February 21, 2014
IN RE GARDNER DENVER, INC. SHAREHOLDERS LITIGATION
Date Submitted: November 26, 2013
Joel Friedlander, Esquire, Jeffrey M. Gorris, Esquire, and Jaclyn Levy, Esquire of Bouchard, Margules & Friedlander, P.A., Wilmington, Delaware; Stuart A. Davidson, Esquire and Cullin A. O'Brien, Esquire of Robbins Geller Rudman & Dowd LLP, Boca Raton, Florida; and Randall J. Baron, Esquire and David T. Wissbroecker, Esquire of Robbins Geller Rudman & Dowd LLP, San Diego, California, Attorneys for Plaintiff.
Robert S. Saunders, Esquire, Amy C. Huffman, Esquire, and Arthur R. Bookout, Esquire of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware, Attorneys for Defendants Michael M. Larsen, Michael C. Arnold, Donald G. Barger, Jr., John D. Craig, Raymond R. Hipp, David D. Petratis, Diane K. Schumacher, Charles L. Szews, Richard L. Thompson, and Garden Denver, Inc.
Raymond J. DiCamillo, Esquire and Scott W. Perkins, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Paul C. Curnin, Esquire, Peter E. Kazanoff, Esquire, Daniel J. Stujenske, Esquire, and Joshua M. Slocum, Esquire of Simpson Thacher & Bartlett LLP, New York, New York, Attorneys for Defendants Renaissance Parent Corp., Renaissance Acquisition Corp., and Kohlberg Kravis Roberts & Co. L.P.
MEMORANDUM OPINION AND ORDER
NOBLE, Vice Chancellor
Before the Court is an apparently novel, procedural request. In short, the plaintiff has moved to strike, from the defendants' brief in support of a motion to dismiss, references to the expedited discovery record, which was developed in advance of a preliminary injunction hearing, that are beyond the selected quotations from, and characterizations of, that record in the amended complaint. Although the Court will address the present motion in isolation, it recognizes that there may be other, and perhaps more appropriate, ways to resolve this procedural issue in the future.
A stockholder (the "Plaintiff") of Gardner Denver, Inc., ("Gardner Denver") filed this class action seeking to enjoin preliminarily a merger (the "Merger") between Gardner Denver and an affiliate of Kohlberg Kravis Roberts & Co. L.P. ("KKR"). After conducting expedited discovery, which involved the production of documents and the depositions of several witnesses, the Plaintiff withdrew his petition for a preliminary injunction in exchange for the waiver of certain contractual provisions governing the Merger and for additional disclosures to stockholders.
Over a month after Gardner Denver stockholders approved the Merger,  the Plaintiff filed an amended complaint (the "Amended Complaint") alleging that the directors of Gardner Denver (the "Board, " and, together with KKR, the "Defendants") breached their fiduciary duties with respect to the Merger and that KKR aided and abetted these breaches. The Amended Complaint includes several quotations from, and numerous characterizations of, selected portions of deposition testimony obtained in expedited discovery. The Defendants moved to dismiss the Amended Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim (the "Motion to Dismiss") and filed a joint opening brief (the "Opening Brief"). In their Opening Brief, the Defendants quote and characterize portions of deposition testimony and certain documents other than those explicitly or implicitly referenced in the Amended Complaint.
In response, the Plaintiff moved to "strik[e] references to matters outside the pleadings from Defendants' Opening Brief" (the "Motion to Strike"). Specifically, the Plaintiff seeks to strike references to: (i) extraneous portions of five deposition transcripts; (ii) an email chain; (iii) printouts of two pages from Gardner Denver's website; (iv) two Gardner Denver filings with the Securities and Exchange Commission ("SEC"); and (v) the purported replacement of Gardner Denver senior management after the Merger.
For the following reasons, the Motion to Strike is granted in part and denied in part.
