Walter Energy, Inc. v. Audley Capital Advisors LLP

Citations: 176 So. 3d 821; 2015 Ala. LEXIS 21; 2015 WL 731152Docket: 1131104

Court: Supreme Court of Alabama; February 19, 2015; Alabama; State Supreme Court

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Walter Energy, Inc. appeals a dismissal by the Jefferson Circuit Court of its claims against Julian A. Treger, Áudley Capital Advisors LLP, and related entities (collectively, "the Audley defendants"). The claims arise from allegations that the Audley defendants engaged in a scheme to manipulate Walter Energy's stock price improperly. 

In late 2010, Walter Energy agreed to acquire Western Coal Corporation, in which the Audley defendants held a significant minority stake. Between the agreement and the acquisition's closure in April 2011, the Audley defendants exchanged millions of shares of Western Coal for approximately $770 million in cash and Walter Energy stock. Walter Energy contends that the Audley defendants conspired to initiate a 'pump and dump' scheme starting on July 17, 2011, through a letter from Treger suggesting a potential acquisition of Walter Energy at double its share price. Despite the letter being marked 'private, confidential,' it was publicly released the next day, resulting in a spike in Walter Energy's stock price and the subsequent sale of approximately 900,000 shares by the Audley defendants.

Further media reports in September and October 2011 about potential acquisitions by other mining companies led to additional sales of Walter Energy stock by the Audley defendants. Despite these reports, no formal acquisition attempts were made, leading Walter Energy to assert that the Audley defendants fabricated the media speculation to inflate the stock price for profit. Additionally, Walter Energy claims the Audley defendants perpetuated the narrative that its board was rejecting merger opportunities due to self-interest.

On March 22, 2013, the Audley defendants announced plans to present their own slate of directors for Walter Energy's upcoming annual meeting, which Walter Energy alleges was intended to obstruct its efforts to raise $350 million through a debt offering. The court ultimately affirmed the dismissal of Walter Energy's claims against the Audley defendants.

Walter Energy filed a lawsuit against the Audley defendants on May 28, 2013, in the Jefferson Circuit Court, alleging that their attempts to influence the company's stock price—specifically, a proposed slate of candidates and efforts to halt a debt offering—constituted improper manipulation. The complaint included claims of violations under the Alabama Securities Act, various forms of fraud, conspiracy, intentional interference with business relations, negligent misrepresentation, and unjust enrichment. The Audley defendants subsequently moved to dismiss the claims under Rule 12(b)(6) of the Alabama Rules of Civil Procedure. On May 20, 2014, the trial court granted this motion, dismissing all claims with prejudice. Walter Energy appealed the dismissal on June 30, 2014, challenging only the claims under the Alabama Securities Act and intentional interference with contractual relations. The appeal focused on whether the allegations were sufficient to withstand a dismissal, emphasizing that the court must accept the allegations as true and determine if there is any set of facts that could entitle Walter Energy to relief. Walter Energy specifically contended that the Audley defendants violated § 8-6-17(a) of the Alabama Securities Act, which prohibits fraudulent practices in connection with securities transactions.

Walter Energy's third amended complaint alleges that the Audley defendants engaged in conduct prohibited by § 8-6-17(a) of the Alabama Securities Act. However, the Audley defendants challenge the applicability of this section, asserting that § 8-6-12(a) limits the Act's reach to transactions where an offer to sell is made or accepted in Alabama. They contend that there is no allegation of an offer to buy in this case and claim they have not made any offer to sell Walter Energy stock in Alabama. The defendants maintain that Walter Energy fails to allege any offer to sell made in Alabama, which they argue is grounds for dismissal of the § 8-6-17(a) claim.

Although Walter Energy does not explicitly state that offers to sell were made in Alabama, it does mention that the sales "occurred on the New York Stock Exchange, and the offers to sell were directed to Alabama." This description could imply an offer made in Alabama if accompanied by an allegation of receipt of such an offer in the state. However, Walter Energy has not alleged that any offers were received in Alabama, leading the trial court to dismiss the claim on the grounds that § 8-6-17 does not apply without such allegations. The court emphasized that the Audley defendants' alleged transactions on the New York Stock Exchange do not suffice to satisfy the legal requirements of the Alabama Securities Act, particularly regarding the necessary connection to Alabama.

