Court: District Court, S.D. New York; November 6, 2016; Federal District Court
Plaintiffs filed a securities class action against CHC Group Ltd., its officers, directors, and underwriters related to the company's January 16, 2014 IPO, claiming the Registration Statement omitted material facts, violating Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. CHC, a major helicopter operator, derives most of its revenue from oil and gas contracts, primarily from fixed "standing charges" that account for 70% of its total revenue. Following an industry-wide suspension of its EC225 helicopters due to incidents and malfunctions in October 2012, one of its key customers, Petrobras, ceased payments on EC225 contracts during the suspension, leading to a dispute over unpaid fees. The Registration Statement acknowledged the suspension but failed to disclose Petrobras' nonpayment during this period. After the IPO, CHC reported decreased revenues linked to the EC225 situation, and its stock suffered a significant decline following the announcement of disappointing quarterly earnings. The Form 10-Q filed shortly after confirmed a continued revenue decrease attributed to the EC225 suspension.
The $21.3 million loss incurred by CHC in Brazil closely mirrored the $20.3 million loss attributed to the EC225 suspension noted in the Registration Statement three months prior. CHC disclosed a fee dispute with Petrobras during a July 10, 2014, conference call regarding its fourth-quarter earnings for fiscal year 2014. CEO Bill Amelio highlighted the significant disruption caused by the EC225 suspension, while CFO Hooper stated that Petrobras ceased payments on contracts beginning April 2013 until the resumption of overwater flights with the aircraft. Following this disclosure, CHC's stock fell by $0.99 per share. Plaintiffs filed a complaint in state court on April 17, 2015, alleging that CHC's failure to disclose the Petrobras dispute in the Registration Statement violated Sections 11, 12(a)(2), and 15 of the Securities Act, claiming this omission made the statements misleading and violated SEC disclosure requirements. In their motion to dismiss, defendants contended that the claims were time-barred, the omissions were immaterial, and that CHC had adequately disclosed the impact of the EC225 suspension.
On a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court accepts factual allegations as true but not legal conclusions, requiring the complaint to present a plausible claim for relief. In securities cases, the court may consider related documents and public disclosures. The statute of limitations for claims under the Securities Act requires filing within one year of discovering the untrue statement or omission. The standard for determining discovery has evolved; previously, "inquiry notice" indicated when an investor should have investigated further. If an inquiry was not made, knowledge of the underlying facts is imputed from the date the duty to inquire arose, while if an inquiry was conducted, the limitations period begins when it should have unveiled the critical facts.
The Merck Court rejected the inquiry notice standard for claims under Section 10(b) of the Securities Act of 1934, establishing that the limitations period begins when a reasonably diligent investor conducting a timely investigation would have uncovered the violation's facts, not when the investor would have initiated the investigation. The Second Circuit clarified that a fact is only "discovered" once a diligent plaintiff has sufficient information to adequately plead it. There is a division among district courts regarding the application of Merck to the statute of limitations for Sections 11, 12(a)(2), and 15, with a majority agreeing it applies. Defendants argue that plaintiffs’ claims are untimely under the one-year statute of limitations, asserting that plaintiffs were on inquiry notice as of March 12, 2014, when CHC disclosed a $21.3 million revenue drop due to the EC225 suspension. They argue that a diligent investor would have uncovered the alleged omissions from public sources by that date. Conversely, plaintiffs contest the inquiry notice standard's applicability to their claims, asserting that the earliest discovery date of the Petrobras nonpayment was during a July 10, 2014 conference call when it was explicitly disclosed. However, the court finds that inquiry notice is irrelevant here, as plaintiffs could have discovered the material omission regarding Petrobras’s nonpayment of EC225 contracts well over a year before filing. The Registration Statement indicated a $20.3 million revenue decrease in Brazil due to the EC225 suspension, implicitly linking it to Petrobras, a key customer in the region. Plaintiffs’ claim that CHC did not specify Petrobras as affected is deemed unpersuasive; the significance of Petrobras’s role in CHC's Brazilian operations made it reasonable for investors to infer its involvement in the revenue loss shortly after the disclosures.
