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Knurr v. Orbital ATK Inc.

United States District Court, E.D. Virginia, Alexandria Division

September 28, 2017

STEVEN KNURR, et al., Plaintiffs,
ORBITAL ATK INC., et al., Defendants.


          T. S. Ellis, III United States District Judge

         Plaintiffs in this federal securities class action allege claims under (i) § 10(b) and Rule 10b-5; (ii) § 14(a) and Rule 14a-9; and (iii) § 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Defendants seek threshold dismissal of claims under all three provisions, and this memorandum opinion addresses the questions presented under § 14(a) and the related § 20(a) claims. Specifically, those questions are as follows:

(1) whether the proxy statements alleged to violate § 14(a) of the Exchange Act are (i) statements of fact; or (ii) merely expressions of opinion; and, if those misrepresentations are expressions of opinion, whether the Complaint[1] alleges facts that warrant an inference that the defendants did not actually hold those opinions;
(2) whether under § 14(a) of the Exchange Act plaintiffs must allege and prove facts showing that the defendants' proxy statement misrepresentations (i) were made with fraudulent intent or reckless disregard of the truth; or (ii) whether it is sufficient that the Complaint alleges facts that warrant an inference that the misstatements were made negligently;
(3) whether under § 14(a) of the Exchange Act, the Complaint alleges a claim against an authorized agent of the corporate defendant and thus adequately states a claim against the corporate defendant; and
(4) whether under § 20(a) of the Exchange Act, the Complaint alleges that the defendants had control over any person liable under § 14(a) of the Exchange Act.

         These questions have been fully briefed and argued and are now ripe for resolution.


         Before reciting the pertinent facts, it is important to identify the proper source of those facts. First, as the parties agree and as settled precedent requires, the facts recited here are taken chiefly from the Complaint's factual allegations, which must be accepted as true at this stage. Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 625 (4th Cir. 2008) (noting that at the motion to dismiss stage, “we must accept plaintiffs' factual allegations as true”). Defendants have also sought to have additional facts considered by attaching various exhibits to the motion to dismiss.[2] Only certain of these documents are appropriately considered at this stage.

         Settled circuit authority permits courts to consider external documents in a motion to dismiss when they “are integral to and explicitly relied on in the complaint, and when the plaintiffs do not challenge the document's authenticity.” Zak v. Chelsea Therapeutics Int'l, Ltd., 780 F.3d 597, 606-07 (4th Cir. 2015) (quotation marks and brackets omitted). The SEC filings attached to defendants' dismissal motion, the transcripts of the August 10, 2016, November 8, 2016, and March 8, 2017 Orbital ATK conference calls, and the Wells Fargo and Barclays analyst reports are integral to or explicitly referenced in the Complaint, and plaintiffs do not challenge their authenticity. Accordingly, these documents are appropriately considered at this stage. Similarly, because the Fourth Circuit permits courts to take “judicial notice of published stock prices without converting a motion to dismiss into a motion for summary judgment, ” it is also appropriate to consider the chart summarizing Orbital ATK's historical stock prices. Greenhouse v. MCG Capital Corp., 392 F.3d 650, 655 (4th Cir. 2004). By contrast, Alliant's August 1, 2013 conference call is not referenced in the Complaint, nor does the Complaint cite the KeyBank analyst report, so it is inappropriate to consider these documents at the motion to dismiss stage.


         The corporate defendant, Orbital ATK, is an aerospace and defense company formed from the 2015 merger of Alliant Techsystems, Inc. (“Alliant”) and Orbital Sciences Corporation (“Orbital Sciences”). With respect to § 14(a), the Complaint also names the following three individual defendants:

(1) Defendant David W. Thompson, who served as Chairman of the Orbital Sciences Board, CEO, and President of Orbital Sciences prior to the merger;
(2) Defendant Garrett E. Pierce, who was Vice Chairman of the Orbital Sciences Board and CFO of Orbital Sciences prior to the merger; and
(3) Defendant Mark W. DeYoung, who was CEO and President of Alliant prior to the merger.

         Prior to their merger, Orbital Sciences and Alliant were both publicly traded aerospace and defense companies that sold products such as rockets and satellites to NASA and the United States military. Of particular importance to this case, Alliant entered into a major ammunition supply contract (“Lake City Contract”) with the United States Army in 2000. Alliant manufactured billions of rounds of small caliber ammunition under this contract at the Lake City Plant in Independence, Missouri which accounted for 13% of Alliant's total revenues in fiscal year 2010. In fiscal year 2010, Alliant received a four-year renewal on the Lake City Contract. In August 2012, Alliant submitted a bid to the Army to retain the Lake City Contract beyond 2013. The Complaint alleges that Alliant was under pressure to retain the Lake City Contract because Alliant had recently lost a bid to renew another major multi-year ammunition Army contract to Alliant's competitor, BAE Systems PLC. Accordingly, the Complaint alleges that Alliant and DeYoung “aggressively bid” on the Lake City Contract renewal with a “low-ball bid.” (Compl. ¶¶ 47, 38). Alliant and DeYoung's plan worked, as Alliant won the renewal of the Lake City Contract on September 28, 2012 for a seven-year term with a three-year extension option and production to begin on October 1, 2013.