A. The "Universe of Facts" Upon a Rule 12(b)(6) Motion
With the allegations of the complaint, the plaintiff "ordinarily defines the universe of facts" from which the Court is to determine, upon a motion to dismiss under Rule 12(b)(6), whether there is a "reasonably conceivable" basis for recovery. At this stage, the Court accepts the non-conclusory allegations of the complaint as true and draws all reasonable inferences in the plaintiff's favor."[C]onsidering facts not before the court . . . on a motion to dismiss is inappropriate." Thus, the universe of facts is typically limited to the allegations of the complaint and any documents attached to it. One harm from the Court's examination of extraneous documents is "the lack of notice [to the plaintiff] that the material may be considered."
But, the Delaware Supreme Court has recognized three exceptions to this rule by which the Court may consider certain documents extraneous to a complaint "for carefully limited purposes": (i) "when the document is integral to a plaintiff's claim and incorporated into the complaint"; (ii) "when the document is not being relied upon to prove the truth of its contents"; and (iii) when the document, or a portion thereof, is an adjudicative fact subject to judicial notice. The public policy behind these exceptions is plain: allegations largely predicated upon documents not presented to the Court in the pleadings should not escape the Court's review under Rule 12(b)(6) by the plaintiff's merely alleging "selected and misleading portions" of those documents.
Whether a document is integral to a claim and incorporated into a complaint is largely a facts-and-circumstances inquiry. This Court has recently determined that documents as varied in form as employment agreements,  a limited partnership agreement,  a merger proxy statement,  an SEC filing,  an investment bank's email to a potential acquirer,  an email chain and an internal corporate letter all can, depending on the relevant allegations of the complaint, be deemed integral to the claims and therefore be considered by the Court on a Rule 12(b)(6) motion.
The Court's context-specific analysis to determine whether a document is integral cautions against an effort to synthesize this precedent into a bright-line rule. Nonetheless, a general tendency is that the Court may conclude a document is integral to the claim if it is the "source for the . . . facts as pled in the complaint." That a document is integral can have a material effect on the disposition of a Rule 12(b)(6) motion, as it is possible for an integral document to "effectively negate the claim as a matter of law."
In addition, this Court commonly considers extraneous documents, not for the truth of their contents, but to test the sufficiency of allegations for disclosure-based claims. For example, a stockholder may, in asserting that the directors improperly failed to disclose a material fact in advance of a stockholder vote, selectively quote or characterize the relevant proxy statement. In such cases, this Court may consider the proxy statement as a whole, rather than merely the portions alleged in the complaint, to determine what information was disclosed. Unless the proxy statement is "put forth by [a] plaintiff as an admission of the truth of the facts referred to therein, " this Court would not assume the truthfulness of the transaction-process disclosures in reviewing, upon a Rule 12(b)(6) motion, whether the plaintiff sufficiently alleged a substantive claim.
B. The Availability of the Motion to Strike
Court of Chancery Rule 12(b) provides that if "matters outside the pleading are presented to and not excluded by the Court, the motion [under Rule 12(b)(6)] shall be treated as one for summary judgment and disposed of as provided in Rule 56." If purportedly extraneous matter is presented, Rule 12(b) implies that the Court may, sua sponte, exclude it and hear the motion to dismiss, consider it and convert the motion into one for summary judgment, or conclude it is not extraneous but rather integral to the claims and then proceed with the motion to dismiss. Indeed, this Court frequently does determine these issues sua sponte in its disposition of the underlying motion.
Nothing in the rule, however, expressly prohibits a plaintiff from moving to ask the Court to define the relevant universe of facts and documents integral to the complaint. The Plaintiff contends that Rule 12(b) "contemplates" a procedural request like his Motion to Strike as a way to avoid the "dilemma" of his "either amend[ing] his Complaint to place in context the new material or run[ning] the risk that the Court accepts the new material as a basis to dismiss the Complaint."Because the Defendants effectively conceded the availability of this procedural request by not arguing that it was improper,  the Court will resolve the questions raised in the Motion to Strike now before considering the Motion to Dismiss in due course.
