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In re Envision Healthcare Corp.

United States District Court, D. Delaware

August 1, 2019

IN RE ENVISION HEALTHCARE CORP.

          REPORT AND RECOMMENDATION

          SHERRY R. FALLON UNITED STATESMAGISTRATE JUDGE

         I. INTRODUCTION

         Presently before the court in this class action for violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 are the following motions:[1] (1) the motion to dismiss for failure to state a claim under Rule 12(b)(6), filed by defendants Envision Healthcare Corp. ("Envision"), and Envision's Board of Directors (the "Board"): William A. Sanger, Christopher A. Holden, James D. Shelton, Michael L. Smith, Leonard M. Riggs, Carol J. Burt, Cynthia S. Miller, Kevin P. Lavender, Joey A. Jacobs, Steven I. Geringer, John T. Gawaluck, and James A. Deal (together with Envision, "defendants") (D.I. 29); and (2) the motion to strike the exhibits to defendants' motion to dismiss, filed by lead plaintiff Jon Barrett ("plaintiff) on behalf of himself and all other similarly situated former public stockholders of Envision (D.I. 33). For the following reasons, I recommend that the court deny the motion to dismiss and deny the motion to strike.

         II. BACKGROUND

         Envision delivers physician services to healthcare facilities throughout the United States. (D.I. 25 at ¶ 31) In the third quarter of 2017, Envision announced the Board's decision to explore strategic options to enhance the stockholder value of the Company. (Id. at ¶ 6) In accordance with the announcement, Envision's management prepared a five-year forecast called the Management Case projections (the "Management Case Projections") in February 2018. (Id. at ¶¶ 7, 46) The Management Case Projections showed a high likelihood of growth and financial success for Envision in the foreseeable future based on conservative projections. (Id. at ¶ 56)

         On May 8, 2018, Envision announced its first quarter 2018 financial results, which were favorable. (D.I. 25 at ¶ 59) Nonetheless, Envision's management prepared another five-year forecast called the Management Sensitivity Case projections (the "Sensitivity Case Projections"), which were provided to the Board and Envision's three financial advisors: J.P. Morgan Securities LLC, Evercore Group L.L.C., and Guggenheim Securities, LLC (the "Financial Advisors"). (Id. at ¶¶ 3, 7, 66) The Sensitivity Case Projections projected a significantly lower stock value than the Management Case Projections, and were prepared shortly after bidder Kohlberg Kravis Roberts & Co. L.P. ("KKR") and two other bidders indicated their intention to offer a price in the mid-forties for Envision's shares. (Id. at ¶¶ 7, 66-68)

         On June 10, 2018, Envision entered into an Agreement and Plan of Merger (the "Merger") with KKR and its affiliates. (D.I. 25 at ¶¶ 1-2; D.I. 31, Ex. 5 at 43-44)[2] In accordance with the Merger, each outstanding share of Envision common stock received $46.00 in consideration. (Id., Ex. 8 at 3) In connection with the Merger, defendants authorized the filing of a proxy statement (the "Proxy") with the SEC on August 13, 2018. (D.I. 25 at ¶¶ 3, 70) The Board reviewed the Proxy, which solicited Envision's stockholders to vote in favor of the Merger. (Id. at ¶ 70) The Proxy disclosed the use of the Management Case and Sensitivity Case Projections, and it contained fairness opinions from the Financial Advisors. (D.I. 31, Ex. 5 at 49, 51-75)

         On September 6, 2018, Envision supplemented the Proxy with more information about the development of the Sensitivity Case Projections. (D.I. 31, Ex. 6) On September 11, 2018, the Envision stockholders held a special meeting to vote on the Merger. (D.I. 25 at ¶ 9) A majority of Envision's stockholders voted to approve the Merger, which closed on October 11, 2018. (Id.)

         III. LEGAL STANDARD

         A. Rule 12(b)(6) Standard Generally

         Rule 12(b)(6) permits a party to move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, the court must accept as true all factual allegations in the complaint and view them in the light most favorable to the plaintiff. Connelly v. Lane Constr. Corp., 809 F.3d 780, 790-91 (3d Cir. 2016).

         To state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." BellAtl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 663; Twombly, 550 U.S. at 555-56.

         The court's determination is not whether the non-moving party "will ultimately prevail," but whether that party is "entitled to offer evidence to support the claims." United States ex rel. Wilkins v. UnitedHealth Grp., Inc., 659 F.3d 295, 302 (3d Cir. 2011). This "does not impose a probability requirement at the pleading stage," but instead "simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element]." Phillips v. Cty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556). The court's analysis is a context-specific task requiring the court "to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 663-64.

         B. Section 14(a) of the Securities Exchange Act of 1934

         Section 14(a) of the Securities Exchange Act of 1934 provides:

It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 781 of this title.

15 U.S.C. § 78n(a)(1). "[Section] 14(a) of the Securities Exchange Act was intended to promote the free exercise of the voting rights of stockholders by ensuring that proxies would be solicited with explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 444 (1976) (internal quotation marks omitted). Rule 14a-9, which was promulgated by the Securities and Exchange Commission ("SEC") pursuant to Section 14(a) of the Securities Exchange Act of 1934, prohibits a proxy statement

containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

17 C.F.R. § 240.14a-9. To prevail on a § 14(a) claim, the plaintiff must show that "(1) a proxy statement contained a material misrepresentation or omission which (2) caused the plaintiff injury and (3) that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction." Tracinda Corp. v. Daimler Chrysler AG, 502 F.3d 212, 228 (3d Cir. 2007) (quoting Cal. Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 144 (3d Cir. 2004) (internal quotation marks omitted)).

         A claim brought under § 14(a) which is grounded in allegations of fraud must satisfy the Rule 9(b) particularity requirements at the pleadings stage. See Chubb Corp., 394 F.3d at 144-45 ("While claims brought pursuant to section 14(a) of the 1934 Act do not require that scienter be pleaded, any claims brought under the 1934 Act must meet the PSLRA particularity requirements ... if a plaintiff elects to ground such claims in fraud."). A § 14(a) claim may also sound in negligence as opposed to fraud. See Gould v. Am.-Hawaiian S. S. Co., 535 F.2d 761, 777 (3d Cir. 1976). Courts in this district have acknowledged that it "appears to be an open question as to whether Section 14(a) claims pled in terms of negligence are subject to Rule 9(b) or PSLRA particularity requirements." Jaroslawicz v. M&TBank Corp., C.A. No. 15-897-RGA, 2017 WL 1197716, at *3 (D. Del. Mar. 30, 2017) (concluding that the Rule 9(b) standard should not apply to § 14(a) claims sounding in negligence).

         IV. DISCUSSION

         A. Motion to Dismiss

          1. Whether the Sensitivity Case Projections are materially false or misleading

         In support of the motion to dismiss, defendants argue that the complaint fails to state a claim because the Management Case Projections and the Sensitivity Case Projections were fully and accurately disclosed in the Proxy. (D.I. 30 at 9) Defendants contend that the Sensitivity Case Projections represented the potential impact of risks outside of Envision's control, and they were not disclosed in the Proxy as a factual statement about Envision's prospects. (D.I. 30 at 9-10) Moreover, defendants allege that plaintiffs claims are barred by the "bespeaks ...


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