UNITED
STATES DISTRICT COURT
EASTERN
DISTRICT OF PENNSYLVANIA
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THE
QUIGLEY CORPORATION,
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CIVIL
ACTION
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Plaintiff,
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No.
09-1725
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v.
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TED
KARKUS, JOHN EDMUND LIGUMS, SR.,
MARK
BURNETT, JOHN DESHAZO,
LOUIS
GLECKEL, and MARK
LEVENTHAL,
Defendants.
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ORDER
AND NOW, this _____ day of
_____________, 2009, upon consideration of the Motion of Defendants Ted Karkus,
Mark Burnett, John DeShazo, Louis Gleckel and Mark Leventhal to Dismiss
Plaintiff’s Complaint as moot, and any response thereto, it is hereby ORDERED that Defendants’
Motion is GRANTED, and
Plaintiff’s claims against Defendants Ted Karkus, Mark Burnett, John DeShazo,
Louis Gleckel and Mark Leventhal are hereby DISMISSED WITH
PREJUDICE.
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BY
THE COURT:
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PRATTER,
J.
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UNITED
STATES DISTRICT COURT
EASTERN
DISTRICT OF PENNSYLVANIA
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THE
QUIGLEY CORPORATION,
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CIVIL
ACTION
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Plaintiff,
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No.
09-1725
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v.
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TED
KARKUS, JOHN EDMUND LIGUMS, SR.,
MARK
BURNETT, JOHN DESHAZO,
LOUIS
GLECKEL, and MARK LEVENTHAL,
Defendants.
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MOTION
OF DEFENDANTS TED KARKUS,
MARK BURNETT,
JOHN
DESHAZO, LOUIS GLECKEL, AND MARK LEVENTHAL,
TO DISMISS PLAINTIFF’S
COMPLAINT
Defendants
Ted Karkus, Mark Burnett, John DeShazo, Louis Gleckel and Mark Leventhal, hereby
move this Honorable Court pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure to dismiss all counts of Plaintiff’s Complaint against
Defendants as moot. The factual and legal grounds for this Motion are
set forth in the accompanying Memorandum of Law, which Defendants incorporate
herein by reference as if set forth in full.
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Respectfully
submitted,
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/s John F. Smith, III
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John
F. Smith, III
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Amy
J. Greer
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Alexis
G. Cocco
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REED
SMITH LLP
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2500
One Liberty Place
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1650
Market Street
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Philadelphia,
PA 19103
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(215)
851-8100
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Of
Counsel:
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Herbert
F. Kozlov
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Lawrence
J. Reina
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REED
SMITH LLP
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499
Lexington Avenue
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New
York, NY 10022
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Counsel
for Defendants Ted Karkus,
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Mark
Burnett, John DeShazo,
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Louis
Gleckel and Mark Leventhal
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UNITED
STATES DISTRICT COURT
EASTERN
DISTRICT OF PENNSYLVANIA
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THE
QUIGLEY CORPORATION,
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CIVIL
ACTION
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Plaintiff,
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No.
09-1725
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v.
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TED
KARKUS, JOHN EDMUND LIGUMS,
SR.,
MARK BURNETT, JOHN DESHAZO,
LOUIS
GLECKEL, and MARK
LEVENTHAL,
Defendants.
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DEFENDANTS’
MEMORANDUM OF LAW IN
SUPPORT OF
MOTION TO DISMISS THE COMPLAINT AS MOOT
Defendants Ted Karkus, Mark Burnett,
John DeShazo, Louis Gleckel, MD and Mark Leventhal (hereinafter, collectively,
“the Karkus Defendants” or “the Karkus Group”), through their counsel, Reed
Smith LLP, respectfully submit this memorandum of law in support of their motion
to dismiss the complaint in this action.1 As set
forth in greater detail below, the Karkus Defendants’ recent filings of
supplemental proxy materials render the Complaint entirely moot.
PRELIMINARY
STATEMENT
This action was brought by The Quigley
Corporation (“Quigley” or “the Company”) on behalf of its present CEO and board
members (the “incumbents”) in order to prevent the Karkus Defendants – who
collectively own over 10% of the Company and have invested millions of their own
dollars in the Company — from soliciting proxies for the purpose of electing
independent directors at the annual meeting of Quigley shareholders to be held
on May 20, 2009.
1 A copy
of the Complaint is attached hereto as Exhibit A.
Mr. Karkus and the other members of the
Karkus Group have been critical of Quigley’s management and the incumbent
members of the Board of Directors who have supported management. The
reasons for their concern, and for their determination to solicit proxies to
elect an independent slate of directors at the upcoming May 20, 2009, annual
shareholders’ meeting, are succinctly stated in their Preliminary Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 dated
April 27, 2009 (“Current Preliminary Proxy Statement”). The Current
Preliminary Proxy Statement states, in part:
We
believe it is time for a change in the Company’s oversight. Over the
past three fiscal years, management has delivered declining revenues, declining
gross and net profits (increasing net losses), declining stockholder’s equity
and declining stock prices. Yet, in our opinion, the Board has
approved massively excessive compensation to management and their family members
which flies in the face of these poor results.
As
disclosed in the Company’s 2009 Proxy Statement and the Company’s Form 10-K for
the year ended December 31, 2008, the Board granted the Company’s top three
executive officers over $3 million in compensation in 2007 and over $2 million
in 2008, while the Company reported net losses of $1.7 million in 2006, $2.4
million in 2007 and $5.5 million in 2008. In 2008, the net loss from
continuing operations was even higher at $6.4 million.
