In exchange for Men's Wearhouse's increased bid, the Standstill Agreement provided, among other things, that Eminence Capital would withdraw the Proxy Solicitation and cease its efforts to pressure the MW Board. See Id. ¶ 25(a). The Standstill Agreement also provided that Eminence Capital would vote its shares of common stock in accordance with the recommendation of the MW Board. Id. Plaintiff alleges that the Standstill Agreement "reflected a formal or informal understanding between Eminence [Capital] . . . and the members of the [MW Board], " which formed "a group within the meaning of Section 13(d) of the Exchange Act for the purpose of voting [Men's Wearhouse's] common stock." Id. ¶ 25(b). The alleged group's collective stake in Men's Wearhouse exceeded 10% of Men's Wearhouse's outstanding shares. Id. According to Plaintiff, the Standstill Agreement was operative from February 24, 2014 through at least July 1, 2015. See Id. ¶ 26.[3]

         On December 16, 2014, Eminence Capital is alleged to have purchased a total of 1, 125, 000 shares of Men's Wearhouse's common stock for an average price of $41.88 per share, thus becoming the beneficial owner of 11.8% of the outstanding shares. See Id. ¶¶ 29, 31.[4] According to the Amended Complaint, Eminence Capital made the following sales of Men's Wearhouse stock during the same general period: (1) a December 1, 2014 sale of 43, 842 shares at $46.72 per share; (2) an April 27, 2015 sale of 9, 446 shares at $57.14 per share; (3) a May 7, 2015 sale of 11, 234 shares at $57.78 per share; (4) a May 26, 2015 sale of 5, 843 shares at $58.29 per share; and (5) a June 5, 2015 sale of 1, 047, 097 shares at $57.97 per share. Id. ¶ 32. Plaintiff alleges that Eminence Capital realized approximately $17.4 million in profits from these sales, all of which occurred within six months of the December 16, 2014 purchase of shares. Id. ¶¶ 32-33.

         On December 11, 2015, Plaintiff sent a letter to Men's Wearhouse demanding that it pursue a Section 16(b) claim against Eminence Capital. See Id. ¶ 35, Ex. A. After a series of communications between Plaintiff, Men's Wearhouse, and Eminence Capital, Men's Wearhouse declined to sue. See Id. ¶¶ 36-44. On January 26, 2016, the MW Board approved an Agreement and Plan of Merger (the "Reorganization") to reorganize Men's Wearhouse into a wholly-owned subsidiary of Tailored Brands. Id. ¶ 3(b)-(d). The Reorganization took place on January 31, 2016 in the form of a stock-for-stock swap-i.e., each outstanding share of common stock in Men's Wearhouse was converted into one share in Tailored Brands. Id. ¶ 3(b). As a result of the Reorganization, Plaintiff was no longer a shareholder of Men's Wearhouse and became a shareholder of its parent, Tailored Brands. Id. ¶ 2. Plaintiff filed this action on May 5, 2016.


         To survive a motion to dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation marks omitted). While the Court must accept as true "all of the factual allegations in the complaint, " it may disregard "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Id. A claim is plausible when the plaintiff "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.


         Section 16 of the Exchange Act imposes certain requirements and prohibitions on a statutorily defined set of persons, commonly known as statutory insiders. See generally 15 U.S.C. § 78p. A statutory insider is one "who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security) which is registered pursuant to [15 U.S.C. § 78/], or who is a director or an officer of the issuer of such security." Id. § 78p(a)(1). Statutory insiders are prohibited under Section 16(b) from realizing profits from the purchase and sale of securities of the issuer within any given six-month period-i.e., "short-swing profits." Id. § 78p(b). Specifically, Section 16(b) states that:

For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) or a security-based swap agreement involving any such equity security within any period of less than six months, unless such security or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such ...

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