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Employees' Retirement System of State of Rhode Island v. The Williams Companies, Inc.

United States Court of Appeals, Tenth Circuit

May 11, 2018


          Appeal from the United States District Court for the Northern District of Oklahoma (D.C. No. 4:16-CV-00131-JHP-FHM)

          Ira A. Schochet, Labaton Sucharow LLP, New York, New York (Joel H. Bernstein, Michael W. Stocker, Eric J. Belfi and Eric D. Gottlieb, Labaton, Sucharow LLP, New York, New York, and William B. Federman and Joshua D. Wells, Federman & Sherwood, Oklahoma City, Oklahoma, with him on the briefs), for Plaintiff-Appellant.

          Sandra C. Goldstein, Cravath, Swaine & Moore LLP, New York, New York (Antony L. Ryan, Cravath, Swaine & Moore LLP, New York, New York, and Michael J. Gibbens, Elliot P. Anderson, Crowe & Dunlevy, P.C., Tulsa, Oklahoma, and Mary H. Tolbert, Oklahoma City, Oklahoma, with her on the brief), for Defendants-Appellees.

          Before LUCERO, BALDOCK, and HARTZ, Circuit Judges.

          HARTZ, Circuit Judge.

         Employees' Retirement System of the State of Rhode Island (Plaintiff) appeals the dismissal of its amended complaint (the Complaint) in a putative class-action suit. It alleges violations of federal securities law because of the failure to disclose merger discussions that affected the value of its investment. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm. The Complaint fails to adequately allege facts establishing a duty to disclose the discussions, the materiality of the discussions, or the requisite scienter in failing to disclose the discussions.


         Before setting forth the factual background, we should explain the sources we rely on. As a general rule, the only facts we consider in assessing the sufficiency of a complaint are those alleged in the complaint itself. See Gee v. Pacheco, 627 F.3d 1178, 1186 (10th Cir. 2010). On occasion, however, it is proper to look beyond the complaint, and this appeal presents such an occasion. We have recognized that we may consider "documents that the complaint incorporates by reference, " "documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity, " and "matters of which a court may take judicial notice." Id. (internal quotation marks omitted). In securities cases it is not unusual to consider "documents incorporated by reference into the complaint, public documents filed with the SEC [Securities and Exchange Commission], and documents the plaintiffs relied upon in bringing suit." Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190, 1196 (10th Cir. 2013). We may look to the contents of a referenced document itself rather than solely to what the complaint alleges the contents to be. See Roth v. Jennings, 489 F.3d 499, 511 (2d Cir. 2007). But "such documents may properly be considered only for what they contain, not to prove the truth of their contents." Id. (citation and internal quotation marks omitted).

         In this case, the Complaint acknowledges that its allegations derive in part from "regulatory filings with the SEC" and "press releases and media reports, " Aplt. App. at A22; and it specifically cites several filings and public statements, including a press release and a transcript of a meeting with security analysts. The following summary relies for the most part on the specific allegations in the Complaint; but we supplement those allegations with additional properly referenced material, indicating when we do so.

         Defendant Williams Companies, Inc. (Williams) is an energy company. At the times material to the Complaint, its president and chief executive officer (CEO) was Defendant Alan Armstrong and its chief financial officer (CFO) was Defendant Donald Chappel. Armstrong also served on its board of directors. Defendant Williams Partners GP LLC (Williams Partners GP) is a limited-liability company owned by Williams. Armstrong was chairman of the board and CEO; and Chappel was CFO and a director. Defendant Williams Partners L.P. (WPZ) is a master limited partnership, whose general partner was Williams Partners GP. Williams owned 60% of WPZ's limited-partnership units.

          Plaintiff's case centers on merger discussions between Williams and Energy Transfer Equity L.P. (ETE), a competing energy firm. The members of the putative class purchased units of WPZ between May 13, 2015 (when Williams announced that it planned to merge with WPZ) and June 19, 2015 (when ETE announced that, despite having been rebuffed by Williams, it would seek to merge with Williams and that such a merger would preclude the merger with WPZ). The value of the units dropped significantly after this announcement. Ultimately, ETE merged with Williams and the proposed WPZ merger was not consummated. The Complaint alleges that the class members paid an excessive price for WPZ units because Williams had not disclosed during the class period its merger discussions with ETE.

         Those discussions began in early 2014 when Kelcy Warren, the chairman and board of directors of LE GP, LLC, the general partner of ETE, contacted Williams' CEO Armstrong to informally express ETE's interest in exploring a merger. Armstrong said he would take any offer to the Williams board of directors. Although not alleged in the Complaint, the SEC Form S-4 registration statement filed by ETE (in connection with the ETE merger with Williams) disclosed that Armstrong told Warren that he did not believe that Williams was interested in a deal.

