Lickteig v. Cerberus Capital Management, L.P.

Background

Ronald Lickteig contributed intellectual property rights to Covis S.á.r.l. and received profit interests representing two percent of the fully diluted equity interests in Covis Holdings. His agreements gave him an option to require Covis Management to buy his vested interests at fair market value when his employment ended. The agreements also provided a process for disputing the valuation and obtaining an independent appraisal.

Lickteig resigned on June 6, 2014, and exercised the option three days later. In July 2014, Dean Mitchell provided him with a valuation that stated Covis Holdings’ total enterprise value was $466.7 million and valued Lickteig’s interests at approximately $1.1 million. Lickteig later agreed in principle to sell the interests for $1.3 million and signed a separation agreement. In March 2015, Covis announced that substantially all of its assets had been sold to Concordia Healthcare, Inc. for $1.2 billion.

Lickteig sued in June 2019. His complaint asserted claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5, control-person claims under Section 20(a), and corresponding claims under the Iowa Uniform Securities Act. He alleged that the defendants misstated or omitted information about Covis’s earnings, valuation, earnings multiple, and potential sale discussions.

Rulings on the Rule 12(b)(6) Motion

The court applied the pleading standards for a motion to dismiss for failure to state a claim, including the heightened requirements for securities-fraud claims under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. At this stage, the court accepted well-pleaded factual allegations as true and drew reasonable inferences in Lickteig’s favor.

The court rejected the statute-of-limitations defense. Although the defendants argued that Covis’s $1.2 billion sale in March 2015 should have warned Lickteig to investigate, the court held that the sale did not, on the face of the complaint, indicate a probable securities-law violation. The court also held that the existence of another lawsuit involving similar defendants did not establish that Lickteig should have discovered his alleged claims. The motion to dismiss on this ground was denied.

The court held that Lickteig adequately alleged that two statements were false or misleading:

1. The 7.5 earnings multiple. The valuation used a 7.5 multiple of earnings before interest, taxes, depreciation, and amortization. Lickteig alleged that Mitchell later described a reasonable range as 8 to 12 times earnings. The court concluded that these allegations plausibly suggested that the defendants may not have honestly believed that 7.5 was a reasonable multiple or may have chosen it in bad faith, despite the agreement’s requirement that the valuation be made in good faith. The court also found the allegation material because Lickteig might have challenged the valuation if he had known that 7.5 was allegedly outside Mitchell’s reasonable range.

2. Projected 2014 adjusted earnings. The valuation reported projected 2014 adjusted earnings of $68.5 million. Lickteig alleged that a July 2014 presentation showed $51.8 million in adjusted earnings during the first two quarters, which was $18.4 million above the amount anticipated by the company’s annual plan for that period. The court held that these allegations plausibly suggested that the defendants knew the $68.5 million projection was misleadingly low. The court also held that the alleged statement was not shown to be immaterial and that the statutory safe harbor for forward-looking statements did not require dismissal at this stage.

The court rejected the other alleged bases for securities-fraud liability. Lickteig did not provide particularized facts supporting his allegation that 2013 adjusted earnings were higher than the reported $62.2 million. He also did not provide sufficient facts supporting the alleged $750 million-to-$1 billion valuation of the pharmaceutical products acquired from GlaxoSmithKline or the alleged $950 million valuation by a potential purchaser. The court held that the allegations about negotiations to sell Covis or its assets did not make the backward-looking figures in the valuation false or misleading because Lickteig did not identify a statement that created a duty to disclose those negotiations. The court also held that the implied 2014 earnings multiple of 6.8 was immaterial because it was mechanically calculated from other figures.

The court further held that Lickteig adequately pleaded the required wrongful state of mind, known as scienter, for the two surviving theories. The alleged motive was that using a lower earnings multiple would reduce the amount the defendants had to pay for Lickteig’s interests. The allegations about the 2014 projection also supported an inference that the defendants knew the projection was misleading.

Because the defendants’ only argument against the federal and Iowa control-person claims was that Lickteig had not adequately pleaded an underlying securities violation, the court declined to dismiss those claims to the extent they were based on the two surviving statements.

Release

The court held that the release in the separation agreement did not bar Lickteig’s securities-fraud claims. Section 29(a) of the Exchange Act generally prevents contractual provisions that waive compliance with the federal securities laws. A release may be effective when it settles a known, pre-existing securities claim, but the court found no indication that Lickteig knew he had such a claim when he signed the agreement. The release was signed as part of the same transaction underlying the alleged fraud and provided consideration for his profit interests, so it did not release these claims at the pleading stage.

Personal Jurisdiction over Dean Mitchell

The court granted the defendants’ Rule 12(b)(2) motion to dismiss the claims against Dean Mitchell for lack of personal jurisdiction. Lickteig relied on a forum-selection clause in the separation agreement requiring consent to the jurisdiction of New York federal and state courts. Mitchell did not sign that agreement. The court also held that Mitchell’s alleged conduct occurred in his corporate capacity and that the complaint did not allege individual acts or other contacts sufficient to establish jurisdiction over him personally.

Disposition

Judge Gregory H. Woods ordered that the defendants’ Rule 12(b)(6) motion was granted in part and denied in part. It was denied as to the two alleged misstatements involving the 7.5 earnings multiple and the projected 2014 adjusted earnings, and granted as to the other alleged statements. The Rule 12(b)(2) motion concerning Dean Mitchell was granted. The court granted Lickteig leave to replead and required any amended complaint to be filed within 30 days. The clerk was directed to remove Mitchell’s name from the case caption.