Also
during this period, the Company employed, at great expense, relatives of the
CEO. As disclosed in the Company’s 2008 Proxy Statement, three
relatives of the Company’s CEO were employed by the Company in 2007 and received
compensation in excess of $120,000 each (for a total of $607,761). In
the Company’s 2009 Proxy Statement, the Company disclosed that one relative of
the Company’s CEO received $221,115 in compensation in 2008, but did not provide
any disclosure as to whether the other related individuals were still employed
by the Company.
A
complete copy of the Current Preliminary Proxy Statement is attached to this
memorandum as Exhibit B. A related filing by the Karkus Defendants,
Schedule 13D dated April 28, 2009 (“Current Schedule 13D”) will also be referred
to in this memorandum; it is attached as Exhibit C.
In order effectively to participate in
an election that is only three weeks away, the Karkus Group needs to start its
solicitation activity virtually immediately. Accordingly, the solicitation will
begin as soon as the Karkus Group receives the anticipated and imminent approval
of their revised proxy materials from the United States Securities and Exchange
Commission (“SEC”). The need to go forward promptly is underscored by
the fact that, since the incumbents are not required to pre-clear their proxy
materials, they commenced their solicitation of proxies
to re-elect themselves to the Board with a filing of their own proxy statement
on April 2, 2009, and a mailing of their solicitation to shareholders on or
about April 20, 2009. Almost four weeks have passed since they began
their campaign. The incumbents therefore enjoy a tremendous head
start in the solicitation effort.
This
litigation is an adjunct to their strategy. With the filing of this
lawsuit, they hope to maintain and extend their advantage and effectively
foreclose any competition at the annual meeting. There is no subtlety
in their choice of tactics. Under their control, the Company
expressly seeks injunctive relief against any solicitation by the
Karkus Group. Indeed, the Company’s Complaint even asks the Court to
“sterilize” the shares of all of the defendants so that none of these shares may
be voted against the slate of incumbent directors hand-picked by
management. To enhance their chances of winning a contested election,
the incumbents seek to harass and delay the efforts of the Karkus Group through
the current litigation. These proceedings are engineered to assure
that the incumbents are the exclusive candidates for as long as possible and to
keep the Karkus Defendants from getting their solicitation materials out to the
shareholders, even as the other shareholders already have and are presently
considering the incumbents’ proxies. In the meantime, the
Company’s request for discovery – expedited or otherwise – is nothing more than
an effort to impose still greater costs on the moving defendants, all to put the
Karkus Group at an even greater disadvantage.
The incumbents, it should be noted, are
able to conduct their proxy solicitations and to pursue this litigation at the expense of Quigley’s
corporate treasury. None of the incumbents are paying for
those costs out of their own pockets. In contrast, the individuals
who comprise the Karkus Group must personally fund their proxy solicitations and
the defense of this action. This disparity constitutes a formidable
advantage for the incumbents, one that argues for a prompt dismissal of this
action by the Court so that the financial advantage enjoyed by the incumbents
does not grow even greater.
In its Complaint, Quigley alleges that
the proxy materials filed by the Karkus Defendants violate technical
requirements of Sections 13(d), 14(a) and 16(a) of the Securities Exchange Act
of 1934 (the “Exchange Act”). Quigley then asks the Court to issue
the extraordinary relief of (A) preventing all defendants from voting the shares
of the Company that they have lawfully purchased, and (B) preventing the Karkus
Defendants from exercising their rights as shareholders to solicit the support
of the independent Quigley shareholders in the upcoming board
election.
There are, however, at least three
fundamental deficiencies with the Complaint. First, it fails
adequately to plead a basis for the relief sought. Second, it
mischaracterizes the facts. And third, importantly, for this motion,
it fails to take account of the SEC filings by the Karkus Defendants that render
it moot.
In the face of Plaintiff’s Complaint,
the Karkus Group has decided that the best course is to disclose each and every
one of the Company’s allegations, and to respond to them, through revised SEC
filings. By doing so, the Karkus Defendants have assured that all shareholders
have available the “total mix” of information to which they are entitled in
casting their votes. Accordingly, notwithstanding that the
Karkus Group had earlier filed entirely appropriate proxy materials filed with
the SEC, the Karkus Group has
now supplemented those materials with both the Current Preliminary Proxy
Statement (Exhibit B) and the Current Form 13D (Exhibit C).
In short, the Karkus Group has taken
the dramatic step of bringing Quigley’s allegations directly to the marketplace
and furnishing factual responses to each assertion. All of this
information is now squarely before the investing public. Plaintiff’s
complaint is moot as a consequence.
As subsequently set forth in the body
of this memorandum, there is ample precedent holding that where, as here, such
supplemental disclosures have been filed and made available to shareholders, a
complaint charging that proxy materials are deficient, and any attendant request
for injunctive relief, is moot and should be
dismissed. For example, in Bally Total Fitness Holding Corp. v.
Liberation Investments, L.P., 2005 U.S. Dist. LEXIS 34897, *4 (D. Del.
Dec. 22, 2005) (Farnan, J.), the plaintiff sought injunctive relief based on the
assertion that the insurgent directors had failed to disclose material facts in
their proxy materials. Rather than engage in protracted proceedings, the
defendants in Bally Total
Fitness filed supplemental proxy materials in which they set forth,
verbatim, the allegations of insufficient disclosures that the plaintiff had
detailed. Id. at *3. The
defendants also included in their supplemental proxy materials responses to
plaintiff’s allegations. Id.
