By Rodney F. Tonkovic, J.D.
A Seventh Circuit panel concluded that statements about a failed merger between Tribune Media and Sinclair Broadcasting were forward-looking and not actionable. Sinclair had agreed to use its best efforts to satisfy regulatory requirements but had instead played hardball with regulator's requests to divest several stations in markets it shared with Tribune. The panel affirmed the district court's dismissal of the fraud claims, concluding that the statements at issue had correctly stated the terms of the deal. The fact that Sinclair understood "reasonable best efforts" differently than Tribune and then failed in its gamble to keep the stations was fraud by hindsight, the court said, and the investors could have been winners if Sinclair's gambit had succeeded (Water Island Event-Driven Fund, LLC v. Tribune Media Company, July 5, 2022, Easterbrook, F.).
Failed merger. The case arose out of Tribune Media Company's May 2017 announcement that it had agreed to merge with Sinclair Broadcasting Group. Both entities were media companies that owned many television stations, and Tribune issued a press release on the same day saying that Sinclair might sell certain of its stations in order to comply with FCC ownership requirements and antitrust regulations. An SEC filing incorporated the merger agreement, which provided that Sinclair would use its "reasonable best efforts" to comply with these requirements and regulations.
After the agreement was announced, Tribune's largest shareholder, Oaktree Tribune, L.P., sold seven million shares to Morgan Stanley in November 2019, which were then offered to the public. In the meantime, however, Sinclair was playing hardball with the DOJ and FCC, both of which had requested that Sinclair divest itself of stations in certain markets that it shared with Tribune. Sinclair instead proposed transactions that would have produce outward signs of divestiture, while leaving it in practical control over these stations. At this point, the FCC started an investigation that could have derailed the merger indefinitely. In March 2018, Tribune filed a Form 10-K projecting that the merger would close in the second quarter of fiscal 2018.
In August 2018, Tribune announced that it was abandoning the merger. A press release disclosed that Sinclair had refused to divest stations and achieve regulatory approval in derogation of its obligation to use its reasonable best efforts to obtain prompt approval. On the same day, Tribune filed a breach of contract action against Sinclair. Investment funds that had purchased Tribune shares in the Oaktree offering then filed suit against Tribune, Oaktree, and Morgan Stanley, alleging various securities fraud violations. In January 2020, the district court dismissed the investors' complaint with prejudice, finding that any challenged statements about the merger's likelihood of success were protected as forward-looking, and there were no allegations that any omissions occurred with the requisite state of mind. In addition, the Oaktree offering had ended before there were any signs that Sinclair was not fulfilling its commitments.
Forward-looking statements. On appeal, the plaintiffs claimed the offering documents through which Morgan Stanley offered shares in the Oaktree offering omitted Sinclair's dealings with the regulators. Sinclair, however, rejected the DOJ's demand to divest two weeks after the investors purchased their shares, and there were no allegations that Tribune or Morgan Stanley knew this would happen at the time of the offering. As a result, the court found no liability under the Securities Act.
The main problem for the plaintiffs, the court said, was that under the PSLRA, any statements about prospects for the merger’s success were forward-looking. All of the press releases and other statements at issue correctly stated the terms of the deal, and the court declined to describe as "fraud" the fact that Sinclair saw its obligation to use reasonable efforts in a way that did not match Tribune's understanding. Plus, Tribune repeatedly warned that the merger was subject to a multitude of conditions—including obtaining governmental approvals—and that it was not certain that all of the conditions would be satisfied.
Moreover, the complaint failed to allege when, if at all, Tribune learned about the issues leading to the merger's demise. The court doubted, though, that Tribune would have understood Sinclair's "entanglements" as adverse to investors. If Sinclair's gambit had succeeded, the merged entity would have had multiple broadcast assets in a given area, and the investors would have been the winners. Sinclair did not succeed, but there is no fraud by hindsight, the court pointed out.
The case is No. 20-1183.