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Montanio v. Keurig Green Mountain, Inc.

United States District Court, D. Vermont

February 16, 2017

KYLE MONTANIO, Individually and on Behalf of All Others Similarly Situated, Plaintiff,


          Geoffrey W. Crawford, Judge

         This is a direct shareholder class action lawsuit in which the lead plaintiff, Kyle Montanio, a former shareholder of Keurig Green Mountain, Inc. ("Keurig"), has sued Keurig, Keurig's former CEO, members of Keurig's former Board of Directors, and the corporate investors that bought out Keurig in a deal completed in March 2016. He alleges that, in connection with the proposed merger, Defendants disseminated a materially false and misleading proxy statement, in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78n(a), 78t(a), and Rule 14a-9, 17 C.F.R § 240.14a-9. Defendants have moved to dismiss the complaint for failure to state a claim. (Docs. 27, 32.)

         The court held a hearing on the motion on September 14, 2016. Counsel was allowed until September 26 to file posthearing memoranda. No supplemental filings were made and the motion was taken under advisement on September 26, 2016.

         The complaint names the following defendants: Keurig Green Mountain, Inc.; Brian Kelley (former CEO of Keurig and a former member of its Board); Norman Wesley (former Chairman of the Board); the following former members of the Board: Barbara Carlini, John Hayes, A.D. David Mackay, Michael Mardy, Hinda Miller, David Moran, Jose Reyes Lagunes, Susan Kilsby, and Robert Steele; JAB Holdings B.V. (the company that bought Keurig); Acorn Holdings B.V. (a subsidiary of JAB Holdings); and Maple Holdings Acquisition Corp. (a subsidiary of Acorn). (Doc. 22 ¶¶ 21-37.)


         The following facts are taken from the complaint and the documents incorporated by reference into the complaint (primarily the proxy statement in question). See Subaru Distribs. Corp. v. Subaru of Am., Inc., 425 F.3d 119, 122 (2d Cir. 2005).

         Keurig is best known for its line of Keurig Hot brewing systems-countertop kitchen and office appliances that brew single servings of coffee, tea, and other beverages through the use of small "K-Cup" pods filled with coffee grounds, tea leaves, or other bases. (Doc. 22 ¶ 40.) The Keurig hot brewers were quite successful, and through 2014, the company's financial prospects were bright. In the fourth quarter of fiscal year 2014, Keurig achieved 14% revenue growth for the quarter and 8% for the year. Its stock reached a high of $ 154.27 per share in November 2014. (Id. 42-45.)

         During 2014 Keurig began developing a new appliance, dubbed Keurig Kold, that would allow consumers to make cold beverages instantly from single-serving pods. (Doc. 22 ¶ 47.) The Kold was to be "game changing" with a "rapid chilling system" and a "carbonation process." (Id.) Like the K-Cups for the hot brewers, single-serving pods for the Keurig Kold would be available from a variety of popular soft drink brands. (Id.) The company invested more than $125 million in the development of the Kold system. (Id. ¶ 56.)

         Coca-Cola was particularly interested in Keurig and the Keurig Kold system. In February 2014, it acquired a 10% stake in Keurig (it would later increase its stake to 17.4%, becoming Keurig's largest shareholder) and signed a 10-year agreement to develop Coca-Cola branded products for the Kold system. (Doc. 22 ¶¶ 46-18.)

         Throughout 2014 and early 2015, Keurig's management, including its CEO Brian Kelley, were optimistic about the future success of Kold. According to the complaint, they "heavily hyped" the Kold system in quarterly and yearly earnings announcements. (Doc. 22 ¶¶ 49-53, 59-62.) At the same time, however, those statements reported weaker-than-expected revenue from the Keurig hot brewers and pods. (Id. ¶ 58.) The statements emphasized that the lower revenue was based only on transitory factors. (Id. ¶¶ 59-60.)

         In January 2015, "Party X" approached Kelley about a possible merger with Keurig. (Doc. 22 ¶ 54.) Party X offered to pay a premium over Keurig's stock price-then $129.00-but Keurig's management and Board of Directors declined to seriously consider the offer, in light of the "value creation potential from the long-term growth of the Keurig hot system, the anticipated launch of the Keurig Kold system later in 2015 and subsequent opportunities to provide products in other high-margin cold beverage categories using the Kold system.'" (Doc. 22 ¶ 54.) Party X [1] again inquired about acquiring Keurig on June 22, but Kelley again "dismissed Party X in light of the projected success of Keurig Kold." (Id. ¶ 54.)