         Nine months later, ETE conveyed another expression of interest to Williams' financial advisor Barclays Capital. Williams' board retained Barclays and legal counsel to provide guidance on ETE's interest in a merger. After a special meeting of the board in early December 2014, it decided that "it was not in the best interest of [Williams] stockholders to engage in discussions with ETE at that time, " Aplt. App. at A33, although it requested its management and Barclays to further study ETE (as well as other strategic opportunities). Then in January the board agreed to obtain more details about ETE's interest in a combination with Williams after completion of a pending merger between WPZ and a company called Access Midstream Partners (AMP). Accordingly, in February 2015, after the AMP merger, Defendant Armstrong reached out to Warren. Armstrong reiterated that he would convey any offer to Williams' board. The S-4 adds that Armstrong also told Warren that Williams "was not seeking a combination" but "always considers strategic proposals." Id. at A106.

         On May 6, Armstrong and Warren met again, with Defendant Chappel and a colleague of Warren also present. The Complaint describes the meeting as ending with ETE's informal proposal to merge still "open." Id. at A35. The description in the S-4 is less upbeat. According to that report, the ETE representatives suggested the logic of combining Williams's natural-gas assets with ETE's diversified portfolio of energy assets and Armstrong pointed out the strength of Williams's focus on natural-gas infrastructure. Armstrong said he would discuss with his board any offer made by Warren, Warren said that ETE would not make an offer unless Armstrong supported it, and an offer from ETE was neither made nor requested.

         In the meantime, Williams was pursuing a plan to acquire WPZ in full (it already owned 60% of the units). On May 12 the Williams board met with WPZ executives and advisers to discuss Williams' possible acquisition of the remainder of WPZ's outstanding units. The boards of both companies unanimously approved the merger that day and the companies entered into a merger agreement. Williams would no longer be a holding company that owned shares in WPZ but instead would directly incorporate WPZ into its structure. According to the Complaint, this absorption of a master limited partnership and consolidation of its assets into a single operating entity has since been adopted by several energy-infrastructure companies-but at the time only one company had done so (about a year before Williams made its decision).

         The next day, a joint press release announced the Williams-WPZ merger, Defendants conducted a presentation to securities analysts (the Analysts Presentation), and WPZ filed a Form 8-K with the SEC. The Form 8-K set forth the conditions for the merger:

(i) the approval and adoption of the Merger Agreement and the Merger by holders of at least a majority of the outstanding WPZ [limited-partnership units]; (ii) [obtaining] all material required governmental consents . . .; (iii) the absence of legal injunctions or impediments . . .; (iv) the effectiveness of a registration statement on Form S-4. . .; (v) approval of the listing on the New York Stock Exchange . . .; (vi) the affirmative vote of the holders of the majority of the aggregate voting power present at the [Williams] Stockholder Meeting . . .; and (vii) the affirmative vote of the holders of a majority of the outstanding shares of [Williams] Common Stock . . . .

Id. at A134.

         At the Analyst Presentation, representatives of Williams and WPZ discussed the proposed merger and answered questions. Defendant Armstrong began his remarks with enthusiasm:

Really glad to have everybody here today. And I have a very genuine smile on my face today as we completed I think what is a fantastic transaction for us, and really simplifying and really being-positioning us to extend the duration of the great growth trajectory we've got in front of us.

Id. at A146. Defendant Chappel provided a detailed discussion of the proposed merger. After describing the financial advantages of the merger and its financial projections, he discussed the timing of the merger, stating:

We would expect to complete and file the initial S-4 filing with the SEC during the month of June. We would then work through SEC comments. That would go effective. We'd have a mailing to Williams shareholders and then a shareholder vote and closing in the third quarter of 2015.

Id. at A151. He concluded by saying that there was one condition of the merger-the approval of those holding WPZ units-that would not be problematic:

There's no risk around the WPZ vote because Williams has [a] majority of the votes, so the outcome of the WPZ vote is already known.

Id. Williams also gave a slide presentation providing supplemental information regarding the merger. The slides made a number of cautionary remarks about the deal. Notably, a list of "[s]pecific factors that could cause actual results to differ from results contemplated by the forward-looking statements, " id. at A159, included "[s]atisfaction of the conditions to the completion of the proposed merger, including approval by Williams stockholders, " id. "Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, " Williams advised investors "not to unduly rely on our forward-looking statement." Id.

         Less than a week after the public announcement, ETE presented a written offer to acquire Williams. ETE included a condition to its offer that had never been brought up in prior discussions: ETE would not merge with Williams if Williams merged with WPZ. The Complaint alleges that this condition was unsurprising because ETE had never strayed from holding its operating assets in master limited partnerships rather than directly-an arrangement that allegedly provided various financial advantages.

         After considering the offer for a month, Williams rejected it on Sunday, June 21, sending ETE a letter explaining that ETE's proposal undervalued Williams. Also that day, Williams issued a press release announcing that it had authorized a process to explore a range of strategic alternatives following an unsolicited acquisition offer. The press release did not identify ETE as the offeror.

         On Monday, ETE issued a press release disclosing its interest in merging with Williams and stating that its proposal would be a better deal for Williams' investors than the merger of Williams with WPZ. The public announcement had a significant ...

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