Securities Law Alert
In This Edition:• Second Circuit: SLUSA Bars Certain Class Action Claims Asserting Breach of the Duty of Best Execution• Ninth Circuit: Limits the Extent to Which Courts Can Rely on Judicial Notice and the Incorporation-byReference Doctrine to Consider Extrinsic Documents at the Pleading Stage• District of Minnesota: Denies Leave to Amend Complaint to Plead Alleged Misstatements From a Press
Release Protected by the PSLRA’s Safe Harbor• Delaware Chancery Court: Business Judgment Standard of Review May Apply Under MFW Even if
Discussions Take Place Before MFW’s Procedural Safeguards Are Announced• Delaware Chancery Court: Two Recent Decisions Provide Guidance on When Courts Will Rely on the
Merger Price as Presumptive Evidence of Fair Value

August 2018

Second Circuit: SLUSA Bars
Certain Class Action Claims
Asserting Breach of the Dutyof Best Execution
Simpson Thacher
litigators “are very
experienced in handlingcomplex, multi-faceted
litigation involving
novel issues.”–Benchmark Litigation(quoting a client)

On July 31, 2018, the Second Circuit affirmed
dismissal of a class action complaint alleging
breach of the duty of best execution claims
against a brokerage house based on the
court’s determination that the Securities
Litigation Uniform Standards Act (“SLUSA”)
precludes such claims.1 Rayner v. E*TradeFin. Corp., 2018 WL 3625378 (2d Cir.
2018) (Livingston, J.). The Second Circuit
joined the Eighth and Ninth Circuits “inconcluding that best execution claims alleging
misrepresentations or omissions relating
to: (1) a broker’s receipt of ‘kickbacks’
1. SLUSA bars certain state law-based class action claims
alleging either that the defendant made “a misrepresentationor omission of a material fact in connection with the purchaseor sale of a covered security” or “that the defendant used or
employed any manipulative or deceptive device or contrivancein connection with the purchase or sale of a covered security.”
15 U.S.C. § 78bb(f)(1).

Simpson Thacher & Bartlett LLP

from trading venues; and (2) the executionof trades so as to take advantage of sucharrangements, satisfy the third element of
SLUSA, by alleging securities claims basedon fraudulent conduct.”2 The court further
held that such “alleged fraudulent conduct”
is “‘in connection with’ the purchase or saleof covered securities” within the meaningof SLUSA.
The Second Circuit explained that it“emphasize[s] substance over form” when
determining whether “allegations fall within
the ambit of SLUSA.” The court stated that“plaintiffs cannot avoid SLUSA merely by
consciously omitting references to securities
or to the federal securities law,” nor can they
“escape SLUSA by artfully characterizing aclaim as dependent on a theory other thanfalsity when falsity nonetheless is essential
to the claim.” Here, plaintiffs alleged thatthe brokerage house falsely represented that
it would “do everything possible” to achieve
2. See Zola v. TD Ameritrade, 889 F.3d 920 (8th Cir. 2018);
Lewis v. Scottrade, 879 F.3d 850 (8th Cir. 2018); Fleming v.
Charles Schwab Corp., 878 F.3d 1146 (9th Cir. 2017).

the “best execution” for clients’ trades, when
in fact, the company allegedly “rout[ed]clients’ trades to the trading venues that paid
the highest ‘kickbacks.’” The Second Circuit
found the “substance” of plaintiffs’ complaint“plainly allege[d] fraudulent conduct.”
The Second Circuit further held that thealleged fraud “arose ‘in connection with’ thepurchase or sale of covered securities.” Thecourt explained that in order “[t]o satisfy
this element, the fraud perpetrated . . . must
be material to a decision by one or moreindividuals (other than the fraudster) to
buy or sell a covered security.” The court
found the company’s purported “fraudulent
failure to provide best execution allegedly
caused . . . clients to purchase and sell
securities at unfavorable prices and at lower
volumes than expected.”theories against the complaint risks
premature dismissals of plausible claims that
may turn out to be valid after discovery.” To
address these concerns, the Ninth Circuit“clarif[ied] when and how the district court[s]should consider materials extraneous to thepleadings at the motion to dismiss stage.”