         A month later, Olivier Goudet, the CEO of JAB Holdings, inquired about acquiring Keurig. (Doc. 22 ¶ 64.) At a meeting on July 21, 2015, Goudet told Kelley and Frances Rathke, Keurig's Chief Financial Officer, that "further developing a relationship with Keurig was a top priority of JAB Holding." (Id. ¶ 65.)

         On August 26 and 27, 2015, members of the Board met with senior management to discuss Keurig's difficulties in 2015 and anticipated challenges in 2016. At this meeting, management provided the Board with updated "financial projections that had initially been prepared for and shared only with financing sources in connection with Keurig's new credit facility earlier in 2015." (Doc. 28-2 at 43; accord Doc. 22 ¶ 67.) The projections estimated that the revenue from Keurig Kold would grow substantially and that by 2022, it would even surpass the expected revenues for Keurig hot brewers. (Doc. 22 ¶ 56.) At a meeting on August 28, Goudet again told Kelley and Rathke that JAB Holdings still wanted to "develop a relationship with Keurig, " but Kelley informed him that Keurig was not for sale. (Id. ¶ 68; Doc. 28-2 at 43.)

         On September 11, at a meeting between representatives of Keurig and Party X, a representative of Party X stated that it was no longer interested in acquiring Keurig. (Doc. 22 ¶ 99; Doc. 28-19 at 3.)

         Keurig formally launched Keurig Kold on September 29, 2015. (Doc. 22 ¶ 57.)

         A little more than a week later, Goudet telephoned Kelley asking to meet for dinner because he had a '"very compelling' proposal to make." (Doc. 22 ¶ 69.) At the dinner, on October 15, Goudet made his initial offer: JAB Holdings would acquire Keurig for $85.00 in cash per share. (Id.) The Board rejected the offer as too low at a meeting on October 19, and eight days later, Goudet increased the offer to $88.00 per share. (Id. ¶ 70-71.) JAB Holdings representatives also specified that it would withdraw the offer if Keurig attempted to generate competing bids. (Doc. 28-2 at 46.)

         According to Plaintiff, this offer "was nowhere near the ballpark of fair value for Keurig, " and the Board members knew it. (Doc. 22 ¶¶ 72-73.) Party X had been willing in June to pay more than $129.00 per share for the company. Because the Board was now interested in selling the company to JAB Holdings, they needed "to develop a creative way to artificially lower the Company's value in order to support a deal price that JAB Holdings would be willing to pay." (Id. ¶ 73.) "Keurig management discovered that by applying a range of probability weighting percentages to the success of Keurig Kold, they could arbitrarily slash their own projections of the future value of the Keurig Kold line, thereby dropping the value of the Company overall, in order to support virtually any price that JAB Holdings would ultimately agree to pay." (Id. ¶ 75.) But, Plaintiff alleges, the Board did not embrace a particular probability scenario "until after the parties agreed on the ultimate deal price, " thereby ensuring that the estimated value of the company would be commensurate with the final share price offered by JAB Holdings. (Id.)

         The Board first considered the $88.00 per share offer at an in-person meeting on November 12, 2015. (Doc. 28-2 at 46.) Together with senior management, the Board reviewed "ten-year financial projection materials, which were based on the August 2015 financial projections made available to the Board but had been revised to reflect management's preliminary fiscal 2016 budget. . . and updated views on Keurig's fiscal 2016 and longer-term financial performance." (Doc. 28-2 at 46.) Then, with Keurig's financial advisors-Bank of America Merrill Lynch ("BofA Merrill Lynch") and Credit Suisse-the Board "began to discuss 'preliminary financial perspectives regarding ... Keurig's Kold business based on different probability scenarios regarding the success of that new business, '" and authorized continued negotiations with JAB Holdings. (Doc. 22 ¶ 75; Doc. 28-2 at 46.)

