A federal appeals panel has agreed investors can’t press their lawsuit against Tribune Media Company for its failed merger with Sinclair Broadcasting, upholding a lower court’s finding that Tribune had no control over, or knowledge of ,Sinclair’s efforts to comply with regulatory agencies.
Tribune and Sinclair announced plans to merge in May 2017, but Tribune called off the deal in August 2018 and sued Sinclair, alleging it fell short of a contractual obligation to “use reasonable best efforts” to meet demands from both the Federal Communications Commission and the Department of Justice’s antitrust division. According to court documents, Sinclair settled that lawsuit for $60 million and transferred one broadcast station, though it denied liability.
The investors’ lawsuit in question traces to late 2017, when Oaktree Capital Management, Tribune’s largest investor, sold shares through a Morgan Stanley registered public offering. The investors’ class action alleges all three companies violated the Securities Act and the Securities Exchange Act “by failing to disclose that Sinclair was playing hardball with the regulators, increasing the risk that the merger would be stymied,” according to Easterbrook.
U.S. Seventh Circuit Court of Appeals Judge Frank H. Easterbrook
| Wikipedia - Contributed by Judge Frank Easterbrook
Negotiations between Sinclair and the federal agencies broke down over how many broadcast stations Sinclair would divest in markets where both companies operated. The DOJ requested 10, which it later reduced to eight, and although Sinclair ultimately agreed to avoid a federal lawsuit, “it did not mean by divesture what the antitrust division meant,” the judges wrote, because it crafted transactions that would’ve left those stations “in friendly hands,” potentially enabling coordinated behavior.
U.S. District Judge Charles Kocoras dismissed investors’ complaint in January 2020, saying Tribune complied with the Private Securities Litigation Reform Act. Statements predicting the merger would succeed, Kocoras found, came with express caution to investors about regulatory approval and the potential for either firm to push back on regulators’ demands.
The investors then appealed to the U.S. Seventh Circuit Court of Appeals.
Judge Frank Easterbrook wrote the appellate opinion issued July 5; Judges Daniel Manion and Michael Scudder concurred.
“The registration statement and prospectus through which Morgan Stanley offered these shares stated all of the material facts,” Easterbrook wrote, explaining why the complaint failed under the Securities Act. “Plaintiffs point to what they say is a material omission: Tribune’s failure to reveal that Sinclair was playing a dangerous game with the regulators. Yet the antitrust division did not propose divestiture of eight to 10 stations until Nov. 17, 2017, and Sinclair did not reject that demand until Dec. 15. That was two weeks after plaintiffs say that they purchased shares from Morgan Stanley. Securities law requires honest disclosures but not prescience or mind reading.”
The main problem for the investors, the panel continued, is the claims falling under the Securities Exchange Act. Everything the Tribune issued — press releases, quarterly reports, public statements and more — used forward-looking language about Sinclair’s “best efforts” to earn approval.
“It is hard to describe as ‘fraud’ by Tribune the fact that Sinclair saw its obligation differently from Tribune’s understanding,” Easterbrook wrote. “And, as the district court stressed, Tribune alerted investors repeatedly to potential problems.”
Congress amended the 1934 Securities Exchange Act in 1995 through the Private Securities Litigation Reform Act, and the panel said Tribune’s statements during the failed merger satisfy the 1995 law’s protection requirements.
“That concessions would be demanded, and that too much would be too much, was disclosed (and outsiders had to know anyway),” Easterbrook wrote. “Likewise investors surely knew that bluffing in negotiations is normal, and Tribune could not reveal, as if they were facts, beliefs about how far Sinclair would push the regulators and whether the Antitrust Division or the FCC would call any bluff.”
The investors’ allegations don’t detail when, if ever, Tribune executives learned how Sinclair was acting. They likewise don’t allege Tribune hoped the merger failed or that any executives could gain through its disruption.
The panel also said there is no law requiring a merging party to disclose its entire strategy or thought process, and noted private entities shouldn’t be compelled to surrender the advantage of confidentiality when negotiating. It also supposed Tribune investors would’ve benefitted had Sinclair been allowed to merge on its terms.
“Trying to put one over on regulators is a dangerous game, and once the FCC caught on the merger was cooked, but if Sinclair’s gambit had succeeded investors would have been the winners,” Easterbrook wrote. “(By this we mean investors in the merged firm; investors in advertisers, and the economy as a whole, would have been worse off as a result of monopoly pricing.) It is hard to see an intent to harm Tribune’s investors.”
The investor plaintiffs have been represented by attorneys Andrew J. Entwistle, Joshua K. Porter and Brendan J. Brodeur, of Entwistle & Cappucci, of Austin, Texas, and New York; and Michael H. Moirano and Claire G. Kenny, of Moirano Gorman Kenny, of Chicago.
Tribune has been represented by attorneys Gerald P. Meyer, of Mololamken LLP, of Chicago; and Mark P. Goodman, Elliot Greenfield and Anna R. Gressel, of Debevoise & Plimpton, of New York.