Courts May Not Judicially Notice
Disputed Facts
The Ninth Circuit explained that “a court may
take judicial notice of matters of public record
without converting a motion to dismiss into a
motion for summary judgment.” However, “acourt cannot take judicial notice of disputed
facts contained in such public records.” The
Ninth Circuit explained that “[j]ust because[a] document itself is susceptible to judicial
notice does not mean that every assertionof fact within that document is judicially
noticeable for its truth.”
The Ninth Circuit found the district court
erred to the extent it took judicial notice of thetranscript of an investor call for the purposeof determining what investors knew at thetime. The Ninth Circuit explained that “[i]tis improper to judicially notice a transcript
when the substance of the transcript is subject
to varying interpretations, and there is areasonable dispute as to what the transcript
establishes.”

Ninth Circuit: Limits the
Extent to Which Courts
Can Rely on Judicial Noticeand the Incorporationby-Reference Doctrine toConsider Extrinsic Documents
at the Pleading StageOn August 13, 2018, the Ninth Circuit heldthat the district court “abused its discretion by
improperly considering materials outside the[c]omplaint” in dismissing a securities fraud
action. Khoja v. Orexigen Therapeutics, 2018
WL 3826298 (9th Cir. 2018) (Tashima, J.). The
Ninth Circuit “note[d] a concerning pattern
in securities cases” in which defendants“improperly” utilize judicial notice and theincorporation-by-reference doctrine “to defeat
what would otherwise constitute adequately
stated claims at the pleading stage.” Thecourt cautioned that “the unscrupulous useof extrinsic documents to resolve competing

Courts May Not Incorporate
by Reference Unmentioned
Documents That Dispute theComplaint’s Factual Allegations
The Ninth Circuit reaffirmed that “adefendant may seek to incorporate adocument into the complaint ‘if the plaintiff
refers extensively to the document or the
document forms the basis of the plaintiff’s
claim.’” Id. (quoting United States v. Ritchie,
342 F.3d 903 (9th Cir. 2003)). The court
stated that a complaint must usually referto a document “more than once” to satisfy
the “extensively” standard. However,the court noted that a single reference“may be sufficiently ‘extensive’ if [it] isrelatively lengthy.”
The Ninth Circuit found that the “moredifficult question is whether a document canever form the basis of the plaintiff’s claim if
the complaint does not mention the document
at all.” The court stated that there are “rare2instances when assessing the sufficiency
of a claim requires that [a] document [notmentioned in the complaint] be reviewed,
even at the pleading stage.” But the Ninth
Circuit made it clear that “if the document
merely creates a defense to the well-pled
allegations in the complaint, then that
document did not necessarily form the basisof the complaint.” The court reasoned that“[s]ubmitting documents not mentioned in
the complaint to create a defense is nothing
more than another way of disputing thefactual allegations in the complaint,” butwith the “added benefit” that “the plaintiff
receives no opportunity to respond to thedefendant’s new version of the facts” “unlessthe district court converts the defendant’s
motion to dismiss into a motion for summary
judgment.”
The Ninth Circuit further noted that the issue
of “what inferences a court may draw froman incorporated document should also beapproached with caution.” The court statedthat “it is improper to assume the truth of anincorporated document if such assumptions
only serve to dispute facts stated in a wellpleaded complaint.”
The Ninth Circuit found the district court
abused its discretion by considering certain
documents that were neither extensively
referenced in the complaint, nor formed thebasis of plaintiffs’ claims.