         JAB Holdings increased their offer price to $92.00 per share on November 29 after a week of negotiation. (Doc. 22 ¶ 76.) On December 1, the Board and management considered the offer and returned to the question of the appropriate "probability weighting" for Keurig Kold's future success. (Doc. 28-2 at 49.) With a final offer price in hand, "[m]anagement recommended a 50% probability weighting for Keurig's Kold business in the fiscal year ending September 25, 2021 and subsequent fiscal years as an appropriate adjustment given the risks associated with the launch of the new platform, " and the Board agreed. (Doc. 28-2 at 49; Doc. 22 ¶ 76.) It "directed BofA Merrill Lynch and Credit Suisse to use the 50% probability weighting" for their financial analyses of the deal. (Doc. 22 ¶ 76.)

         At a board meeting on December 6, BofA Merrill Lynch and Credit Suisse both informed the Board that, based on the Board's preferred 50% probability weighting and other factors, the offer of $92.00 per share was "fair, from a financial point of view, " to holders of Keurig common stock.[2] (Doc. 28-2 at 50.) The Board then unanimously approved the merger and the deal was announced the next day. (Id.)

         Keurig issued a proxy statement to obtain shareholder support of the merger on January 12, 2016. (Doc. 22 ¶ 92; Doc. 28-2.) The proxy statement outlines the merger agreement, provides background information on the negotiations of the merger, details the conduct of senior management and the Board during those negotiations, includes the financial projections for Keurig (both with and without the 50% probability weighting applied), includes financial analyses of the proposed merger by Keurig's two financial advisors (BofA Merrill Lynch and Credit Suisse), and includes the Board's recommendation that shareholders vote in favor of the merger. (Doc. 28-2.)

         Two weeks later, Plaintiff filed suit, alleging that the proxy statement was materially false and misleading. (Doc. 1.) Keurig issued supplemental disclosures on February 16. (Doc. 28-19; Doc. 22 ¶ 99.) The deal was approved by shareholders on February 24, and on March 3, the merger was officially consummated. (Doc. 22 ¶ 104.) Plaintiff filed an amended complaint, the one at issue here, on April 27. (Doc. 22.)

         The complaint alleges five specific ways in which the proxy statement was materially false and misleading: (1) the Board's recommendation of the 50% probability weighting was false and misleading and the proxy failed to disclose a sufficient basis or enough background supporting that recommendation (Doc. 22 ¶¶ 78-79, 95-96); (2) the proxy failed to disclose "any details or discussions" regarding the Board's consideration of alternative scenarios for Keurig (Id. ¶ 97); (3) it failed to disclose any basis for the Board's belief that other parties would not be able to offer a higher price for Keurig, even though Party X had made such an offer in June 2015 (Id. ¶¶ 98-99); (4) it failed to "disclose any details of management's discussions with Goudet" and whether management had discussed continued roles with Keurig or opportunities to invest after the buyout (Id. ¶¶ 100-02); and (5) it failed to disclose the meaning of "Keurig forecasts" in its summary of the financial analyses of BofA Merrill Lynch and Credit Suisse, and so made it unclear whether that term refers to the "Financial Projections" disclosed earlier in the proxy or to a different, undisclosed set of financial forecasts (Id. ¶¶ 103-05).


         I. Applicable Legal Standards

         Before reaching the merits of the parties' arguments, the court addresses two initial issues: elements of claims under Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934, and the elevated pleading standard required by the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(1).

         Section 14(a) prohibits the solicitation of proxies "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." 15 U.S.C. § 78n(a). Rule 14a-9(a) prohibits solicitations "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 non false or misleading." 17 C.F.R. § 240.14a-9(a).

         To state a claim under these provisions (collectively "Section 14(a)"), a plaintiff must allege that: "(1) a proxy statement contained a material misrepresentation or omission, which (2) caused plaintiffs' 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." Bond Opportunity Fund v. Unilab Corp., 87 F.App'x 772, 773 (2d Cir. 2004); accord Police & Fire Ret. Sys. of Detroit v. SafeNet, Inc., 645 F.Supp.2d 210, 226 (S.D.N.Y. 2009).

         "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Indus., Inc. v. Northway, Inc.,426 U.S. 438, 449 (1976); accord Va. Bankshares, Inc. v. Sandberg,501 U.S. 1083, 1090 (1991). In other words, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having ...

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