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Stadnick v. Lima

United States Court of Appeals, Second Circuit

June 21, 2017

Robby Shawn Stadnick, individually and on behalf of all others similarly situated, Plaintiff-Appellant,
v.
Thomas Lima, individually and on behalf of all others similarly situated, Consolidated Plaintiff, Brennen Hyatt, Plaintiff,
v.
Vivint Solar, Inc., The Blackstone Group L.P., Gregory S. Butterfield, Dana C. Russell, David F. D'Alessandro, Alex J. Dunn, Bruce McEvoy, Todd R. Pedersen, Joseph F. Trustey, Peter F. Wallace, Joseph S. Tibbetts, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC, Barclays Capital Inc., Blackstone Advisory Partners L.P., Defendants-Appellees.

          Argued: August 25, 2016

         Appeal from the United States District Court for the Southern District of New York. No. 14 Cv. 9283 - Katherine B. Forrest, District Judge.

         Plaintiff-Appellant Robby Shawn Stadnick appeals from a judgment of the United States District Court for the Southern District of New York (Forrest, J.) dismissing his securities class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Stadnick's claims arise out of the October 1, 2014 Initial Public Offering ("IPO") for shares of Vivint Solar, Inc., a residential solar energy unit installer. Stadnick principally argues on appeal that Vivint was obligated to disclose financial information for the quarter ending one day before the IPO because Vivint's performance during that quarter constituted an "extreme departure" under Shaw v. Digital Equipment Corp., 82 F.3d 1194 (1st Cir. 1996). He also argues that Vivint misled prospective shareholders regarding the company's opportunities for expansion in Hawaii by failing to disclose the potential impact of the state's evolving regulatory regime. We conclude that the "extreme departure" test of Shaw is not the law of this Circuit and that Vivint's omissions were not material under the test set forth in DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003), to which we adhere. We further conclude that Vivint did not mislead shareholders regarding the company's prospects in Hawaii. We therefore AFFIRM the judgment of the district court.

          Nicholas Ian Porritt (Adam M. Apton on the brief), Levi & Korsinsky LLP, Washington, DC, for Plaintiff-Appellant.

          Jay B. Kasner (Scott D. Musoff on the brief), Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants-Appellees Vivint Solar, Inc., The Blackstone Group L.P., Gregory S. Butterfield, Dana C. Russell, David F. D'Alessandro, Alex J. Dunn, Bruce McEvoy, Todd R. Pedersen, Joseph F. Trustey, Peter F. Wallace & Joseph S. Tibbetts.

          Paul Vizcarrondo, Jr., Carrie M. Reilly & Steven Winter on the brief, Wachtell, Lipton, Rosen & Katz, New York, NY, for Defendants-Appellees Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC, Barclays Capital Inc. & Blackstone Advisory Partners L.P.

          Before: Walker, Cabranes, and Lohier, Circuit Judges.

          John M. Walker, Jr., Circuit Judge:

         Plaintiff-Appellant Robby Shawn Stadnick appeals from a judgment of the United States District Court for the Southern District of New York (Forrest, J.) dismissing his securities class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Stadnick's claims arise out of the October 1, 2014 Initial Public Offering ("IPO") for shares of Vivint Solar, Inc., a residential solar energy unit installer. Stadnick principally argues on appeal that Vivint was obligated to disclose financial information for the quarter ending one day before the IPO because Vivint's performance during that quarter constituted an "extreme departure" under Shaw v. Digital Equipment Corp., 82 F.3d 1194 (1st Cir. 1996). He also argues that Vivint misled prospective shareholders regarding the company's opportunities for expansion in Hawaii by failing to disclose the potential impact of the state's evolving regulatory regime. We conclude that the "extreme departure" test of Shaw is not the law of this Circuit and that Vivint's omissions were not material under the test set forth in DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003), to which we adhere. We further conclude that Vivint did not mislead shareholders regarding the company's prospects in Hawaii. We therefore AFFIRM the judgment of the district court.

         BACKGROUND

         For purposes of this appeal we must accept the facts as they are alleged in the complaint and draw all reasonable inferences in Stadnick's favor. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Stadnick argues, in essence, that the registration statement Vivint issued in conjunction with its IPO misled prospective shareholders.