District of Minnesota: Denies
Leave to Amend Complaint toPlead Alleged Misstatements
From a Press Release Protectedby the PSLRA’s Safe Harbor
On July 11, 2018, Magistrate Judge Franklin
Noel of the District of Minnesota denied
plaintiffs’ request to file an amended classaction complaint in a long-pending securities
fraud action against a major electronics
retailer.3 IBEW Local 98 Pension Fund v.
Best Buy Co., 2018 WL 3377175 (D. Minn.
2018) (Best Buy IV). Plaintiffs sought the
court’s leave to plead additional alleged
misstatements from a press release that the
court had previously deemed protected byappropriate cautionary language under thesafe harbor provision of the Private Securities
Litigation Reform Act (“PSLRA.”) The BestBuy IV court held that plaintiffs’ “attempt
to present a different portion of the [same]press release countervail[ed] the law of thecase doctrine.” The court explained that “[t]hecautionary language was issued in tandemwith the entire press release, not merely
excerpts of it.”
The Best Buy IV court also found meritlessplaintiffs’ contention that the proposed
amended complaint would be sufficient
to merit class certification with respect
to alleged misstatements made during a
September 14, 2010 conference call, whichwere the only statements that the court
had found actionable under the securities
laws. The court explained that “the issueof class certification” as to these alleged
misstatements had already “been exhaustively
litigated.” The Eighth Circuit had previously
reversed the court’s order granting classcertification based on its determination thatthe statements made during the September
14, 2010 conference call had no price impact;
the district court subsequently denied
plaintiffs’ request to file a new motion forclass certification.4 The Best Buy IV court
found no “clear error or manifest injustice inthese holdings,” and explained that it would
be inappropriate “to permit amendment
based on an issue competently decided by theEighth Circuit and District Court.” The BestBuy IV court held that “[a]fter seven yearsof litigation . . . this case must now proceed
as an individual action based” solely on thestatements made during the September 14,
2010 conference call. Plaintiffs have filed
an objection to the decision with the district
court judge presiding over the case.
4. Please click here to read our discussion of the Eighth Circuit’s
decision in IBEW Local 98 Pension Fund v. Best Buy Co., 818
F.3d 775 (8th Cir. 2016).

3. Simpson Thacher represents Best Buy and several of its
executives in this matter.
3

Delaware Chancery Court:
Business Judgment Standardof Review May Apply Under
MFW Even if Discussions
Take Place Before MFW’s
Procedural Safeguards Are
Announced
On July 20, 2018, the Delaware Chancery
Court held that the business judgment rule
applied to an alleged controlling stockholdertransaction even though discussions about thepossibility of the transaction had taken place
before the alleged controller conditioned
the transaction in compliance with MFW’s
requirements.5 Olenik v. Lodzinski, 2018
WL 3493092 (Del. Ch. 2018) (Slights, V.C.).
The court reasoned that the discussions,“while extensive, never rose to the levelof bargaining” but were instead “entirely
exploratory in nature.”order “to mimic arms-length dealing, and toneutralize the controller’s influence, these two
conditions must be [in] place . . . before any
negotiations take place.” 2018 WL 3493092.
The Olenik court stated that “for purposesof the MFW analysis, in most instances,‘negotiations’ begin when a proposal ismade by one party which, if accepted by
the counter-party, would constitute anagreement between the parties regarding thecontemplated transaction.” Applying thisstandard, the court found that the receipt ofa definitive proposal (in the form of an Offer
Letter) “marked the appropriate time at which
to announce the MFW ab initio conditions.”
The court rejected plaintiffs’ contention thatnegotiations began for MFW purposes when
the CEO engaged in “substantial preliminary
discussions” with the alleged controller. The
court found “[t]his argument . . . ignores theimportant distinction between ‘discussions’
about the possibility of a deal and‘negotiations’ of a proposed transaction afterthe ‘discussions’ lead to a definitive proposal.”

The Transaction Structure Satisfied
MFW’s Requirements
The court held that the transaction structure
at issue met MFW’s conditions because thespecial committee was “well-functioning,” andthe stockholder vote was adequately informed
and uncoerced.

