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City of Hialeah Employees' Retirement System v. FEI Co.

United States District Court, D. Oregon

January 25, 2018

CITY OF HIALEAH EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated,, Plaintiff,
v.
FEI COMPANY, THERMO FISHER SCIENTIFIC INC., THOMAS F. KELLY, DONALD R. KANIA, HOMA BAHRAMI ARIE HUIJSER, JAN C. LOBBEZOO, JAMI K. DOVER NACHTSHEIM, JAMES T. RICHARDSON AND RICHARD H. WILLS, Defendants.

          Gary M. Berne, Jennifer S. Wagner, and Nadia H. Dahab, STOLL STOLL BERNE LOKTING & SCHLACHTER David T. Wissbroecker, ROBBINS KELLER RUDMAN & DOWD LLP, CA. Of Attorneys for Plaintiff.

          Philip S. Van Der Weele and Kara M. Borden, K&L GATES LLP, B. John Casey, STOEL RIVES LLP, Of Attorneys for Defendant Thermo Fisher Scientific Inc.

          David Angeli and Kristen Tranetzki, ANGELI LAW GROUP, Boris Feldman, Keith E. Eggleton, and Michael R. Petrocelli, WILSON SONSINI GOODRICH & ROSATI, Of Attorneys for Defendant FEI Company, Thomas F. Kelly, Donald R. Kania, Homa Bahrami, Arie Huijser, Jan C. Lobbezoo, Jami K. Dover Nachtsheim, James T. Richardson, and Richard H. Willis.

          OPINION AND ORDER

          Michael H. Simon, United States District Judge.

         On March 7, 2017, Plaintiff City of Hialeah Employees' Retirement System (“Plaintiff”) filed a Second Amended Complaint (“SAC”) against Defendant Companies FEI Company (“FEI”) and Thermo Fisher Scientific Inc. (“Thermo”), as well as named Individual Defendants Thomas Kelly, Donald Kania, Homa Bahrami, Arie Huijser, Jan Lobbezoo, Jami Dover Nachstsheim, James Richardson, and Richard Wills (collectively, “Defendants”) bringing claims under § 14(a) and § 20(a) of the 1934 Securities and Exchange Act (“The 1934 Act”). Before the Court is Defendant FEI and Individual Defendants' motion to dismiss Plaintiff's SAC, and Defendant Thermo's motion to dismiss Plaintiff's SAC. For the following reasons, the Court grants Defendant FEI and Individual Defendants' motion to dismiss and also grants Defendant Thermo's motion to dismiss.

         STANDARDS

         A motion to dismiss for failure to state a claim may be granted only when there is no cognizable legal theory to support the claim or when the complaint lacks sufficient factual allegations to state a facially plausible claim for relief. Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010). In evaluating the sufficiency of a complaint's factual allegations, the court must accept as true all well-pleaded material facts alleged in the complaint and construe them in the light most favorable to the non-moving party. Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012); Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). To be entitled to a presumption of truth, allegations in a complaint “may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). All reasonable inferences from the factual allegations must be drawn in favor of the plaintiff. Newcal Indus. v. Ikon Office Solution, 513 F.3d 1038, 1043 n.2 (9th Cir. 2008). The court need not, however, credit the plaintiff's legal conclusions that are couched as factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).

         A complaint must contain sufficient factual allegations to “plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation.” Starr, 652 F.3d at 1216. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)).

         BACKGROUND

         Defendant FEI is an Oregon corporation that designs, manufactures and supports a broad range of high-performance microscopy workflow solutions that provide images and answers at the micro-, nano-, and picometer scales. Defendant Thermo Fisher is a Delaware corporation that provides products and services to customers in a variety of scientific fields. On September 19, 2016, FEI was acquired by Thermo Fisher and became its wholly owned subsidiary. The Individual Defendants were members of FEI's management and board of directors (“the Board”) before its merger with Thermo. Plaintiff Hialeah Employees' Retirement System is a former shareholder of FEI.

         A. FEI Projections and Performance

         In the fall of 2015, FEI engaged in its annual, comprehensive strategic and financial review and planning process. As part of that process, FEI management prepared two sets of projections (jointly, “the Management Projections”). One set (“the Higher Projections”) was compiled by aggregating department-specific projections made by managers at various business units across FEI. The other set (“the Lower Projections”) modified the Higher Projections downward by “applying adjustments developed by FEI senior management to reflect FEI group-level dynamics.”[1] The Board used the Higher Projections in the acquisition of DCG Systems, Inc. in December 2015 and updated both sets of Management Projections after that acquisition.

         FEI reported strong earnings for the fourth quarter of 2015 and first quarter of 2016. On February 2, 2016, FEI reported record revenue for the fourth quarter of 2015. Revenue for that quarter was up 8.2% compared with fourth quarter 2014. FEI's CEO, Defendant Kania, announced that he expected “improved organic revenue growth driving increased earnings and cash flow for FEI” in 2016. On May 4, 2016, FEI reported that it had exceeded its revenue projections for the first quarter of 2016 and saw a revenue increase of 3.5%, compared with the first quarter of 2015. The earnings per fully diluted share (EPS) for the first quarter of 2016 were $0.56, at the top end of the February 2016 projections of an EPS range of $0.46 to $0.57. Defendant Kania commented that “[o]ur record backlog positions us for accelerated revenue and profitability growth as 2016 progresses.”

