Plaintiff Shareholders Fail to State a Claim for Relief under the Exchange Act in Louisiana Municipal Police Employees Retirement Systems v. Cooper Industries

In Louisiana Mun. Police Emps. Ret. Sys. v. Cooper Indus., No. 12 CV 1750, 2012 WL 4958561 (N.D. Ohio Oct. 16, 2012) the Northern District of Ohio granted the defendants’ motion to dismiss, finding that the plaintiffs had failed to state a claim for relief under sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”).  Two Cooper Industries (“Cooper”) shareholders, the Louisiana Municipal Police Employees Retirement System and Frank E. Waters (collectively, the “Plaintiffs”) filed a derivative action regarding the proposed sale of defendant Cooper to defendant Eaton Corporation (“Eaton”) (collectively, “Defendants”).  Plaintiffs alleged that Defendants violated provisions of the Exchange Act by failing to implement a process that would obtain the maximum share price for shareholders and by omitting material information about the sale, ultimately harming shareholders.

Cooper is a global electrical products manufacturer located in Ireland; Eaton is a diversified power management company based in Ohio.  On May 21, 2012, Eaton issued a press release announcing an agreement in which Eaton would purchase Cooper for cash and shares valued at $72 per share.  This press release directed interested shareholders to review a joint proxy statement for more information about the agreement. 

Plaintiffs alleged that the proxy statement contained material omissions and misstatements in violation of federal securities laws.  Specifically, the alleged misstatements included a lack of disclosure regarding (1) the sales process of the acquisition; and (2) the analysis performed by Cooper’s financial advisor in violation of section 14(a) of the Exchange Act.  Plaintiffs also contended that Cooper’s directors oppressed shareholders, a violation of Irish law.

Under section 14(a) of the Exchange Act, it is unlawful for any person “in contravention of such rules and regulations as the Commission may prescribe to solicit or permit … to solicit any [p]roxy or consent or authorization in respect of any security.”  However, it is not enough to merely desire more information about the sale.  The plaintiff must allege that the defendants omitted material information that caused the proxy statements to become misleading.  The court concluded that Plaintiffs did not point to any statement within the proxy that was misleading.  Therefore, the court found that mere allegations that Defendants excluded relevant data about the sales process in order to mislead shareholders were insufficient to state a claim. 

Next, the court addressed Plaintiffs’ section 20(a) claim against Defendants as the “controlling persons.”  In order to state a claim for relief under section 20(a) of the Exchange Act, plaintiffs must first prove a “primary violation of federal securities laws and that the targeted defendants . . . exercised actual power or control over the primary violator.”  However, because Plaintiffs failed to state a claim under section 14(a), no primary violation existed on which a section 20(a) claim could be premised and, therefore, Plaintiffs’ claim under section 20(a) was dismissed without further deliberation. 

Here, the court granted Defendants’ motion to dismiss because it found Plaintiffs’ allegations were insufficient to raise a right to relief under section 14(a) of the Exchange Act and declined to exercise supplemental jurisdiction on the Irish law claim.

The primary materials for this case may be found on the DU Corporate Governance website.