MFW’s Conditions Must Be in Placeat the Time a “Definitive Proposal”
Is MadeMFW holds that the business judgment
standard of review applies to a controllingstockholder transaction if the transaction “isconditioned ab initio upon the approval ofboth an independent, adequately-empowered[s]pecial [c]ommittee that fulfills its duty ofcare, and the uncoerced, informed vote of amajority of the minority stockholders.” 88
A.3d 635. The Olenik court explained that in
5. The parties disputed whether the stockholder at issue was acontrolling stockholder. The court found it unnecessary toresolve the question because it found the business judgment
rule applicable under MFW. Please click here to read our
discussion of the Delaware Supreme Court’s decision in Kahn
v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (MFW).

The court explained that in order to questiona director’s independence, plaintiffs
must “show[ ] that a specific director’s
independence is compromised by factors
material to” that director. Here, plaintiffs
claimed, inter alia, that there were financial
ties between two of the directors and thealleged controller. The court found these
allegations insufficient because plaintiffs
failed to “even attempt” to plead that thesefactors were material to those directors.
The court further found that the special
committee had appropriate authority andacted with due care in negotiating the deal
price. The court stated that “the [s]pecial[c]ommittee did not rubber-stamp a fullybaked deal that [the CEO] had negotiated.”
Rather, “[i]t was actively engaged in
the process, called its own shots andinterfaced directly with management andits legal and financial advisors throughout
the negotiations.”
4

Delaware Chancery Court:
Two Recent Decisions Provide
Guidance on When Courts
Will Rely on the Merger Priceas Presumptive Evidence ofFair Value
Last year, the Delaware Supreme Court issued
two decisions emphasizing the significance ofthe deal price in appraisal litigation. See DFC
Glob. Corp. v. Muirfield Value Partners, 172
A.3d 346 (Del. 2017); Dell v. Magnetar Glob.
Event Driven Master Fund, 177 A.3d 1 (Del.
2017).6 Two recent appraisal rulings suggestthat the weight a court places on the deal
price will depend on the court’s assessment of
the sales process. Compare Blueblade Capital
Opportunities v. Norcraft Cos., 2018 WL
3602940 (Del. Ch. July 27, 2018) (Slights,
V.C.) (no weight on the merger price where
the court found the sales process defective)
with In re Appraisal of Solera Holdings,
2018 WL 3625644 (Del. Ch. July 30, 2018)(Bouchard, C.) (dispositive weight on themerger price where the court found the sales
process thorough and effective).

Blueblade Court Places No Weighton the Merger Price Because of
Deficiencies in the Sales Process
In Blueblade, the Delaware Chancery Court
determined the deal price did not reflect
the fair value of petitioners’ shares as of themerger date in view of what the court foundto be “significant flaws in the process leading
to the [m]erger.” 2018 WL 3602940. The
court stated that it was “cognizant of theDelaware Supreme Court’s embrace of ‘deal
price’ as a strong indicator of fair value inDell and DFC.” But the court noted that inboth cases, the Delaware Supreme Court“declined to adopt a rule that the deal price ispresumptively reflective of fair value.”
The Blueblade court stated that “[i]n an
appraisal action under the Delaware General
Corporation Law, the trial court’s ‘fair value’
determination must ‘take into account all
relevant factors.” Id. (quoting 8 Del. C.
§ 262(h)). The court explained that theDelaware Supreme Court has “reiterated
the ‘flexible’ nature of the trial court’s fair
6. Please click here to read our discussion of the Delaware
Supreme Court’s decision in DFC and here to read our
discussion of the Delaware Supreme Court’s decision in Dell.