The
Delaware District Court – which is certainly no stranger to litigation with
respect to corporate disclosures – concluded that the insurgent directors’
supplemental filing mooted the pending action. The court therefore dismissed
plaintiff’s injunction proceeding and denied plaintiff’s request for expedited
discovery. Id. at
*4-5. Similarly, plaintiff’s complaint in this action is
rendered moot as a consequence of the filing of supplemental proxy materials by
the Karkus Defendants.
The
Karkus Defendants therefore respectfully request that this Court reject Quigley’s
effort to interfere with the rights of the Karkus Group to solicit proxies in
connection with the forthcoming annual meeting and dismiss the
action.
BACKGROUND
FACTS
Parties
Plaintiff Quigley is a Nevada
corporation with its principal place of business in Doylestown,
Pennsylvania. The Company is a leading manufacturer, marketer and
distributor of a diversified range of homeopathic and health products which
comprise the Cold Remedy and Contract Manufacturing segments, including
Cold-Eeze®. Shares of Quigley’s common stock are registered
under Section 12(g) of the Exchange Act, and trade on the NASDAQ Global Market
under the symbol “QGLY.” As of March 27, 2009, Quigley had 12,908,383
shares of its common stock outstanding, owned by several hundred
shareholders. Exhibit A, Compl. ¶ 3.
The
Karkus Defendants2 all are
stockholders of the Company. Collectively, they own 10.14% of the
common stock of the Company, and individually none owns more than
4.8%. Exhibit B, at 2.3 As
seen in the Preliminary Proxy Statement filed by the Karkus Defendants, of the
12,908,383 outstanding shares of Quigley common stock as of March 6, 2009, the
Karkus Defendants beneficially own 1,309,323 shares. Exhibit B, at
2. They all are highly qualified business
professionals. Exhibit B, at 5-7.
2 John
Ligums, Sr. (“Ligums”) has also been named as a defendant and has been
characterized as an undisclosed member of the Karkus Group. As
discussed at greater length below, no proper basis has been stated for this
conclusory assertion. Quigley’s assertion is nevertheless disclosed
and responded to in the revised proxy materials filed by the Karkus Group. Mr.
Ligums is not a party to such filing. See in particular, Appendix C
to the Current Preliminary Proxy Statement, Exhibit B, at 23.
3 In considering a motion to dismiss, a
court may consider exhibits attached to the complaint and authentic documents
submitted by the defendant upon which a Plaintiff’s complaint is premised, in
addition to assessing the allegations asserted therein. Matters of
public record may also be considered. Pension Benefit
Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196-97 (3d Cir.
1993),
cert. denied, 510 U.S.
1042 (1994) (no need to convert Rule 12(b)(6) dismissal motion into summary
judgment motion where, insofar as claims in complaint are premised upon
documents submitted by defendant, plaintiff is obviously on notice of their
contents and need not be afforded an opportunity to refute them) (citations
omitted); accord In Re Donald
J. Trump Casino Sec. Litig.-Taj Mahal Litig., 7 F.3d 357, 368 n.9 (3d Cir. 1993)
(holding district court properly considered prospectus appended to motion to
dismiss by defendants, where plaintiffs’ claims were based upon the document and
plaintiffs failed to attach the document to their complaint); Lum v. Bank of Am., 361 F.3d
217, 222 n.3 (3d Cir. 2004) (court may consider “the allegations in the
complaint, exhibits attached to the complaint, matters of public record, and
documents that form the basis of a claim.”).
Operative
Events
Notice of Annual Meeting and
Solicitation of Proxies by Quigley
On April 2, 2009, the Company filed its
definitive proxy statement in connection with the forthcoming shareholders’
meeting. Having done so, the incumbent directors could and did send
out a notice of the meeting, and could and did begin their own solicitation of
shareholder proxies.
Determination of Ted Karkus
to Solicit Proxies and Form a Group
Mr. Karkus initially invested in the
Company in 1996. Exhibit B, at 4. In light of concerns he
had about the Company’s performance and management, in February 2009, he decided
to consider challenging the incumbent Board of Directors at the May 20, 2009
Shareholder’s Meeting. Exhibit B, at 2.
On April
6, 2009 Mr. Karkus filed with the SEC a press release indicating that he planned
to offer an alternative slate of directors and intended to file a preliminary
proxy statement with the SEC in connection with the nomination of independent
directors to replace the entire Board of Directors of the Company at Quigley’s
May 20, 2009 Annual Meeting of Stockholders.4
4 See Schedule 14A filed by Ted
Karkus on April 6, 2009, available at:
http://www.sec.gov/Archives/edgar/data/868278/000114420409018962/v145410_dfan14a.htm.
On April 7, 2009, having agreed with
one another to vote their shares of Common Stock of the Company in support of
their own slate of directors and to solicit proxies from other shareholders in
support of that slate, defendants Mark Burnett, John DeShazo, Louis Gleckel,
M.D., Mark Leventhal and Ted Karkus, the Karkus Defendants, publicly filed a
statement on Schedule 13D announcing their agreement to act in
concert. Exhibit A, Compl. ¶ 19.
