United States: Tenth Circuit Affirms Dismissal Of Exchange Act Claims Based On Undisclosed Merger Discussions

On May 11, 2018, the United States Court of Appeals for the Tenth Circuit affirmed the district court's dismissal of a putative class action asserting claims under Sections 10(b) and 20(a) of the Exchange Act against Williams Companies, Inc. ("Williams" or the "Company"), its CEO, CFO, and certain affiliates.  Emps.' Ret. Sys. of R.I. v. Williams Cos., et al., No. 17-5034 (10th Cir. May 11, 2018).  The claims alleged in the complaint related to an unconsummated merger between Williams, an energy company, and its affiliate, Williams Partners L.P. ("WPZ"), and the Company's subsequent agreement to merge with a competing energy company, Energy Transfer Equity L.P. ("ETE").  Plaintiff alleged that the Company misled investors by describing its proposed merger with WPZ, of which Williams held 60% of the units, as "no risk," and by failing to disclose its merger discussions with ETE.  The Court rejected both arguments and affirmed the district court's dismissal, reasoning that plaintiff had taken the alleged misstatement out of context, and that it otherwise failed to allege a basis for requiring the disclosure of the merger discussions with ETE. 

On May 13, 2015, Williams and WPZ announced plans for WPZ to merge into Williams.  Among the conditions to the merger was the approval and adoption of the merger agreement by "at least a majority of the outstanding WPZ [units]."  At a subsequent analyst presentation, the Company's CFO stated that "[t]here's no risk around the WPZ vote because Williams has [a] majority of the votes."  That presentation also included a number of cautionary remarks regarding the proposed merger, including that the merger was subject to the satisfaction of all of the conditions precedent.  Less than a week later, ETE, which had previously given informal expressions of interest in exploring an acquisition of Williams, presented a written offer conditioned on the termination of the proposed Williams-WPZ merger.  Williams rejected ETE's offer, and issued a press release that it had authorized a process to explore a range of strategic alternatives following an unsolicited acquisition offer.  On the next day, ETE announced that it was interested in merging with Williams and that its proposal would be a better deal for the Williams stockholders than the Williams-WPZ merger.  WPZ's stock price dropped 7.6% following that announcement.  In the following months, Williams terminated its merger agreement with WPZ and entered into a merger agreement with ETE.  Plaintiff, seeking to represent purchasers of WPZ stock during the approximately one-month period between the announcement of the Williams-WPZ merger and ETE's announcement, brought an action asserting that defendants misled investors by stating that the Williams-WPZ merger was a "no-risk" proposition and by failing to disclose merger discussions with ETE. 

The district court dismissed the complaint for failure to state a claim, and the Tenth Circuit affirmed the dismissal.  First, the Court held that plaintiff's "no risk" claim took the statement out of context.  The statement referred only to one of the conditions precedent to the merger (i.e., the vote) and not to the merger as a whole.  The Court also found that the Company's announcement made clear that there were other conditions that had to be satisfied.  Second, the Court ruled that there was no actionable omission regarding merger discussions with ETE.  As an initial matter, the Court held that defendants had no duty to disclose talks with ETE because Rule 10b-5 does "not create an affirmative duty to disclose any and all material information."  As a result, "[d]isclosure is required . . . only when necessary to make statements made, in the light of the circumstances in which they were made, not misleading."  Because defendants had made no statements about the prospects of Williams merging with any other company at the time it announced the proposed merger with WPZ, it had no duty to disclose discussions with ETE.  Next, the Court ruled that the existence of merger discussions generally was not material, absent "a serious commitment to consummate the transaction," which plaintiff failed to show existed at the time of the alleged omission.  Lastly, the Court ruled that plaintiff failed to allege that defendants acted with scienter at the time of the allegedly misleading statements given the small likelihood that the informal contacts by ETE prior to the Williams-WPZ merger announcement posed a risk to the merger and also because plaintiff failed to allege any plausible motive. 

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