MDL No.: 1271 Civil Action No.: 99-63 (GMS) (D. Del. Document Nos.: 44, 62, 63
The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge
MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART DEFENDANT USOP'S MOTION TO DISMISS; GRANTING IN PART AND DENYING IN PART DEFENDANT LEDECKY'S MOTION TO DISMISS; GRANTING IN PART AND DENYING IN PART DEFENDANT CLAYPOOLE'S MOTION TO DISMISS; GRANTING THE PLAINTIFFS' MOTION FOR LEAVE TO AMEND THE COMPLAINT
In October 1997, the plaintiffs sold their company, Aztec International ("Aztec"), to defendant U.S. Office Products ("USOP") in exchange for 720,000 shares of USOP common stock. After the merger and before the plaintiffs sold their USOP stock, the value of the USOP stock decreased significantly. In response, the plaintiffs filed a 20-count complaint claiming contract violations, fraud, negligence, negligent misrepresentation, conspiracy, and breach of fiduciary duty on the part of the defendants. The complaint addresses two contracts: the written Agreement and Plan of Reorganization ("Reorganization Agreement") governing the merger of Aztec and USOP, and an oral contract wherein the defendants allegedly promised to compensate the plaintiffs for the loss in value of their USOP stock. In the Second Amended Complaint ("complaint"), the plaintiffs claim that the defendants breached the contracts, made false statements regarding the contracts, and fraudulently induced the plaintiffs to enter into the contracts.
The plaintiffs originally filed this action in the United States District Court for the District of Delaware. The Judicial Panel on Multi-District Litigation transferred the case to this court for pretrial proceedings as part of the USOP Multi-District Litigation ("MDL") pending in this court. This case and others in the USOP MDL action involve defendants USOP; Jonathan Ledecky, the former President, Chief Executive Officer, and Chairman of USOP; and James Claypoole, the President of the Technology Solutions Division of USOP. This matter is now before the court on the defendant USOP's, Ledecky's, and Claypoole's separately filed motions to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the court grants in part and denies in part the defendants' motions to dismiss.
The plaintiffs are the former owners of Aztec, a closely held Delaware corporation located in Connecticut that the plaintiffs sold to defendant USOP in October 1997. Compl. ¶ 4. Plaintiffs Jack and Fran Meehan, Les Asher, and Gordon Tingets reside in Connecticut, plaintiffs Beth and Christopher Meehan reside in Colorado, plaintiff William Durniak resides in New York, and plaintiff Michael Dickens resides in Texas. Id. ¶¶ 7-15. The plaintiffs claim that during negotiations regarding the USOP-Aztec merger, the defendants made false and misleading statements and omissions regarding USOP's future business strategy. E.g., id. ¶¶ 38, 62. The plaintiffs detrimentally relied on these false statements and agreed to sell Aztec to USOP based on these statements and omissions. Id. ¶ 38. The plaintiffs state that had they been aware of USOP's true business plans, they would not have sold Aztec to USOP. Id. ¶ 39.
Once the plaintiffs became aware of USOP's new business strategy, they met with defendants Ledecky and Claypoole in the District of Columbia in February 1998 to discuss their concerns. Id. ¶¶ 54, 55. At this meeting, defendant Ledecky guaranteed that USOP would provide the plaintiffs with consideration equal to that agreed upon for the sale of Aztec. Id. ¶ 56. Furthermore, Mr. Ledecky allegedly gave his personal guarantee that he would make the plaintiffs whole if USOP failed to do so. Id. Later, both Mr. Ledecky and USOP refused to provide the plaintiffs with the consideration they allegedly agreed to. Id. ¶ 61.
B. Defendant USOP's Original Business Plan
Defendant Ledecky founded USOP, a company located in the District of Columbia and incorporated in Delaware, in 1994. Id. ¶ 24. USOP's business strategy was to acquire existing companies in exchange for USOP stock and then group these companies together as a single corporate entity to achieve increased reported revenues, thereby increasing the value of USOP stock. Id. To maintain its stock price, USOP used business practices, such as the pooling-of-interests accounting method. *fn2 Id. ¶ 26. USOP could not use the pooling-of-interests accounting method, however, if it intended to engage in a buyback or spin-off of an acquired company within two years of the acquisition. Id. ¶ 26.