The Karkus Group Files a
Preliminary Proxy Statement
On April 9, 2009 Mr. Karkus took the
next step, which was to file a Preliminary Proxy Statement with the
SEC. Exhibit A, Compl. ¶ 24. The Preliminary Proxy stated
that at the May 20, 2009 Annual Meeting of the Company, he would nominate Mark
Burnett, John DeShazo, Mark Frank, Louis Gleckel, M.D., Mark Leventhal, James
McCubbin and Ted Karkus (collectively, the “Shareholder Nominees”) to be elected
to the Company’s Board of Directors. Exhibit B, at
5-6. The Preliminary Proxy further stated that the Shareholder
Nominees oppose the election of the slate of directors named in the proxy
statement distributed in the name of the legacy Board of Directors of the
Company. Exhibit B, at 2-6. Mr. Karkus also caused to be
publicly filed with the SEC on April 9, 2009 a press release announcing the
filing of the Preliminary Proxy.5
Subsequent Communications to
Shareholders by the Parties
On April 15, 2009 Mr. Karkus publicly
filed a press release urging the Company’s shareholders to “stop, look and
listen” before voting in response to the Company’s proxy statement while the SEC
review of his Preliminary Proxy is underway.6 He
has not yet begun to solicit those proxies, however.
6 See Schedule 14A filed by Ted
Karkus, Mark Burnett, John DeShazo, Mark Frank, Louis Gleckel, MD, Mark
Leventhal, and James McCubbin on April 15, 2009, available at
http://www.sec.gov/Archives/edgar/data/868278/000114420409020526/v146267_dfan14a.htm.
In response, on April 16, 2009, the
Company filed with the SEC additional proxy materials, announcing that the
Company had sent a letter out to all shareholders (and enclosing the text of
that letter) specifically asking them “to reject any proxy material and
accompanying blue proxy card they may receive from dissident stockholder Ted
Karkus,” even though Mr. Karkus had yet to send any materials to
shareholders.7 In
its letter, Quigley made a variety of unfounded allegations, characterizing Mr.
Karkus’s effort as “costly and disruptive”, calling his director candidates
“inexperienced”, incorrectly asserting that he “has never contacted the Board of
Directors of Quigley”, and accusing him of “attempting to steal” the
company.
The Karkus Group Revises its
Proxy Materials In Response to SEC Comments
On April 21, Mr. Karkus filed a further
statement asking shareholders to continue to refrain from acting on the proxy
materials provided by the Company. 8 The
statement explained that the Karkus Defendants’ proxy materials were currently
awaiting clearance from the SEC and should be available for delivery to
shareholders within the week, but the Company was not required to clear their
proxy materials with the SEC, giving the Company a "head start" in soliciting
their votes.
7 See Schedule 14A filed by The
Quigley Corporation on April 16, 2009, available at
http://www.sec.gov/Archives/edgar/data/868278/000092189509001044/defa14a03814_04162009.htm.
8 See Schedule 14A filed by Ted
Karkus, Mark Burnett, John DeShazo, Mark Frank, Louis Gleckel, MD, Mark
Leventhal, and James McCubbin on April 21, 2009, available at
http://www.sec.gov/Archives/edgar/data/868278/000114420409021596/v146774_dfan14a.htm.
On April 21, 2009, Mr. Karkus responded
to comments from the SEC on the initial materials by filing with the SEC a
revised Preliminary Proxy Statement.9
Quigley Files Its Complaint
On Behalf Of The Incumbents
On April 23, 2009 the Company filed
this Action, seeking injunctive and declaratory relief. As noted, the
Company claimed that defendant John Ligums, another shareholder of Quigley, was
an undisclosed member of their Section 13D “group”, that the Karkus Defendants
had made various statements in their proxy materials which were inaccurate, and
that they had failed to disclose “their plans to sell the Company”.
The
Karkus Defendants File Supplemental Proxy Materials
Disclosing the Allegations
in Complaint and Responding to Those Claims
Faced with these allegations, the
Karkus Defendants had a choice to make. They could either stand on
their earlier filings, all of which were accurate, and fight it out with the
Quigley incumbents in court, or they could take it upon themselves to bring
Quigley’s assertions to the Company’s shareholders and respond to them in detail
so the shareholders could decide for themselves. The Karkus
Defendants chose the latter course. Accordingly, on April 28, 2009,
the Karkus Defendants filed the Current Preliminary Proxy Statement (Exhibit B)
informing the investing public of all of the allegations of this Complaint,
directing the investing public to the actual text of the Complaint, and
providing a factual response to these allegations.
The Current Preliminary Proxy Statement
accurately summarizes this proceeding and informs stockholders that they may
request a full copy of the Complaint or can download it, as it appears in full
in Current Schedule 13D. In addition, in an easy-to-read columnar
format, (virtually identical to the format used by the defendants in Bally Total Fitness in their
proxy materials), the Current Preliminary Proxy Statement quotes the material
allegations in the Complaint, and provides objective facts and responses to
those allegations. Defendants also filed the Current Form 13D,
attaching the Complaint as an exhibit.
9 See Schedule 14A filed by Ted
Karkus, Mark Burnett, John DeShazo, Mark Frank, Louis Gleckel, MD, Mark
Leventhal, and James McCubbin on April 21, 2009, available at
http://www.sec.gov/Archives/edgar/data/868278/000114420409021715/v146816_prrn14a.htm.
In short, the Karkus Defendants have
taken steps to bring all of the relevant information, even Quigley’s calumnies
and the responses to them, to the attention of their fellow Quigley shareholders
and the investing public.