C. The Focus of the Motion to Strike
The Plaintiff argues that the Defendants, in their Opening Brief, improperly reference certain extraneous documents related to "seven factual issues"implicated by the allegations of the Amended Complaint. Much of the parties' submissions to the Court reflects and adopts this framework. Yet, because Delaware case law addresses whether a particular document, rather than a particular subject matter, is integral to the asserted claims, a more appropriate way to determine the propriety of the Defendants' references in the Opening Brief is to examine each document in turn.
1. The Deposition Transcripts
For the Court to consider the additional references to the deposition transcripts in the Opening Brief, as the Defendants contend it may do,  instead of just the selected portions of deposition testimony referenced in the Amended Complaint, as the Plaintiff maintains it must only do,  the Court must conclude that each transcript was integral to the alleged claims. The five depositions referenced in the Opening Brief are those of: (a) Barry Pennypacker ("Pennypacker"), the former Chief Executive Officer ("CEO") of Gardner Denver; (b) Dianne Schumacher ("Schumacher"), the Chair of the Board; (c) Michael Larsen ("Larsen"), the CEO, Chief Financial Officer, and a director of Gardner Denver; (d) Matt McClure ("McClure") of Goldman Sachs, the financial advisor to Gardner Denver for the Merger; and (e) Pete Stavros ("Stavros") of KKR.
The parties have not identified a binding precedent in Delaware or a persuasive decision from another jurisdiction in which deposition transcripts, produced in expedited discovery in advance of a preliminary injunction hearing and then partially quoted and characterized in an amended complaint, were deemed integral to the claims and thus properly before the court on a motion to dismiss.Instead, the parties argue over the effects of In re Morton's Restaurant Group, Inc. Shareholders Litigation, a decision of this Court dismissing a stockholder complaint, amended with references to the expedited discovery record, for failure to state a claim. After noting how the plaintiffs made "substantial references" to four deposition transcripts in "construct[ing] their Complaint, " as evidenced by "citing them 28 times" as well as including "selective quotations, " the Morton's Restaurant court concluded that "the depositions have been incorporated by reference." But, the court's express acknowledgement that its disposition of the motion to dismiss did "not turn on this point" largely limited its preceding analysis as dictum. Nonetheless, the reasoning animating Morton's Restaurant is persuasive.
It would be difficult for the Plaintiff to argue he was harmed for want of notice of the Court's consideration of additional sections of the deposition transcripts when deciding the Motion to Dismiss if the Plaintiff's actions not only created the transcripts, but made them integral to the claims of the Amended Complaint. The Plaintiff took the depositions, undoubtedly reviewed the transcripts, and deemed it appropriate to amend his complaint with quotations from, and substantial characterizations of, them. That the Plaintiff took the depositions at issue means that, although they are testimonial in nature, the transcripts do not suffer from the limitation on cross-examination that has motivated this Court's excluding of certain documents from its review at this procedural stage. Moreover, it is not clear why, or how, deposition transcripts should be treated differently than any other type of document that could be found integral to a claim. Therefore, consistent with analogous precedent, as well as the Morton's Restaurant analysis, the Court concludes that a deposition transcript may be deemed integral to the Plaintiff's claims if it was a substantial source for the allegations in the Amended Complaint.
A thorough and careful review of the Amended Complaint reveals that all five deposition transcripts are substantial sources for the Plaintiff's allegations underlying his substantive claims. Accordingly, the transcripts of the depositions of Pennypacker, Schumacher, Larsen, McClure, and Stavros are all integral to the Amended Complaint.
The Court thus may examine the integral deposition testimony referenced by the Defendants in their Opening Brief when considering the pending Motion to Dismiss. Yet, this conclusion should not be interpreted as an open invitation for the Defendants here or similarly situated parties in the future to contend that, because a deposition transcript is integral to a claim, the Court must accept every statement made during that deposition as true. That position is incompatible with settled Delaware law.