C. Defendant USOP's Negotiations with Aztec
In early 1997, USOP representatives approached plaintiff Jack Meehan, Aztec's principal owner, about the possibility of acquiring Aztec. Id. ¶ 27. Based on USOP representatives' description of USOP's business plan, Jack Meehan and Eric Schwartz, president of USOP's Computer Network Services Division, entered into a confidentiality agreement. Id. USOP and Aztec then began acquisition discussions. Id. ¶¶ 27-28. During these discussions, USOP Technology Solutions President defendant Claypoole indicated that defendant Ledecky was directing USOP's strategy for this merger and that Mr. Ledecky was the visionary leader who would build USOP into an $8 billion company by the year 2000. Id. ¶ 28.
During the first week of October 1997, Aztec received a Letter of Intent from USOP confirming USOP's intent to acquire Aztec in exchange for 720,000 shares of USOP stock. Id. ¶ 31. USOP representatives refused the plaintiffs' original demand for cash consideration and represented that the all-stock deal would be beneficial to the plaintiffs because it would allow the transaction to qualify for pooling-of-interests accounting treatment. Id. To this end, USOP's Letter of Intent stated that "[t]he Proposed Acquisition [of Aztec] must qualify for the pooling-of-interest [sic] accounting treatment." Id.
During late October 1997, Aztec and USOP representatives negotiated the terms of the Reorganization Agreement. Id. ¶ 32. During these negotiations, USOP representatives provided the plaintiffs with copies of USOP's most recent prospectus and supplements, as well as various articles on USOP, Mr. Ledecky, and the nature of USOP's stock. Id. USOP did not mention any planned changes in its business strategy. Id. The Reorganization Agreement provided for total consideration ("Merger Consideration") of 720,000 shares of USOP Common Stock that were trading at a price of $37.5625 per share as of the closing date. Id. ¶ 34. The shares were subject to transfer restrictions in accordance with the pooling-of-interests accounting rules. Id. ¶ 35. These restrictions prohibited the plaintiffs from selling any of their USOP shares until USOP and Aztec operations had been combined for a period of 30 days after publication of their combined results in a public announcement. Id. USOP controlled the timing of this public announcement and the restriction on the plaintiffs' shares was set to expire in mid-February 1998. Id.
On October 24, 1997, the plaintiffs entered into the Reorganization Agreement with USOP and its subsidiary, Mason Acquisition Corporation. Id. ¶ 38. On the same day, the acquisition closed, Aztec became a subsidiary of USOP, and the Aztec shareholders were issued 720,000 shares of USOP stock with a total market value of $27,000,000.00. Id. ¶ 39.
D. The Defendants' Alleged Misrepresentations and Omissions During the Negotiation of the Reorganization Agreement
The plaintiffs plead that, during the negotiations, USOP's representatives provided them with false and misleading information and failed to disclose other adverse information. Id. ¶ 38. The plaintiffs relied on this information and, if not for the defendants' omissions and false statements, they would not have entered into the Reorganization Agreement. Id. ¶¶ 39, 42, 45, 62.
From October 4 through 7, 1997, USOP held a Technology Solutions Presidents' Meeting in the District of Columbia. Id. ¶ 37. Mr. Claypoole presided over this meeting, which Computer Network Services Division President Eric Schwartz attended. Id. At this meeting Mr. Claypoole and other unnamed individuals discussed a new business strategy involving entering into a stock repurchase and spin-off transaction. Id. This new business strategy included spinning off the Technology Solutions Division, which was to include Aztec. Id. ¶¶ 28, 31.
The defendants knew that this spin-off (which would occur within two years of the Aztec acquisition) and repurchase plan would specifically disqualify USOP from using the pooling-of-interests accounting method specified in USOP's Letter of Intent. Id. ¶¶ 31, 36. In addition, USOP representatives had represented that Mr. Ledecky was the driving force behind USOP and that he and the company intended to continue making new acquisitions. Id. ¶ 30. Despite knowledge of the planned transition within USOP, the company's representatives failed to inform the plaintiffs of the transition, continued to sell USOP as an acquisition-driven company, and told them that USOP's strategy would not undergo any drastic changes. Id. ¶¶ 32, 41.
E. Post-Merger Events within Defendant USOP
On November 5, 1997, USOP announced that Mr. Ledecky was stepping down as President and Chief Executive Officer and that Tom Morgan would replace him. Id. ¶ 40. In the press release, Mr. Ledecky referred to Mr. Morgan's "outstanding service in transitioning [USOP] from an acquisition-driven company to one that is focused on exploiting the opportunities [it has] to realize tremendous operating efficiencies." Id. Mr. Ledecky announced the news to plaintiffs Jack Meehan, William Durniak, Les Asher, and Gordon Tingets during a conference call held that same day. Id. On November 21, 1997, USOP held a management retreat for its division presidents. Id. ¶ 42. At this retreat, the presidents received copies of a memorandum prepared by new USOP President Tom Morgan. Id. This memorandum stated that one of USOP's new priorities was to become less dependent on acquisitions. Id. Following these events, USOP's stock price dropped. Id. ¶ 43.