ARGUMENT
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QUIGLEY’S
COMPLAINT HAS BEEN MOOTED BY
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THE SUPPLEMENTAL DISCLOSURES
FILED BY DEFENDANTS
Contrary to the position urged by
Quigley, the Defendants have not violated the federal proxy solicitation rules
(allegedly, Sections 13(d), 14(a) and 16(a) of the Exchange Act) and should not
be precluded from soliciting the proxies of other shareholders in advance of the
upcoming May 20 Shareholders’ Meeting. The Karkus Group’s Current
Preliminary Proxy Statement and the Current 13D, (hereinafter referred to as
“Supplemental Proxy Materials”) disclosing the existence of and allegations of
this Complaint and the Karkus Defendants’ response to the material allegations
therein moot the claim for relief asserted by the Company. Simply
put, there is nothing more to disclose to shareholders.
A. Applicable Legal
Standards
1. Section 13(d)
Standards
Pursuant to Section 13(d) of the
Exchange Act, any person who, directly or indirectly, acquires “beneficial
ownership” of more than 5 percent of certain classes of “equity security” is
required to file appropriate disclosures with the SEC within ten days of the
acquisition. 15 U.S.C. § 78m (d)(1).
Section 13(d) states that “when two or
more persons act as a partnership, limited partnership, syndicate, or other
group for the purpose of acquiring, holding, or disposing of securities of an
issuer, such syndicate or group shall be deemed a ‘person’ for the purposes of
this subsection.” 15 U.S.C. § 78m(d)(3). The SEC has also
promulgated Rule 13d-5, which defines beneficial ownership by a
“group”:
When two
or more persons agree
to act together for the purpose of acquiring, holding, voting or
disposing of equity securities of an issuer, the group formed thereby shall be
deemed to have acquired beneficial ownership, for purposes of sections 13(d) and
(g) of the Act, as of the date of such agreement, of all equity securities of
that issuer beneficially owned by any such persons.
17 C.F.R.
§ 240.13d-5(b)(1) (emphasis added). “Mere relationship, among persons
or entities, whether family, personal or business, is insufficient to create a
group which is deemed to be a statutory person.” Scott v. Multi-Amp Corp., 386
F. Supp. 44, 71 (D.N.J. 1974) (citing Texasgulf Inc. v. Canada Development
Corp., 366 F. Supp. 374, 403 (S.D. Tex. 1973)). “There must be
agreement to act in concert.” Id. (citing Texasgulf, 366 F. Supp. at
403).
The goal of 13(d) is to “alert the
marketplace to every large, rapid aggregation or accumulation of securities,
regardless of technique employed, which might represent a potential shift in
corporate control.” Charming Shoppes Inc. v. Crescendo
Partners II, L.P., 557 F. Supp. 2d 621, 624 (E.D. Pa. 2008) (citing IBS Financial Corp. v. Seidman
Assocs., 136 F.3d 940, 945-46 (3d Cir. 1998)); see also Treadway Cos. v. Care
Corp., 638 F.2d 357, 380 (2d Cir. 1980) (citing GAF Corp. v. Milstein, 453
F.2d 709, 717 (2d Cir. 1971)).
Section 13(d), which was enacted as
part of the Williams Act, was intended to provide an issuer and investors with
information regarding certain acquisitions of the issuer’s equity securities for
the purpose of acquiring control of the issuer. See Filing & Disclosure
Requirements Relating to Beneficial Ownership, 43 Fed. Reg. 18484 (Apr. 28,
1978) (citing S. Rep. No. 90-550 (1968); H.R. Rep. No. 90-1711 (1968) (Section
13(d) “was intended to provide information to the public and the affected issuer
about rapid accumulations of its equity securities in the hands of persons who
would then have the potential to change or influence control of the
issuer.”)).
In addition, the proponents of the
Williams Act took extreme care to “avoid[] tipping the balance of regulation
either in favor of management or in favor of the person making the takeover
bid.” H.R. Rep. No. 90-1711, at 2814. Thus, courts have rebuffed
efforts by management to use Section 13(d) as a sword to entrench management
rather than a shield to protect
investors. See
Treadway Cos., 638 F.2d at 380 (In enacting Section 13(d), “Congress
expressly disclaimed an intention to provide a weapon for management to . . .
prevent large accumulations of stock . . . .”) (quoting Rondeau v. Mosinee Paper
Corp., 422 U.S. 49, 58, 95 S. Ct. 2069, 2076 (1975)); see also Pennwalt Corp. v. Centaur
Partners, 1989 U.S. Dist. LEXIS 1363, *13-14 (E.D. Pa. Feb. 10, 1989)
(“The use of injunctive relief to thwart a takeover attempt, once the
shareholders have a full understanding of the options before them, not only
deprives shareholders of their right to make informed decisions, but provides
management with a weapon to discourage takeover bids.”).
In addition to being mooted by the
Karkus Defendants’ supplemental disclosures, Plaintiff’s § 13(d) claim also
fails because the Complaint does not properly allege an agreement between
Ligums and the Karkus defendants. Essentially, Plaintiff
asks this Court to enjoin the proxy contest because of prior relationships among
some of them and the unfounded (but ultimately irrelevant) assertion that
“defendant Ligums played a key role in forming the
‘group.’” Compl. ¶ 18. Prior associations, and playing a
role in the formation of a group (even if that allegation were supported by
facts, which it is not) however, does not meet the requirements of
13(d). The Complaint certainly states that Ligums has relationships
with some of the Karkus defendants—he is a Facebook friend of some of the
members of the group, he has had business relationships with some of them in the
past related to other entities, and has had discussions in the past related to
issues with Quigley’s performance.10 But
it lacks any proper, non-conclusory allegation that Ligums actually entered into
any agreement with the Karkus Defendants “for the purpose of acquiring, holding,
or disposing of” Quigley stock. See Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007) (a complaint must contain more than
“labels and conclusions”; rather, the factual allegations in the complaint "must
be enough to raise a right to relief above the speculative level."); see also Baraka v. McGreevey,
481 F.3d 187, 195 (3d Cir. 2007) (a court is not bound to accept as true
“unsupported conclusions and unwarranted inferences” or “a legal conclusion
couched as a factual allegation”). “Factual allegations must be
enough to raise a right to relief above the speculative level,” and “the
pleading must contain something more . . . than . . . a statement of facts that
merely creates a suspicion [of] a legally cognizable right of
action.” Twombly, 550 U.S. at
555. As such, the Complaint, measured by the legal standard set forth
above, fails to state a claim under § 13(d) for failure to fully disclose the
members of the group, and this claim should be dismissed on its
face.
