First New York Securities LLC v. United Rentals Inc.

SUMMARY ORDER This appeal arises out of securities fraud claims stemming from the failed 2007 merger between United Rentals, Inc. (“URI”) and RAM Holdings, Inc. and RAM Acquisition Corp. (together, “RAM”), affiliates of Cerberus Capital Partners, L.P. (“Cerberus”). At the outset of the bidding process, in April 2007, URI’s common stock jumped from $27.55 per share to $32.36 per share upon news that URI was exploring strategic alternatives. After entertaining at least one other potential bidder, URI and RAM signed a merger agreement in July 2007. Over the next few months, as the parties worked to close the transaction, economic conditions, particularly in the credit and debt markets, were less than optimal. In late August 2007, RAM contacted URI’s bankers and stated that due to deterioration in the credit markets, it wanted to renegotiate the purchase price. URI expressed reluctance at the time; one week later, URI replied and flatly refused to reopen the negotiations. On November 14 2007, Cerberus informed URI that RAM was repudiating the merger agreement; URI stock opened the day at $34.37 and closed at $23.50. Plaintiffs-appellants are investors who purchased URI common stock during the class period commencing August 30, 2007 and ending November 14, 2007. They allege that URI had a clear duty to disclose that RAM was seeking to renegotiate the purchase price and that there was a high likelihood that the deal would fall apart. They claim that by making certain public pronouncements that gave the impression that the transaction would close as originally negotiated — including, inter alia, filing a preliminary proxy, issuing a press release announcing a special meeting of shareholders, disseminating proxy materials, and issuing a press release and financial statements at the end of the quarter— URI made material misstatements in violation of federal securities law. They further claim that in failing to inform the public of these events, URI acted with scienter by deliberately and improperly concealing the clear risks affecting the deal in order to stabilize the market price of its stock. We assume the parties’ familiarity with the remaining facts, procedural context, and specification of appellate issues. We review de novo a district court’s ruling on a motion to dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). See Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 194 (2d Cir.2008). In considering a motion to dismiss a section 10(b) action, we accept all factual allegations in the complaint as true and must consider the complaint in its entirety. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The district court twice dismissed plaintiffs-appellants’ complaints on the basis that they failed to allege scienter adequately, finding that whatever inferences could be drawn regarding the failure to comply with a clear duty to disclose, “on balance, the court is not persuaded that the inference of scien- *73 ter is ‘at least as compelling as any opposing inference of nonfraudulent intent.’” First New York Sec., L.L.C. v. United Rentals, Inc., 648 F.Supp.2d 256, 276 (D.Conn.2009) (quoting Teamsters Local 115, 581 F.3d at 194). We agree and therefore affirm. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), where, proof of scienter is a required element, a complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Under Section 10(b) and Rule 10b-5, the required state of mind is “scienter” or an intent “to deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 313, 127 S.Ct. 2499. To have a “strong inference” of scienter, as required by the PSLRA, the inference must be such that a “reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324, 127 S.Ct. 2499; see also Slayton v. Am. Express Co., 604 F.3d 758, 766 (2d Cir.2010). In this case, URI’s failure to disclose certain information is not actionable unless it intended to defraud or mislead by withholding information that it knew it had a clear duty to disclose. Having carefully reviewed the parties’ arguments and the record on appeal, we conclude that even though plaintiffs-appellants put forth a plausible interpretation of URI’s actions, that interpretation is belied by many other factors — and by certain actions taken by RAM and Cerberus — which persuade us that it is more likely than not the case that URI believed the deal would close as originally negotiated. For example, at the August 29, 2007 meeting during which RAM first mentioned its desire to renegotiate the terms of the agreement, URI’s representative stated that URI did not think that RAM had a “walkaway” and that URI believed it had the right to demand specific performance. The representative also specifically asked RAM if it was going to repudiate the contract; RAM replied in the negative. Reasonable and persuasive inferences one may draw from this evidence are that URI did not believe that: (1) the deal was seriously threatened because it could always demand specific performance; 1 and (2) RAM intended to repudiate the agreement. Moreover, in a letter from RAM to URI two days later, RAM made no effort to clarify its position regarding its alleged threat to repudiate the agreement. Additionally, there were no substantive or other renegotiation discussions between RAM and URI between August 29th and November 14th. Although plaintiffs-appellants point to other events in the credit markets — e.g., the demise of the Cerberus-ACS transaction — they do not argue that RAM approached URI again or made any other threats regarding the closing of the transaction. In point of fact, RAM and URI worked diligently to close the transaction by, inter alia, initiating tender offers for URI’s debt securities and conducting a “road show” to place $2.5 billion in post-merger debt. These and other facts convince us that the more likely interpretation of the events surrounding the August 29th meeting between RAM and representatives of URI is that URI believed that the deal was going to close under the terms negotiated in the merger agreement. We therefore con- *74 elude that plaintiffs-appellants do not meet the Tellabs standard of setting forth an “inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324, 127 S.Ct. 2499. Due to our disposition based on absence of scienter, we need not and do not address issues of materiality. See, e.g., Kalnit v. Eichler, 264 F.3d 131, 144 (2d Cir.2001). Similarly, plaintiffs-appellants’ section 20(a) claim fails because they fail to show a “primary violation by a controlled person.” Slayton, 604 F.3d at 778 (internal quotation marks omitted). Accordingly, the judgment of the district court is AFFIRMED. Footnotes [1] Even though this position was ultimately rejected by the Delaware Chancery Court, the judge in that case found that the position was reasonable as a matter of law and sufficiently strong that the court came “exceedingly close” to granting the remedy of specific performance to URI on summary judgment. United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 814, 833 n. 104 (Del.Ch.2007).