On January 13, 1998, USOP issued a detailed press release entitled "U.S. Office Products Announces Strategic Restructuring," revealing that USOP was planning a $1 billion self-tender for approximately 37 million shares at a price of $27.00 per share. Id. ¶ 44. USOP was also planning to spin-off four divisions: Corporate Travel Services, Education, Print Management, and Technology Solutions. Id. The company planned to incur approximately $800 million in additional indebtedness to fund the repurchase, the spin-offs, and a $270 million equity investment from a fund managed by Clayton, Dublier & Rice, a private equity firm. Id. The press release estimated that at the close of all transactions, USOP would have approximately $1.3 billion in total indebtedness and announced that Mr. Ledecky would step down as chairman of USOP once the transactions were complete. Id. Following the publication of this press release, USOP's stock price dropped sharply. Id.
Although not mentioned in the press release, the transaction with Clayton, Dublier & Rice allowed USOP management personnel, including defendants Ledecky and Claypoole, to exercise stock options that the plaintiffs believe allowed the defendants to saturate the market with USOP stock. Id. ¶ 48. These options allowed USOP personnel to sell their stock for $27.00 per share, "a substantial premium to the then-current stock price, which has since repeatedly fallen." Id. Also on January 13, 1998, USOP notified the plaintiffs that the USOP stock that they received as Merger Consideration would be traded in for watered-down USOP stock and shares of stock in the four newly created spin-off companies. Id. ¶ 46.
On January 21, 1998, the plaintiffs began planning to sell their USOP stock pending the lifting of the pooling-of-interests transfer restrictions. Id. ¶ 52. When plaintiff Meehan contacted USOP by telephone, USOP's legal department informed Mr. Meehan that the restrictions were lifted on January 13, 1998. Id. Although USOP's legal department told Mr. Meehan that it had transmitted this information to Mr. Meehan's office, it later acknowledged that it had sent the notification to the wrong number. Id. Between January 13 and 21, 1998, USOP's stock price declined from $20.56 per share to an unspecified amount. Id. ¶ 53.
Once Mr. Meehan learned of USOP's mistake regarding the facsimile, he contacted Mr. Claypoole and demanded that Mr. Claypoole provide the plaintiffs with solutions to their problems regarding the declining value of USOP's stock. Id. ¶ 54. On January 22, 1998, Mr. Meehan and Mr. Claypoole met in Florida and Mr Claypoole advised Mr. Meehan to "hold tight" and said he would arrange a meeting with Mr. Ledecky. Id.
F. Plaintiff Meehan's February 11, 1998 Meeting with Defendants Ledecky and Claypoole
On February 11, 1998, plaintiff Meehan met with defendants Ledecky, then the Chairman of USOP, and Claypoole in the District of Columbia. Id. ¶ 55. Phillip Arturi and Bruce Torello *fn3 of Professional Network Services, another USOP Technology Division company, also attended the meeting. Id. At this meeting, Mr. Meehan informed Mr. Ledecky of his concerns and told him that he and the other shareholders wanted to be made whole. Id. Mr. Ledecky told Mr. Meehan that he was certain that the pending stock spin-off and tender offer would "make Plaintiffs whole" and earn them a profit. Id. ¶ 55. He also told Mr. Meehan "that his word was his bond, this is how he built his business and [he had] never gone back on [his] word." Id. (internal quotation marks omitted).
Mr. Ledecky stated that, if the post-split aggregate value of the spin-offs and the cash received from the stock self-tender failed to equal the Merger Consideration provided for in the Reorganization Agreement, USOP would make the plaintiffs whole. Id. ¶ 56. Mr. Ledecky also said he personally would make the plaintiffs whole if USOP failed to do so. Id. In consideration for these promises, and at the insistence of both Mr. Ledecky and Mr. Claypoole, the plaintiffs agreed to refrain from selling any of their USOP stock prior to the spin-off scheduled for April 25, 1998. Id. ¶ 56, Ex. A.
Mr. Claypoole urged the parties not to create a formal written agreement because "these deals were made behind closed doors." Id. ¶ 57. Mr. Meehan asked Mr. Ledecky if he would accept the details of the agreement in writing, but Mr. Ledecky refused. Id. Mr. Claypoole, however, did agree to accept a letter from Messrs. Meehan, Arturi, and Torello concerning the meeting and the "make-whole" agreement. Id. Mr. Meehan then asked Mr. Ledecky to shake hands to the agreement. Id. Mr. Ledecky did so and told Mr. Meehan "[y]ou have my word." Id.