         Defendant-Appellee Vivint Solar is a residential solar energy unit installer that leases solar energy systems to homeowners.[1]During the relevant period, Vivint was the second largest installer of solar energy systems in the U.S. residential market, with approximately an 8% market share in 2013 and a 9% share in the first quarter of 2014. Vivint operated in a number of states, but as of June 30, 2014 more than 50% of its installations were in California and 15% in Hawaii. Twenty-one of its thirty-seven offices were located in those two states.

         Vivint's business model is predicated upon its continued ownership of the solar energy equipment it installs, which allows Vivint to qualify for various tax credits and other government incentives. Customers pay no up-front costs and instead enter into twenty-year leases by which they purchase solar energy in monthly payments at approximately 15% to 30% less than they would pay for utility-generated electricity. These monthly payments are Vivint's primary revenue stream. Because Vivint incurs significant up-front costs, it has operated at a loss from its inception.

         To fund its operations, Vivint secures financing from outside investors. Pursuant to contractual arrangements, these outside investors periodically make cash contributions into investment funds jointly owned by the investors and Vivint. Each investment fund then finances Vivint's purchase and installation of a particular tranche of solar energy systems. Once a system is installed, its title is transferred to the fund that contributed the capital, which allows the fund to benefit from the relevant tax credits. The fund also receives most of the customer's monthly payments until either the fund achieves a targeted rate of return or the recapture period associated with certain tax credits expires. At that time, Vivint begins to receive a majority of the revenues.

         Given the investment funds' role, Vivint allocates its income between (i) its public shareholders and (ii) the outside investors, the latter of whom Vivint refers to variously as non-controlling interests or redeemable non-controlling interests ("NCIs"). Vivint thus calculates the income available to public shareholders by first determining the company's overall income and then subtracting the portion allocated to NCIs.

         Vivint utilizes an equity accounting method known as Hypothetical Liquidation at Book Value ("HLBV"). Under HLBV, the value of an individual's portion of a business is determined by hypothetically liquidating the business at book value, i.e., the value at which its assets are carried on a balance sheet. If the calculation is performed at the end of two successive quarters, the difference in the amount an individual would receive from the first quarter to the second represents his or her net gain or loss over the course of the second quarter.

         Due to Vivint's business model and the HLBV method, the allocation of income (a net loss in each quarter during the relevant period) between shareholders and NCIs may vary substantially from one quarter to the next depending upon (1) contributions by investors and (2) transfers of title to the funds that provided the requisite capital. For example, if a fund provided capital to Vivint but did not receive title to the systems until after the quarter ended, HLBV would show a loss being allocated to NCIs. If title were transferred before the quarter ended, however, the loss would be allocated to shareholders. Because the income allocated to NCIs was a net loss during every quarter, subtracting NCI income from Vivint's overall income had the effect of recognizing increased income to shareholders. NCI losses were occasionally larger than the amount lost by the company as a whole, resulting in the recognition of a net positive amount of income to shareholders.

         In 2014, Vivint sought capital on the public equity markets. On October 1, 2014, Vivint issued the IPO at issue on appeal, in which it sold 20, 600, 000 shares of common stock at $16 per share, raising $300.8 million in net proceeds. In the accompanying registration statement, Vivint disclosed financial results for the six quarters immediately preceding the third quarter of 2014. These results revealed ever increasing overall net losses and fluctuating NCI losses, income available to shareholders, and earnings-per- share. Vivint also warned of the impact its business model and accounting practices could have on the allocation of income between NCIs and shareholders. The registration statement identified certain "key operating metrics" for assessing the company's performance: (1) system installations, (2) megawatts and cumulative megawatts installed, (3) estimated nominal contract payments remaining, and (4) estimated retained value. Vivint also identified Hawaii as a target for expansion while warning that changes in regulatory limitations, particularly in concentrated markets such as Hawaii, could hinder the company's growth.

         On November 10, 2014, Vivint issued a press release that disclosed its financial results for the quarter ending September 30, 2014, the day before the October 1 IPO. The net loss attributable to NCIs decreased from negative $45 million in the second quarter to negative $16.4 million in the third-a decrease of $28.6 million. This change contributed substantially to a decrease in net income for shareholders, from positive $5.5 million in the second quarter to negative $35.3 million-a decline of ...


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