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Paradise Wire & Cable Defined Benefit Pension Plan v. Weil

United States Court of Appeals, Fourth Circuit

March 11, 2019

PARADISE WIRE & CABLE DEFINED BENEFIT PENSION PLAN; HOLLINGSWORTH, MENDENHALL AND MCFADDEN, LLC; IG HOLDINGS, INCORPORATED; IG REVOCABLE TRUST; DR. STUART WOLLMAN; SHEILA ROSENBERG; RENE DEMEULE, Individually on behalf of themselves and all others similarly situated, Plaintiffs - Appellants,
v.
EDWARD M. WEIL, JR.; AMERICAN REALTY CAPITAL RETAIL ADVISOR, LLC; DAVID GONG; LISA D. KABINICK; STANLEY PERLA; NICHOLAS RADESCA; LESLIE D. MICHELSON; EDWARD G. RENDELL; AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INCORPORATED; AR GLOBAL INVESTMENTS LLC; AMERICAN FINANCE TRUST, INCORPORATED, Defendants - Appellees.

          Argued: December 11, 2018

          Appeal from the United States District Court for the District of Maryland, at Baltimore. Catherine C. Blake, District Judge. (1:17-cv-00132-CCB)

         ARGUED:

          Jeffrey Simon Abraham, ABRAHAM, FRUCHTER & TWERSKY, LLP, New York, New York, for Appellants.

          George Stewart Webb, Jr., VENABLE LLP, Baltimore, Maryland, for Appellees.

         ON BRIEF:

          John B. Isbister, TYDINGS & ROSENBERG, LLP, Baltimore, Maryland, for Appellants.

          John T. Prisbe, Michael J. Wilson, VENABLE LLP, Baltimore, Maryland, for Appellees

          American Finance Trust, Inc. and American Realty Capital - Retail Centers of America, Incorporated. Reid M. Figel, David L. Schwarz, Daniel V. Dorris, KELLOGG HANSEN TODD FIGEL & FREDERICK PLLC, Washington, D.C., for Appellees

          American Realty Capital Retail Advisor, LLC, AR Global Investments LLC, Nicholas Radesca and Edward M. Weil, Jr. Jay A. Dubow, Matthew D. Foster, Christopher B. Chuff, PEPPER HAMILTON LLP, Philadelphia, Pennsylvania, for Appellees

          David Gong, Lisa Kabnick, and Stanley Perla. Eric N. Whitney, Jeffrey A. Fuisz, ARNOLD & PORTER KAYE SCHOLER LLP, New York, New York, for Appellees Leslie D. Michelson and Edward G. Rendall.

          Before NIEMEYER, DUNCAN, and QUATTLEBAUM, Circuit Judges.

          QUATTLEBAUM, Circuit Judge:

         This case arises from the merger of American Realty Capital - Retail Centers of America, Inc. ("RCA") and American Finance Trust, Inc. ("AFIN"). After the merger, the shareholders of RCA discovered information about AFIN's financial condition that indicated AFIN was worth less and was less healthy than represented in the proxy statement that induced their vote for the merger. Believing they had been misled, the RCA shareholders sued alleging the proxy statement was false and misleading under the federal securities laws. However, the statements complained of were not false or misleading and the alleged omissions were addressed by narrowly tailored warning language. Therefore, we affirm the district court's dismissal of the claims.

         I.

         RCA and AFIN's merger stems from their relationship with a business known as AR Global Investments LLC ("AR Global").[1] AR Global, directly and through entities it owns, creates and sells ownership interests in real estate investment trusts, which are sometimes referred to as REITs.[2] AR Global's affiliates then manage the day-to-day operations of those REITs including the purchase, sale and rental of real estate assets. This business model has historically produced substantial fee revenue for AR Global.

         Consistent with its business model, AR Global, through an affiliated company, created RCA and AFIN and sold ownership interests in them. In addition, one of AR Global's affiliates managed their day-to-day operations.

         In 2014 and 2015, financial improprieties regarding several companies affiliated with AR Global became public. As a result, a number of the REITs with whom AR Global had management contracts terminated AR Global as their asset manager. Fearing the loss of management fee revenue from additional terminations, AR Global developed a plan to prevent other REITs from terminating their contracts. To effectuate this plan, AR Global attempted to merge REITs with freely terminable management agreements into REITs with longer management agreements that were more difficult, if not virtually impossible, to break.

         AFIN had a management contract with AR Global that was difficult to terminate because it had a twenty-year term. By contrast, RCA had a management contract that could be easily terminated because it only required sixty days' written notice and could be terminated without cause. Consistent with its plan, AR Global sought to merge RCA into AFIN to prevent RCA from terminating AR Global as its asset manager, thereby protecting future management fee revenues.

         In response to the efforts of AR Global, in early 2016, AFIN and RCA began merger negotiations. On September 7, 2016, RCA announced a merger agreement between the two REITs. Under the terms of the agreement, RCA was to merge into AFIN so that AFIN would be the surviving entity after the merger. In other words, the RCA shareholders would become AFIN shareholders. The merger agreement provided that the RCA shareholders would receive a combination of cash and AFIN stock, estimated to be $10.26, in exchange for each of their RCA shares.

         The merger had to be approved by RCA's shareholders. To solicit the shareholders' vote on the merger, on or about December 16, 2016, RCA's directors disseminated a proxy statement (the "Proxy") to the RCA shareholders. Like the merger agreement, the Proxy estimated that the RCA shareholders would receive $10.26 per RCA share from the merger.

         An estimate, by its very nature, is not certain. To know the actual-rather than estimated-value the RCA shareholders would receive for their RCA shares, the current per share net asset value ("NAV") of AFIN stock would have been needed. However, AFIN's most recent calculation of its NAV was effective as of December 31, 2015. As of that date, the value of AFIN's NAV was $24.17. Even though it was almost a year old at the time, AFIN's $24.17 NAV, effective as of December 31, 2015, was used to arrive at the $10.26 per share estimate of the value to be received by the RCA shareholders.

         Of course, changes in AFIN's NAV after December 31, 2015, would necessarily affect the actual value received by the RCA shareholders from the merger. If the NAV increased after December 31, 2015 due to improvements in AFIN's financial condition, the actual value to the RCA shareholders from the merger would be greater than the $10.26 per share estimate. On the other hand, if AFIN's fortunes worsened and the NAV decreased from its December 31, 2015 value, the actual per share value to the RCA shareholders from the merger would be less than $10.26.

         In addition to the information about the value to be received by the RCA shareholders, the Proxy also contained information about AFIN and its financial condition, including projections of AFIN's future financial ...


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