         B. Merger Negotiations

         On February 2, 2016, Marc Casper, the president and CEO of Thermo Fisher, called defendant Kania, FEI's President and CEO, to express Thermo Fisher's interest in discussing a potential strategic transaction with FEI. Kania then notified the Board of Casper's message and interest. On February 4, 2015, Kania and defendant Kelly, the chairman of the Board, met with Goldman Sachs about their possible retention as FEI's financial advisor. In response to a conflict questionnaire sent by FEI's general counsel, Goldman Sachs disclosed that it had received approximately $7 million in fees from Thermo over the past two years. The Board determined that these past fees would not create a conflict of interest that would jeopardize Goldman's ability to effectively advise the Board. The Board entered into an agreement with Goldman Sachs to provide financial advice to the Board. Of the fees that FEI agreed to pay Goldman, $10 million was contingent on the announcement of a merger, and $35 million was contingent on the closing of the merger.

         Shortly after entering into the agreement with Goldman Sachs, FEI provided the firm with a copy of the updated Management Projections. Neither FEI nor Goldman Sachs expressed a view that one set was better or more realistic than the other. On February 10 and 11, 2016, the Board held a meeting in which Goldman Sachs discussed the Management Projections. At that meeting, no Board member expressed the view that one projection was more reasonable than the other.

         On March 21, 2016, Thermo made an initial, non-binding proposal of an acquisition price of $96.00 per share in cash. The same day, the Board determined that the proposal was “insufficient in comparison to the value embodied in the Company's standalone plan.” Again, no Board member took the view that the Higher Projection was less realistic than the Lower Projection. On April 15, 2016, Thermo sent FEI a revised non-binding indication of interest proposing to acquire FEI at a price of $103.00 per share in cash. The Board held a meeting to discuss the proposal the next day and decided to explore whether FEI could obtain a better price from a different party.

         Between April 16, 2016 and April 18, 2016, Goldman Sachs contacted three parties to explore their interest in a potential acquisition. One of the parties declined. Two of the parties executed confidentiality agreements containing standstill provisions. On April 28, the Board authorized Goldman Sachs to engage in transaction discussions with Thermo and the other two parties.

         On April 20, 2016, Kania told Casper that Thermo's offer of $103.00 per share was insufficient. In an effort to “convey the intrinsic value of FEI” to Thermo, FEI provided Thermo with the Higher Projections. On April 29, Kania and FEI's CFO met with Thermo's senior management and made presentations on FEI's business, products, ongoing strategy and vision, financials and outlook. On May 5th, one of the other parties engaged in transaction discussions informed FEI that they were no longer interested in continuing discussions.

         On May 12, 2016, Thermo raised its offer to acquire FEI to $105.00 per share. The same day, the second party that had engaged in transaction discussions informed FEI that they were no longer interested in continuing discussions. The Board met to discuss Thermo's offer the next day. At this point, the Board began calling the Higher Projections unrealistic. Plaintiff alleges that the Board knew that using the Lower Projections would result in a lower estimate of the intrinsic value of FEI, thereby making a share price close to $105.00 appear fair. Later that day, Kania made a counteroffer to Thermo of $110.00 per share. The next day, Thermo offered $107.50 per share. The Board accepted this offer on May 16, 2016.

         On May 26, 2016, the Board met with Goldman Sachs, which provided the financial analysis that would ultimately appear in a proxy statement disseminated to shareholders (“the Proxy”). Based on its analysis of the Lower Projections, Goldman Sachs told the Board that $107.50 per share was a fair price (the “Fairness Opinion”). The Board unanimously approved the Acquisition and recommended the Acquisition to FEI's shareholders for approval.

         Plaintiff alleges that as a result of the Acquisition, the Individual Defendants expected to secure liquidity for hundreds of thousands of shares of illiquid FEI stock, valued at more than $42.8 million combined. Other material benefits accruing to the Board, Plaintiff alleges, included the accelerated vesting of their unvested stock options and unvested restricted stock units. This benefit was not available to other stockholders. Further, members of management were to receive up to $29 million in change-of-control benefits upon the closing of the merger, and received salary increases and tens of thousands of additional shares of restricted stock on the eve of the signing of the merger.

         C. Proxy

         On July 27, 2016, FEI's Board filed and disseminated the Proxy to the Company's shareholders. The Proxy recommended that the Company's shareholders vote in favor of the Acquisition. The Proxy contained both sets of Management Projections, but explained that the Board had directed Goldman Sachs to base its analysis for the Fairness Opinion on the Lower Projections because those “were more likely to reflect the future business performance of FEI on a standalone basis than would the [Higher Projections].” The Proxy elaborated on this decision:

[T]he Board of Directors considered that the [Higher Projections] were compiled based on individualized projections developed by managers at various business units across FEI without any adjustments by FEI senior management to reflect the historical reality that it was rare for all of FEI's business units to achieve their projected financial goals in any particular year. Therefore, the [Higher Projections] represented an upside case that would be dependent on substantially all individual business units of FEI performing at planned levels of performance, which was inconsistent with FEI's historical experience, and as a result such [Higher Projections] were significantly less likely than the [Lower Projections] to reflect a reasonable estimate of the future performance of FEI on a standalone basis.

         The Proxy warned that the Management Projections were “not fact and should not be relied upon as being necessarily indicative of actual future results, ” and that “actual results may be materially better or worse than those contained in the Management Projections.”

         Although the Proxy included both sets of projections, certain line items that were included in the Lower Projections table were omitted from the Higher Projections table. The omitted items include:

(a) Changes in net working capital;
(b) Capital expenditures; and
(c) Unlevered Free Cash Flow.

         Plaintiff also alleges that the Fairness Opinion and analysis presented in the Proxy statement was flawed because it applied a discounted cash flow (DCF) analysis to the already-discounted Lower Projections, which, they allege, double-discounted the inherent value of FEI. On August 30, 2016, a majority of FEI's shareholders ...


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