The standard of review for the Motion to Dismiss under current Delaware law is straightforward. The Court must accept the allegations in the Amended Complaint, including those based on deposition testimony, as true. All reasonable inferences from these allegations based on deposition testimony must be viewed in the Plaintiff's favor. Reasonable inferences favoring the Plaintiff cannot be disregarded in favor of contrary inferences favoring the Defendants. And, most importantly, the Court may not resolve conflicting testimony or conflicting inferences drawn from testimony.
The integral deposition transcripts are testimonial in nature. They will undoubtedly include statements that conflict, perhaps irreconcilably, with the allegations of the Amended Complaint. Thus, in light of the procedural standard when testing the sufficiency of the Amended Complaint under Rule 12(b)(6), the parties should expect that the Court will disregard the additional deposition transcript references quoted and characterized by the Defendants in the Opening Brief absent endorsement of their truthfulness by the Plaintiff, which the Plaintiff has not done. It is conceivable that there may be situations in which it would be appropriate for the Court to rely upon integral deposition testimony beyond that quoted or characterized in a complaint in its disposition of a Rule 12(b)(6) motion. But, the present action does not appear to qualify as one of those situations.
2. The Email Chain
The same analytical framework applies to the email chain referenced in the Opening Brief; the Court must conclude it is integral to the Amended Complaint to consider it upon the Motion to Dismiss. The Plaintiff alleges that an email from Ray Hipp ("Hipp"), a Gardner Denver director, to Larsen complaining about being "in the dark" (the "Hipp Email") is evidence of the Board not being informed about the company's sales process. The Amended Complaint features a block quotation of almost the entire Hipp Email. The Opening Brief cites a response email from Larsen, sent thirty-one minutes later, in which he offers to "sort through the media reports and fill [Hipp] in on the details" (the "Larsen Email"). The Hipp Email and the Larsen Email are part of the same document produced in discovery (the "Email Chain Document"). In the Amended Complaint, the Plaintiff does not quote or characterize the Larsen Email or the Email Chain Document, other than the Hipp Email.
The Plaintiff argues it is improper for the Defendants, at the motion to dismiss stage, to "add their own evidence not relied upon in the Complaint and ask the Court to conclude that evidence outweighs the well-pled allegations in the Complaint." Meanwhile, the Defendants contend that the Plaintiff's use of the Hipp Email makes the entire Email Chain Document integral to the Amended Complaint such that they may "place into context the selective quotation."
It is clear from the significant quotation and characterization of it in the Amended Complaint, albeit in only one paragraph, that the Hipp Email is integral. The issue, however, is whether the Email Chain Document-including both the Hipp Email and the Larsen Email-is integral. In Latesco, L.P. v. Wayport, Inc., this Court found an email chain to be integral where a portion of it was quoted in a complaint alleging a fraudulent misrepresentation claim that "rest[ed] on the quoted email." The claims for breach of fiduciary duty and aiding and abetting asserted in the Amended Complaint are distinguishable from the fraudulent misrepresentation claim in Latesco. In the Plaintiff's words, the reference to the Hipp Email in the Amended Complaint supports its allegations that the Board "was kept in the dark about the sale process." The Plaintiff's claims cannot be said to "rest" on the existence or content of any email response from Larsen as the claim for fraudulent misrepresentation did on an email chain in Latesco. Accordingly, the Court concludes that the only integral document is the Hipp Email, not the Email Chain Document or the Larsen Email.
3. The Gardner Denver Website Printouts and SEC Filings
The Amended Complaint alleges in part that Pennypacker shared "confidential information" with KKR, including information about Gardner Denver's history, markets, and "product strengths and weaknesses, " in violation of the confidentiality obligations of his Waiver and Release Agreement with Gardner Denver. In their Opening Brief, the Defendants argue that the supposedly confidential information that Pennypacker is said to have shared was actually publicly available. They cite to public statements about these topics on two pages of Gardner Denver's website and in two Gardner Denver SEC filings, a February 2012 Form 10-K and a May 2012 Form 8-K containing an investor presentation,  in support of their position.