10 The
Complaint’s discussion of Mr. Ligums has something of an “aha” quality, as
though he is a stranger to Quigley corporate management, when nothing could be
farther from the case. As the Complaint reveals, Mr. Ligums is a
Quigley shareholder. Compl. ¶ 5. Moreover, as the Current
Preliminary Proxy Statement discusses, in response to the Complaint’s
allegations, when Mr. Karkus wanted to discuss certain matters with Quigley
management, he called on Mr. Ligums because of Ligums’ relationship with that
management, specifically with Mr. Phillips, the Quigley Executive Vice-President
and Chief Operating Officer, to arrange a forum for that
discussion. Exhibit B, p. 27. Mr. Ligums was, in fact,
able to arrange a call with Mr. Phillips, in which Mr. Karkus
participated. Id. Thus, it is certainly possible that
Quigley has a better idea than the Karkus Group of Mr. Ligums’ plans for how he
will vote his shares.
2. Section 14A
Standards
Section 14(a) of the Exchange Act and
Rule 14a-9 promulgated thereunder provide that proxy statements may not contain
“any statement which . . . is false or misleading with respect to any material
fact . . . .” 17 C.F.R. § 240.14a- 9(a). For a
misstatement or omission to be material “there must be a
substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the ‘total
mix’ of information made available.” TSC Indus. v.Northway, 426
U.S. 438, 449, 96 S. Ct. 2126, 2132 (1976); California Public Employees’
Retirement System v. Chubb Corp., 394 F.3d 126, 169 (3d Cir.
2004).
The Schedule 14A is not an isolated
filing, but is merely one part of the “total mix of information” available to
investors. United
Paperworkers Int’l Union v. Int’l Paper Co., 985 F.2d 1190, 1199 (2d.
Cir. 1993) (citing TSC
Indus., 426 U.S. at 449, 96 S. Ct. at 2132) (internal quotation marks
omitted); Charming, 557
F. Supp. 2d at 628-29. Shareholders are deemed to have constructive
notice of the facts reported in readily available media when such reports
feature the subject of the proxy solicitation. United Paperworkers Int’l,
985 F.2d at 1199.
The
increased access to public information due to the “explosion in Internet
availability” has enlarged the total mix of information available to
shareholders. In re
Keyspan Corp. Sec. Litig., 383 F. Supp. 2d 358, 374 n.6 (E.D.N.Y.
2003). Therefore, the “total mix of information” includes
widely-available news reports as well as knowledge gleaned from public SEC
filings. Id.
at 731.
3. Section 16(a)
Standards
Under Section 16(a) of the Exchange
Act, the beneficial owner of 10% of any
equity security must disclose: (A) “the amount of all equity securities of [an]
issuer of which the
filing person is the beneficial owner.” 15 U.S.C. § 78p(a)(3).
B. Materiality
Standards
The goal of the proxy disclosure laws
is to provide shareholders with the material facts sufficient for them to make
an informed decision. See, e.g., CALPERS, 394 F.3d
at 168; Charming
Shoppes, 557 F. Supp. 2d at 628 (“the purpose of Section 14(a) is to
ensure that shareholders make informed decisions”). Once that goal
has been satisfied, there is nothing more for the courts to do. See Treadway Cos., 638 F.2d 357, 380 (2d
Cir. 1980); Charming
Shoppes, 557 F. Supp. 2d at 624 n.3.
The materiality threshold is high, and
a claim of non-disclosure is only cognizable if there is “a substantial
likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of
information made available.” TSC Indus., Inc., 426 U.S. at
449 (1976); accord
Shapiro v. UJB Fin.
Corp., 964 F.2d 272, 281 n.11 (3d Cir. 1992); Lewis v. Chrysler Corp., 949
F.2d 644, 649 (3d Cir. 1991); Charming Shoppes, 557 F.
Supp. 2d at 628-29.
Moreover, the Supreme Court has made
clear that the materiality threshold cannot be met when an alleged omission
relates to subjective motives rather than objective facts. Assertions
concerning the soliciting party’s intentions, motives or plans are “insufficient
to satisfy the element of fact that must be established under §
14(a).” Virginia
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1096 (1991); Tracinda Corp. v. DaimlerChrysler
AG, 502 F.3d 212, 228 (3d Cir. 2007) (“In order to succeed, a 14(a) claim
that relies on the undisclosed intent and ‘unclean heart of a director’ must
also be accompanied by objective and external evidence of actual
misrepresentation.”).