value calculus, while also noting its lack of‘confidence in its ability to craft, on a generalbasis, the precise pre-conditions that would
be necessary to invoke a presumption’ infavor of the deal price.” Id. (quoting DFC, 172
A.3d 346).
In the case before it, the Blueblade court
found the “deal process did not include ameaningful market check and, consequently,
the [m]erger [p]rice was not arrived upon by
the collective views of many sophisticatedparties with a real stake in the matter.”With respect to the company’s decision tonegotiate with a single bidder during the
pre-signing phase, the court recognized thatsuch an approach “can, in certain instances,
lead to significant value.” Here, however,“the [b]oard’s focus on only one bidder wastainted” because the board member who
served as the company’s “lead negotiatorfrom start to finish” was “conflicted.” Thecourt found the post-signing go-shop process“equally ineffective as a price discovery tool”
because of the restrictions placed on theprocess by the acquiror.
The court also deemed the company’s
unaffected trading price unreliable as anindicator of fair value because “at the timeof the [m]erger, [the company] was fresh
off an initial public offering of its stock,[the stock] was relatively thinly traded given
the niche market in which it operated and[the company] was also thinly covered byanalysts.”
The court opted to place no weight on either
the merger price or the unaffected trading
price, and instead employed a discounted
cash flow analysis. The court did then use
the merger price as a “‘reality check’” on
its fair value determination. The court
determined that each share was worth $26.16,
an additional 66 cents over the deal price of$25.50 per share.

Solera Court Relies on the Merger
Price Where the Company Was Soldin an Open Process With Objective
Indicia of Reliability
In contrast with the Blueblade court, theSolera court gave the deal price, as adjusted
for merger synergies, “sole and dispositive
weight in determining the fair value of
petitioners’ shares as of the date of themerger.” 2018 WL 3625644. The court
5

found “the [m]erger price resulted from an
open process, informed by robust public
information, and easy access to deeper,
non-public information, in which many
parties with an incentive to make a profit
had a chance to bid.” The court also foundit significant that there was “an efficient andwell-functioning market for [the company’s]
stock” at the time of the merger.
The Solera court stated that the Delaware
Supreme Court’s recent decisions in DFC and
Dell “teach that deal price is the best evidenceof fair value” in cases where the sales process“is characterized by objective indicia of
reliability.” The Solera court also noted thatboth rulings “emphasized” that “the price ofa widely dispersed stock traded in an efficient
market may provide an informative lower
bound in negotiations between parties in a
potential sale of control.”
The Solera court found unpersuasive
petitioners’ contention that the deal price
was not reliable because the sale “took placeagainst the backdrop of extraordinary market
volatility, such that it was not the product of awell-functioning market.” The court explainedthat petitioners “are only entitled to the fairvalue of [the company’s] stock at the time ofthe [m]erger, not the best price theoreticallyattainable had market conditions been themost seller-friendly.”
The court also rejected petitioners’ argumentthat a management buyout transaction(“MBO”) “should be subject to heightened
scrutiny.” The court stated that “even though

there may be theoretical characteristics of an
MBO that could detract from the reliabilityof the deal price, the deal price that resultsfrom an MBO is not inherently suspect or
unreliable per se.”In addition, the court found no basis for
petitioners’ request that the merger fees
should be added to fair value as part ofwhat the acquiror was willing to pay forthe company. The court observed that “[i]fstockholders received payment for transaction
fees in appraisal proceedings, then it would
compel rational stockholders in even themost pristine deal processes to seek appraisal
to capture their share of the transaction
costs (plus interest) that would otherwise
be unavailable to them in any non-litigatedarm’s-length merger.”
Finally, the court rejected defendants’contention that the deal price should be
downwardly adjusted for the value of control.
The court found that a number of recent
appraisal decisions “suggest that the value ofcontrol is properly part of the going concern
and not an element of value that must be
excised under Section 262(h).” Moreover,the court stated that it did not read DFC and
Dell “to suggest that agency costs represent
an element of value attributable to a merger
separate from synergies that must be
excluded under Section 262(h).” If that had
been the Delaware Supreme Court’s intentionin either case, the Solera court reasoned that“it would have said so explicitly.”

This edition of the
Securities Law Alert was edited by
Paul C. Gluckow
pgluckow@stblaw.com / +1-212-455-2653,
Peter E. Kazanoffpkazanoff@stblaw.com / +1-212-455-3525,
Linton Mann III
lmann@stblaw.com / +1-212-455-2654,
and Lynn K. Neuner
lneuner@stblaw.com /+1-212-455-2696.

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