In Rubke v. Capitol Bancorp Ltd., 2009 WL 69278 (9th Cir. Jan. 13, 2009), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a class action complaint alleging violations of Section 11 of the Securities Act of 1933 and Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 through materially misleading statements and omissions in connection with a tender offer. The Ninth Circuit carefully considered each alleged misleading statement and omission, ultimately determining that none was actionable. The decision in Rubke highlights the types of statements and omissions that would not be viewed as materially misleading when made by a corporation in connection with a tender offer.

At issue in Rubke was an exchange offer made by defendant Capitol Bancorp Ltd., (“Capitol” or “the Company”), a publicly traded bank holding company, to the shareholders of Napa Community Bank (“NCB”). In April 2005, Capitol attempted to acquire the minority shares of NCB (the “Exchange Offer”). The Company filed a registration statement with the SEC and sent all NCB shareholders an offer document. In the offer document, Capitol offered to exchange shares of NCB common stock with shares of Capitol at a rate of approximately 150% of the book value of the NCB common stock. The offer document was accompanied by two fairness opinions that concluded that the transaction was “fair from a financial point of view.” In connection with the Exchange Offer, a member of Capitol’s board of directors allegedly placed telephone calls to some of NCB’s minority shareholders and encouraged them to sell their shares to Capitol. After the Exchange Offer was completed, a subset of minority shareholders who had tendered their stock to Capitol filed a complaint, naming Capitol and its CEO as defendants, and asserting violations of the federal securities laws.

Plaintiffs alleged that Capitol was able to acquire NCB at a price below fair market value because of misrepresentations made by Capitol in the registration statement, the offer document and telephone calls. Specifically, plaintiffs alleged that (1) the fairness opinions Capitol relied upon were misleading because the shareholders had obtained a competing fairness opinion that concluded that the offer was unfair, and Capitol knew about this competing opinion; (2) the registration statement was misleading because it failed to mention that one year prior to the Exchange Offer, Capitol initiated a similar offer for shares of NCB’s holding company and paid approximately 167% of book value for those shares; (3) Capitol misrepresented NCB’s future income projections in the registration statement; (4) the offer document led investors to believe that they had an obligation to tender their shares to Capitol when in fact they did not; (5) the registration statement contained misleading references to a “premium” that caused shareholders to believe that accepting the tender offer would give them a premium on the shares’ fair value, rather than on the book value; and (6) Capitol made misleading statements in telephone calls to its minority shareholders.

Capitol moved to dismiss plaintiffs’ original and first amended complaints on the grounds that plaintiffs’ Section 11 claims failed to satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and their Sections 10(b) and 14(e) claims failed to satisfy the pleading requirements of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). The district court granted both motions, and plaintiffs appealed.

The Ninth Circuit affirmed. The court held that in order to state claims under Sections 11, 10(b) and 14(e), plaintiffs were required to allege, with the particularity required by either Rule 9(b) (for the Section 11 claims) or the Reform Act (for Sections 10(b) and 14(e) claims), that Capitol made materially misleading statements and/or omissions in connection with the Exchange Offer. The court thus began by analyzing the alleged misrepresentations and omissions. The court turned first to plaintiffs’ allegation that the fairness opinions provided by Capitol were misleading. The Court noted that plaintiffs were required to allege with particularity that Capitol “believed the deal offered [to] the minority shareholders was unfair,” and held that the plaintiffs had failed to offer any factual allegations to support such an inference. Even though plaintiffs had obtained a competing fairness opinion which stated that Capitol’s Exchange Offer was unfair, the Court held that nothing in the complaint indicated that anyone at Capitol actually saw or assessed the shareholders’ competing fairness opinion.

The court turned next to plaintiffs’ allegation that the registration statement was misleading because it did not disclose that that Capitol had offered a higher book value for similar shares just a year before the Exchange Offer at issue. The court held that this allegations also failed because plaintiffs did not allege why the omitted information was false or misleading. The court noted, “[t]he fact that Capitol purchased a slightly different security nearly a year earlier for a slightly higher price was simply extraneous to the Exchange Offer.” The court also pointed out that information regarding the earlier offer was publicly available.

The court went on to consider plaintiffs’ allegation that the registration statement misrepresented NCB’s future income projections. Plaintiff had alleged the registration statement was misleading because it stated that “NCB’s profitability will increase,” and this did not adequately disclose NCB’s dramatic growth. The panel quickly dismissed this allegation, stating, “[t]his allegation merely squabbles about the adverbs used in the registration statement, and fails to indicate that the language used was false. Furthermore, there is no duty to disclose income projections in a prospectus.”

The court also rejected plaintiffs’ allegation that the offer document was misleading because it failed to disclose that the shareholders did not have any obligation to participate in the offer. The panel held that plaintiffs had failed to demonstrate that the allegation was misleading because there were other disclosures in the documents indicating that accepting the offer was optional.

The court considered and rejected the allegation that the registration statement misled shareholders into believing they would receive a premium on the shares’ fair value, as opposed to the book value. According to the court, “the language in the registration statement specifically referred to the ‘book value’ of the NCB shares, not a premium to the fair value of the shares.”

Plaintiffs’ final allegation was that Capitol made misleading statements in connection with phone calls placed to the minority shareholders before the offer expired. Considering this allegation, the court noted that plaintiffs alleged only that one board member, Dennis Pedisich, made such calls, and that plaintiffs had “failed to allege with particularly that Capitol or its officers either made similar calls themselves or exhorted Pedisich to make the calls.” Plaintiffs’ complaint merely alleged, based upon information and belief, that Pedisich was exhorted by Capitol’s CEO to call shareholders. This allegation failed, the court held, because plaintiffs did not reveal the sources of their information or otherwise explain how they knew that Capitol “exhorted” Pedisich to make the calls.

Having exhausted plaintiffs’ allegations and finding not one misleading statement or omission, the panel affirmed the district court’s dismissal of plaintiffs’ complaint with prejudice. Rubke provides useful guidance to drafters of tender offer materials, who must necessarily balance the interest in full and fair disclosure to shareholders against the burden to shareholders of wading through unduly voluminous offering materials.