The rationale behind this bright-line
rule is straightforward: To hold otherwise would permit disclosure litigation
“confined solely to what one skeptical court spoke of as the “impurities” of an
“unclean heart.” See Virginia Bankshares, 501
U.S. at 1096 (citing Stedman
v. Storer, 308 F.Supp. 881, 887 (S.D.N.Y. 1969)); see also Tracinda Corp., 502
F.3d at 228. But Rule 14(a) “does not raise a duty of self-accusation; it
enforces a duty to refrain from misleading.” Virginia Bankshares, at 1098
n.7. Thus, a non-disclosure case is only cognizable if the defendant
has made affirmative misrepresentations or omissions of a material
fact. See
id. at 1096; Tracinda
Corp., 197 F.Supp.2d at 62-63.
C. Defendants’ Disclosures In
The Supplemental Filing Moot the Claims in the Complaint
Where, as here, there has been
compliance with the federal securities laws through a supplemental filing, the
purpose of the law has been fully served and there is no threat of continuing
harm that would justify injunctive relief. See, e.g., Charming Shoppes, 557 F.
Supp. 2d at 528-29 (denying preliminary injunction when corrective disclosures
were issued); Bally Total
Fitness Holding Corp. v. Liberation Investments, L.P., 2005 U.S. Dist.
LEXIS 34897, *4 (D. Del. Dec. 22, 2005) (“if a defendant cures the alleged
defects in disclosure, a showing of irreparable harm is precluded . . .
..”); Energy Ventures,
Inc. v. Appalachian Co., 587 F.Supp. 734, 743 (D. Del. 1984) (citing
Rondeau v. Mosinee Paper
Corp., 422 U.S. 49, 59-60 (1975)) (denying a preliminary injunction);
accord City Capital Assocs.
Ltd. P’Ship v. Interco, Inc., 696 F.Supp. 1551, 1557, 59 (D. Del.), aff’d
860 F.2d 60 (3d Cir. 1988) (denying a preliminary injunction where the
defendants made supplemental disclosures revealing the existence of the
plaintiff’s action and summarizing the disclosure allegations); Sea Containers Ltd. v. Stena
AB, 890 F.2d 1205, 1210-11 (D.C. Cir. 1989) (holding that the annexation
of the complaint to a supplemental filing offset “most if not all possible
adverse consequences” of a disclosure violation); Condec Corp. v. Farley, 573
F.Supp. 1382, 1386-87 (S.D.N.Y. 1983) (denying a preliminary injunction where
the defendant had made a “full recitation” of the plaintiff’s allegations);
Avnet, Inc. v. Scope
Indus., 499 F.Supp. 1121, 1125-27 (S.D.N.Y. 1980) (denying a preliminary
injunction on disclosure violation claims where the disputed facts were
disclosed).
Indeed, in cases with facts similar to
those present here, the courts have denied injunctive relief and dismissed the
entire disclosure action in which such relief was sought. See Vestcom Int’l, Inc. v.
Chopra, 114 F.Supp.2d 292, 300, 303 (D.N.J. 2000) (dismissing disclosure
action where the defendant subsequently disclosed the existence of the lawsuit
and the plaintiff’s allegations); Weeden v. Continental Health
Affiliates, Inc., 713 F.Supp. 396, 400 (N.D. Ga. 1989) (granting judgment
on the pleadings in defendants’ favor after they amended their disclosures to
reveal the parties’ dispute); Howell v. Mgmt. Assistance,
Inc., 519 F.Supp. 83 (S.D.N.Y. 1981), aff’d 685 F.2d 424 (2d Cir.),
cert. denied, 549 U.S.
862 (1982) (dismissing case in which a preliminary injunction had already been
denied because the disputed conduct had been disclosed); Avnet, 499 F.Supp. at 1126
(dismissing disclosure violation claims because the amended disclosures cured
any violation).11
11 But see Warner Communications, Inc.
v. Murdoch, 581 F. Supp. 1482 (D. Del. 1984) (where defendants attached
the adverse allegations in their proxy materials but did not, as here, respond
to them in those materials, court refused to dismiss as moot). As
noted in the text, in subsequent cases, where responses were provided, the courts
have found
mootness.
The recent decision in this circuit,
Bally Total Fitness Holding
Corp. v. Liberation Investments, L.P., 2005 U.S. Dist. LEXIS 34897 (D.
Del. 2005), clearly illustrates the effect of corrective disclosures on
injunctive proceedings. In Bally, the court dismissed a
corporation’s request for preliminary injunction against shareholders arising
out of a proxy contest. 2005 U.S. Dist. LEXIS 34897,
*4-5. Plaintiff alleged that defendants violated sections 13(d) and
14(a) of the securities laws in their disclosures filed with the
SEC. Id. at
*3. Before the preliminary injunction hearing was scheduled to take
place, “Defendants submitted a Revised Preliminary Proxy Statement in which they
set forth, verbatim, all of the allegations of insufficient disclosures that
Plaintiff had listed. Defendants also included their responses to Plaintiff's
allegations.” Id. (internal citations
omitted). The Court held that defendants’ actions were sufficient to
cure any alleged defects and dismissed the preliminary injunction as
moot. Id. at
*4-5.
The case currently before this Court
involves virtually the same circumstances that were before the court in Bally. Quigley
brought this action to challenge alleged misrepresentations and purported
omissions from the Karkus Defendants’ SEC filings. Although the
Karkus Defendants sharply disagree with Quigley’s allegations, they filed the
Supplemental Proxy Materials to provide shareholders with all the information
concerning this lawsuit and the allegations made by Quigley, specifically
responding to the matters raised.
As a result, Quigley cannot now claim
that shareholders do not have knowledge of every issue involved in this
litigation, whether disputed or not. That disclosure meets or exceeds
what is required by law, and is fully sufficient to moot this
proceeding. Accordingly, Plaintiff’s request for injunctive relief,
and in fact, the entire Complaint, should be dismissed.