Walter Energy's claim under the Alabama Securities Act is dismissed because it fails to meet the two critical requirements of § 8-6-17, which stipulates that offers must be directed to and received by persons located in Alabama. The court agrees with the trial court’s conclusion that Walter Energy has not adequately pled a claim for relief under the Act. The assertion that all transactions on national exchanges fall within the Act's scope is rejected, as the court has not accepted such a broad interpretation in past rulings. The mere fact that the transactions involve an Alabama corporation is insufficient to invoke the Act, which is focused on the location of the offer rather than the issuer’s state of incorporation. Walter Energy’s complaint does not allege that the Audley defendants made offers to sell or buy stock in Alabama, which is essential for a valid claim under the Act, leading to the affirmation of the trial court’s dismissal.

Regarding the claim of intentional interference with contractual or business relations, Walter Energy alleges that the Audley defendants improperly interfered with its relationships with shareholders and lenders, particularly related to a $350 million debt offering. The court outlines the elements required for such a claim, emphasizing the necessity for the defendant to be a stranger to the business relationships involved. Walter Energy contends that the Audley defendants are strangers, while the defendants argue they are not. The court agrees with the Audley defendants, referencing the precedent set in Waddell, Reed, Inc. v. United Investors Life Insurance Co., which clarifies that a party to a contract cannot be liable for tortious interference and that beneficial interest or control over a relationship can establish a party’s connection to it.

Liability for tortious interference with a contract requires that the defendant be a stranger to both the contract and the related business relationship. Merely not being a party to the contract does not qualify one as a stranger. A claim necessitates wrongful conduct by the defendant without privilege, where 'privilege' refers to the defendant's legitimate economic interests or relationships to the contract. The term 'participant' is used to describe an entity that, while not a party to the contract, is essential to the relationship and not a stranger. A participant with legitimate interests is privileged to be involved without facing interference claims.

In the case analyzed, the trial court found that the Audley defendants, as shareholders of Walter Energy, had direct economic interests in the company's relationships with its shareholders and lenders. Their engagement in corporate governance, such as participating in proxy contests, allowed them to influence business decisions legitimately. Therefore, they were not considered strangers to these relationships. The court noted that decisions made by a corporation's board are in the shareholders' interests, making any gains or losses ultimately relevant to them. Shareholders inherently have interwoven economic interests, as their decisions impact one another. Thus, the Audley defendants were deemed participants in the alleged interference, leading to the dismissal of Walter Energy’s claim of intentional interference with contractual or business relations.

Walter Energy initiated a lawsuit against the Audley defendants, alleging their involvement in a 'pump and dump' scheme to manipulate the stock price of Walter Energy. The trial court dismissed all claims based on Rule 12(b)(6) after granting Walter Energy three opportunities to amend its complaint. Walter Energy appealed the dismissal of two claims, but the court upheld the trial court's decision, affirming the dismissal. The Audley defendants include multiple entities, such as Audley Capital Advisors and other funds based in London, Guernsey, and the Cayman Islands. 

The court defined a 'pump and dump' scheme as artificially inflating a stock's price to sell it at a profit, leading to losses for unsuspecting investors once the inflated shares are sold off. Walter Energy also named the Scoggin defendants, claiming they aided the Audley defendants in attempting to replace Walter Energy's board of directors and had an agreement to share profits from their investment. However, the Scoggin defendants’ motion to dismiss for lack of personal jurisdiction was granted, and Walter Energy did not appeal this decision.

Walter Energy could have potentially pursued claims under federal securities regulations but chose to focus solely on Alabama law, explicitly stating in its complaint that no federal claims were asserted. Consequently, the court found it unnecessary to address the trial court's additional reasoning for dismissing the Alabama Securities Act claim, specifically that Walter Energy lacked standing since it did not allege purchasing shares post-scheme. The complaint did not clarify how the Audley defendants interfered with relationships among shareholders, although it mentioned that false reports of a sale or merger led shareholders to perceive the board as resistant to change.