On February 12, 1998, Mr. Claypoole telephoned Mr. Meehan to confirm that Mr. Ledecky had reached a satisfactory deal with Mr. Meehan. Id. Mr. Claypoole also urged Mr. Meehan to keep the specifics of the meeting confidential. Id. On February 15, 1998, Messrs. Meehan and Arturi sent a letter to Mr. Claypoole detailing the agreement ("Claypoole letter"). Id. ¶ 58, Ex. A.
G. The May 21, 1998 Shareholders' Meeting
On May 21, 1998, Mr. Meehan and Mr. Arturi attended the USOP shareholders' meeting in the District of Columbia in an attempt to meet again with Mr. Ledecky. Id. ¶ 59. Mr. Ledecky met with Mr. Meehan and asked him to forward a copy of the Claypoole letter to him because he wanted to remind himself of the commitments he had made at the February meeting. Id. Mr. Ledecky then urged the plaintiffs to continue to hold their stock until September 7, 1998, 90 days after the spin-off of Aztec which had been rescheduled from April 25, 1998 to June 9, 1998. Id. ¶ 59, Ex. B. Mr. Ledecky assured Mr. Meehan that this spin-off would "more than make him whole." Id. On May 28, 1998, Mr. Meehan and Mr. Arturi sent Mr. Ledecky a new letter ("Ledecky Letter") detailing the alleged February 11, 1998 agreement ("February 11 Agreement") and included a copy of the Claypoole letter. Id. ¶ 60, Ex. B.
The plaintiffs allege that on September 4, 1998, defendant Ledecky sent an e-mail to Mr. Arturi, with copies to defendant Claypoole and other USOP officials, stating that Mr. Ledecky's "actions and discussions with [Mr. Arturi] - which were documented - were done in [his] capacity as an officer of USOP at the direction of [his] then colleagues." Id. ¶ 61. Once it became clear that the post-split aggregate value of the spin-offs and the cash received from the impending stock self-tender were less than the Merger Consideration, the plaintiffs demanded that USOP and Mr. Ledecky cover their losses. Id. Both USOP and Mr. Ledecky refused. Id.
The plaintiffs originally filed this action in the United States District Court for the District of Delaware. Subject-matter jurisdiction in that court was premised on diversity of citizenship under 28 U.S.C. § 1332. The Judicial Panel on Multi-District Litigation transferred the case to this member of this court for pretrial proceedings pursuant to 28 U.S.C. § 1407, as part of the USOP MDL action. Subsequently, the plaintiffs filed a 20-count complaint focusing on the Reorganization Agreement and the February 11 Agreements and claiming breach of contract, promissory estoppel, unjust enrichment, fraud, fraudulent inducement, inducement by misrepresentation, negligent misrepresentation, negligence, civil conspiracy, breach of fiduciary duty, and violation of the Connecticut Unfair Trade Practices Act. On September 13, 1999 the defendants filed motions to dismiss the plaintiffs' complaint. Since the filing of these motions this MDL action was stayed several times due to bankruptcy filings, MDL transfers, and mediation efforts. Renewed Mot. of Class Action Pls. to Restore Case to Active List at 1-2. On March 5, 2001 USOP filed a Notice of Bankruptcy. On January 4, 2002 USOP filed a Notice of Effective Date of Joint Liquidation Plan of Reorganization of USOP.
J. The Plaintiffs' Withdrawn Counts
In their oppositions to the defendants' motions to dismiss, the plaintiffs agree to withdraw the fiduciary duty and conspiracy claims, Counts VI, VII, XIII, and XVII, in their entirety. Pls.' Opp'n (Ledecky) at 6 n.4; Pls.' Opp'n (USOP) *fn4 at 2 n.1; Pls.' Opp'n (Claypoole) at 6 n.3. *fn5 The plaintiffs also agree to withdraw the fraud and misrepresentation claims regarding the Reorganization Agreement against defendant Ledecky contained in Counts II-V and VIII. Finally, the plaintiffs assert that they will withdraw the promissory estoppel claim regarding the February 11 Agreement against defendant Claypoole in Count XX. Pls.' Opp'n (Ledecky) at 6 n.4; Pls.' Opp'n (Claypoole) at 6 n.3.
A. Legal Standard for a Motion to Dismiss for Failure ...