Quigley cannot avoid dismissal by
arguing that they see the facts differently than the way the Karkus Defendants
have disclosed them. Even when there is a genuine basis for a plaintiff to
dispute the facts — and Quigley has no basis here — a supplemental disclosure
which relays the substance of the dispute is all that is required to cure the
alleged deficiencies. Bally, 2005 U.S. Dist. LEXIS
34897 at *4 (“In the context
of a motion for preliminary injunction, where there is a good faith dispute as
to facts or an alleged legal violation, disclosure of the dispute is sufficient
to cure the alleged defects.”) (emphasis
added); see also Charming Shoppes,
557 F. Supp. 2d at 628-29; City Capital, 696 F.Supp. at
1556. There is no need to endorse a plaintiff’s view of the dispute
or to admit wrongdoing; the disclosure laws only require a fair presentation of
the plaintiff’s allegations. Vestcom, 114 F. Supp. 2d at
300; City Capital, 696
F.Supp. at 1556; Avnet,
449 F.Supp at 1125.
It is equally clear that Quigley cannot
attempt to have its contentions “bootstrapped into a live controversy” on the
merits of the disclosures themselves. Vestcom, 114 F.Supp.2d at
300; see also Avnet,
499 F.Supp. at 1125 “It should be noted that the . . . cases [do] not require
the offerors to actually resolve [their] opposing arguments . . . .”). The
purpose of the securities laws is to ensure disclosure of all material facts to
the shareholders — not to determine the merits of collateral questions or to
provide an indirect mechanism for litigating a defendant’s putative
“sins.” See TSC
Indus., Inc., 426 U.S. at 448; Crane Co. v. Westinghouse Air Brake
Co., 419 F.2d 787, 795 (2d Cir. 1969).
The courts have held that when it is
clear that investors were otherwise notified of information allegedly omitted
from the soliciting party’s proxy, there can been no actionable disclosure
violation in that regard. See
Seibert v. Sperry Rand Corp., 586 F.2d 949, 952 (2d Cir. 1978) (no
disclosure violation where allegedly omitted information was available to
shareholders in the public domain); Charming Shoppes, 557 F.
Supp. 2d at 628-29 (no disclosure violation when facts regarding the allegedly
omitted information were disclosed in definitive proxy).
In summary, the operative inquiry at
this point is whether the Supplemental Proxy Materials disclose Quigley’s
allegations and the definitive responses of the Karkus
Defendants. There can be no question that they do. The
investing public has the information needed to make an informed choice, and it
is there, not in a courtroom, that the choice needs to be made.
D. Expedited
Discovery Is Inappropriate and Should be Denied.
Under the
circumstances of this case, there is no basis for granting a request by
Plaintiff for expedited discovery. In addition to the fact that this
action is moot, the Private Securities Litigation Reform Act of 1995 (“PSLRA”)
also imposes an automatic stay of discovery in a securities law case when a
motion to dismiss is pending.
The PSLRA
provides that “in any private action arising under this title, all discovery and
other proceedings shall be stayed during the pendency of any motion to dismiss,
unless the court finds upon the motion of any party that particularized
discovery is necessary to preserve evidence or to prevent undue prejudice to
that party.” 15 U.S.C. § 78u-4(b)(3)(B); see also Winer Family Trust v.
Queen, 2004 U.S. Dist. LEXIS 1825, at *4 (E.D. Pa. Feb. 6, 2004).12
CONCLUSION
In conclusion, all of the information
which the Company complains was not disclosed is now in the
“marketplace.” What is left for this Court is to dismiss this action
and allow shareholders, including the Defendants, to exercise their rights to
decide the issue by permitting the Defendants to solicit proxies and vote at the
upcoming May 20, 2009 Shareholder’s Meeting, as that is the proper forum for
this dispute. Only in this way can there be some semblance of a
balanced contest between, on the one hand, the entrenched incumbents – with
their head start and their other inherent advantages – and, on the other hand,
the self-funded, non-insider Karkus Defendants as the latter seek to bring the
real issues of this
proxy contest – poor corporate performance and the payment of grossly excessive
compensation to insiders – to the attention of the company’s
shareholders.
12 The
only possible applicable exception here might be the “undue prejudice”
exception, but by reason of the disclosures that have been made that exception
is not applicable.
For all the foregoing reasons, this
Court should find that Quigley’s Complaint is now moot, dismiss this Action, and
grant such other and further relief as it deems appropriate.
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REED SMITH
LLP
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s/John F. Smith, III
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John
F. Smith, III
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Amy
J. Greer
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Alexis
G. Cocco
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2500
One Liberty Place
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1650
Market Street
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Philadelphia,
PA 19103
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(215)
851-8100
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Of
Counsel:
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Herbert
F. Kozlov
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Lawrence
J. Reina
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REED
SMITH LLP
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499
Lexington Avenue
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New
York, NY 10022
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Counsel
for Defendants Ted Karkus,
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Mark
Burnett, John DeShazo,
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Louis
Gleckel and Mark Leventhal
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Dated: April
29, 2009
CERTIFICATE OF
SERVICE
I hereby
certify that on this 29th day
of April, 2009, I caused to be filed the foregoing Motion to Dismiss of
Defendants Ted Karkus, Mark Burnett, John DeShazo, Louis Gleckel and Mark
Leventhal and that said Motion is available for viewing and retrieval on the
Court’s ECF system.
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/s John F. Smith, III
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John
F. Smith, III
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