         Shortly after production began on the Lake City Contract, Orbital Sciences and Alliant announced they planned to merge to form Orbital ATK. As a result of the merger, Orbital Sciences shareholders would receive .449 shares of Alliant stock for each share they held of Orbital Sciences stock, and Alliant would change its name to Orbital ATK.

         On December 17, 2014, Alliant and Orbital Sciences filed a joint proxy statement (“Joint Proxy Statement”) with the SEC concerning the proposed merger. The Joint Proxy Statement contained a letter signed by DeYoung to Alliant shareholders, who had to approve the issuance of Alliant common stock to Orbital Sciences shareholders, and a second letter signed by Thompson to Orbital Sciences shareholders, who had to approve the merger agreement. Each company held a special shareholders meeting in January 2015, and in February, the shareholders of each company voted to approve the merger.

         A little more than one year after the merger, Orbital ATK announced (i) that the company would not be able to file its quarterly report for second quarter 2016 on time; (ii) that the company's previously issued quarterly and annual financial statements in fiscal year 2015, transition period 2015, and first quarter 2016 were no longer reliable; (iii) that the company would have to restate its financial statements because of material misstatements related to the Lake City Contract; and (iv) that the company's internal financial controls were ineffective and weak. Orbital ATK ultimately filed two restatements with the SEC. These restatements confirmed that Alliant had submitted a significantly low bid for the Lake City Contract and that although Orbital ATK had achieved some cost reductions, those reductions were not sufficient to achieve profitability over the life of the Lake City Contract. Moreover, once misstatements in the Lake City Contract were corrected, it became clear that the costs of the Lake City Contract would exceed its revenues over the life of the contract, which meant that the entire anticipated forward loss should have been recorded when the loss became evident. Orbital ATK determined that $32 million of the loss should have been evident when the contract was signed in the second quarter of fiscal 2013, and $342 million should have been evident in the second quarter of fiscal 2014.

         After these restatements were issued, plaintiffs filed this action alleging, among other claims, that defendants made a series of misleading or false statements in the Joint Proxy Statement filed with the SEC and disseminated to shareholders of Orbital Sciences and Alliant. Specifically, the Complaint identifies four categories of misrepresentations: (i) statements regarding Alliant's financial results; (ii) statements regarding the Lake City Contract; (iii) statements regarding Alliant's internal controls; and (iv) statements regarding the fairness of the Exchange Ratio and the merger (“Fairness Statement”). These misrepresentations, plaintiffs contend, led to the overvaluing of Alliant and affected the Exchange Ratio to the detriment of Orbital Sciences shareholders. Plaintiffs request damages to recover for losses suffered by Orbital Sciences shareholders. The following is a brief summary of each of the four categories of proxy statement misrepresentations and the ways in which the Complaint alleges they are misleading.

         Statements Regarding Alliant's Financial Results

         The Joint Proxy Statement included historical financial information for Alliant-namely, the financial results from fiscal years 2013, 2014 and the first half of 2015. The results from 2013 and 2014 were derived from audited consolidated financial statements, while the 2015 results were derived from Alliant's quarterly report on Form 10-Q.

         The Complaint alleges that these statements were false and misleading because, as a result of the Lake City Contract losses, Alliant's Gross Profit, Operating Income and Earnings Per Share were substantially overstated. For example, the financial statements incorporated in the Joint Proxy Statement stated Gross Profit for the first half of fiscal year 2015 as $611 million. That value, however, was overstated by approximately $9 million.

         Statements Regarding the Lake City Contract

         The Joint Proxy Statement also incorporated by reference Alliant's 2014 Form 10-K. This 10-K Form described the size of Lake City's operations and the contributions of the Lake City Contract to Alliant's overall financial results. Specifically, the Form 10-K stated that the Lake City Contract contributed 14% to the total fiscal 2013 sales and 15% of the total fiscal 2012 sales. The Joint Proxy Statement stated that Alliant had experienced lower profit rates in that division, owing to the competitive bid on the contract The Complaint alleges that these statements were false and misleading because Alliant was not deriving profits ...

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