The Plaintiff now contends that the Defendants should not be permitted to submit these documents to the Court because they are not "integral to, or even referenced in, the Complaint." However, the Plaintiff does not contest the authenticity of any of these documents. The Defendants, in opposition, argue that they are not asking the Court to accept the truth of the website printouts and the SEC filings, which they recognize would require a finding that the documents are integral to the Plaintiff's claims. Instead, they submit the four documents "only to demonstrate what those documents said, " insisting that "[t]he four public documents contain the very information that Plaintiff claims is confidential."
These four documents, although they would not qualify as integral, are nonetheless documents that the Court may consider when deciding the Motion to Dismiss for what they disclose publicly, so long as it does not accept what they disclose as true. Because the Defendants do not seek to rely on the website printouts for the truth of what they disclose, the Court need not be concerned with the potential limitations on its ability to take judicial notice of them. Even though the website pages were not publicly filed with a governmental agency, it cannot be reasonably disputed that they were publicly available. To test whether the Amended Complaint states a reasonably conceivable claim related to Pennypacker's alleged disclosure of confidential information, the Court may look to these documents to determine what was public information and, conversely, what may have been confidential information. In this way, the Plaintiff's allegations about Pennypacker's disclosure of confidential information are largely analogous to allegations about material omissions from a proxy statement.
4. The Purported Replacement of Gardner Denver Senior Management
In the preliminary statement of their Opening Brief, the Defendants assert that, after the Merger, "most of the senior management team [of Gardner Denver] (including the CEO [Larsen] who was the only management director on the Board), has been replaced." There is no supporting citation to an allegation of the Amended Complaint or any other source. The Plaintiff contends this statement must be stricken because it is an improper attempt to contradict his allegations that an interest in future employment motivated Larsen's actions during the sale of Gardner Denver. The Defendants, in response, claim that Stavros's deposition testimony "supports the substance of the passage." In addition, they argue the Court may take judicial notice of this purported fact because it was "reported in GDI's public filings and [is] not subject to reasonable dispute." But, judicial notice, the Plaintiff insists, is inappropriate because the statement is unrelated to his substantive allegations.
Assuming the Defendants have requested the Court to take judicial notice of this purported fact, the Court must only do so if it is "supplied with the necessary information." The August 2013 SEC filing cited by the Defendants states, with one listed exception, that "the incumbent officers of the Company [i.e., Gardner Denver] immediately prior to the Effective Time [of the Merger with KKR] continued as officers of the Company [after the Merger]." The accompanying press release describes the exception, noting that Timothy Sullivan became Gardner Denver's President and CEO and that Larsen "has transitioned to the role of Interim Vice President & Chief Financial Officer." Because it discusses a change in responsibility for only Larsen, this SEC filing does not meet the "necessary information" standard required for judicial notice of the purported replacement of Gardner Denver senior management.
Stavros's integral deposition testimony may support the substance of the Opening Brief statement, but only to the limited extent that his deposition was taken before the Merger. Because this statement in the Opening Brief refers to purported facts occurring after the Merger, separate from the allegations of the Amended Complaint, and not subject to judicial notice, it is beyond the Court's review when deciding the Motion to Dismiss.
For the foregoing reasons, the Plaintiff's Motion to Strike is denied as to the five deposition transcripts of Pennypacker, Schumacher, Larsen, McClure, and Stavros; the two Gardner Denver website printouts; and the February 2012 and May 2012 Gardner Denver SEC filings. The Motion to Strike is granted as to the Larsen Email and the statement about the purported replacement of Gardner Denver senior management after the Merger.
IT IS SO ORDERED.