Plaintiffs had a high likelihood of alleging in a complaint that Petrobras disputed payments owed under EC225 contracts around the time of the IPO. Their argument that CHC failed to disclose Petrobras's reduced payments is weak, as the Registration Statement indicated a revenue decline linked to established customers, suggesting payment issues during a period of market growth. Plaintiffs’ claims regarding "nonpayment" or "formal dispute" do not alter the fact that the disclosed revenue decline could be attributed to broader issues, including Petrobras's refusal to pay both variable flight and standing charges. Public disclosures, including statements from CHC's competitor ERA, indicated Petrobras's intent to pay reduced amounts, which should have informed investors of the situation prior to the one-year limitation for filing claims. The Court concludes that the alleged omissions were clear from the available disclosures and that a diligent investor would have investigated these issues by March 12, 2014, if not at the IPO. As such, plaintiffs' claims are deemed untimely.
The court finds that the plaintiffs fail to establish a claim under Sections 11, 12(a)(2), and 15 of the Securities Act, which hold parties liable for material misstatements or omissions in securities offerings. Section 11 pertains to registration statements, Section 12(a)(2) to prospectuses and oral communications, and Section 15 addresses derivative liability for those controlling liable parties. Liability arises from: 1) misrepresentation, 2) omission contrary to legal disclosure obligations, and 3) omission of information necessary to prevent misleading disclosures.
The case focuses on the latter two bases, requiring plaintiffs to plead materiality of any alleged omissions. A corporation must disclose facts only if their omission would significantly alter the information mix for a reasonable investor. The plaintiffs claim the omission of Petrobras halting payments on EC225 contracts was misleading and required disclosure. However, the court concludes that this omission did not render five specific statements in the Registration Statement misleading.
First, the fact that Petrobras was CHC's largest customer remained accurate despite the omission. Second, the assertion of a "strong customer relationship" is considered mere "puffery," which does not constitute a securities violation. Lastly, while plaintiffs argue that cautionary statements about risks cannot shield a company from liability for undisclosed events, they fail to demonstrate that Petrobras attempted to cancel its contract prior to the offering, undermining their claim.
Petrobras did not make payments on its EC225 contracts during a suspension due to an unexpected event, which plaintiffs argue was misleading because CHC did not warn against this type of risk. However, the court found that the omission did not mislead investors, as the nature of standing charges was characterized accurately by CHC. The plaintiffs claimed that misleading statements were made regarding standing charges, particularly because one major customer had previously refused to pay them. Despite this, the court noted that Petrobras likely withheld payment due to the lack of service justifying the charges during the suspension. The plaintiffs failed to show that the nonpayment affected CHC's ability to collect standing fees generally, and the court concluded that the Registration Statement was not misleading as it disclosed the financial impact of the suspension without identifying the specific customer involved.
Regarding SEC regulations, plaintiffs argued that CHC had an obligation to disclose Petrobras's nonpayment during the suspension. The court rejected this claim, noting that CHC's Registration Statement adequately disclosed its reliance on major customers and the risks associated with that reliance. It also addressed Item 303 of Regulation S-K, which requires disclosure of unusual events affecting income. The Registration Statement disclosed the EC225 grounding and its impact on revenue, thus complying with regulatory requirements. Ultimately, the court granted the defendants' motion to dismiss the plaintiffs' claims under Sections 11, 12(a)(2), and 15 of the Securities Act, concluding that plaintiffs did not adequately state a claim for relief.
Unusual events and their impacts on reported income were disclosed by CHC, and by the time of filing the Registration Statement, operations had resumed for the last EC225. Petrobras’ temporary nonpayment did not constitute a "known trend" or uncertainty that mandated disclosure under Item 303. The argument was rejected as Item 503 requires offering documents to address significant risk factors, which plaintiffs failed to demonstrate were misleading in the Registration Statement.
Item 11A on Form S-1 mandates registrants to describe any material changes since the end of the last fiscal year; however, CHC disclosed the financial impacts of EC225 suspension, and the materiality of omitted details was a reiteration of previous arguments already dismissed. Regulation C similarly requires additional material information to prevent misleading statements, but plaintiffs' arguments were deemed insufficient for the same reasons.
The court granted the defendants' motion to dismiss the consolidated amended complaint against all defendants except CHC, denying the motion concerning CHC based on 11 U.S.C. § 362(a). Since this ruling effectively disposes of all claims against all defendants except CHC, the court ordered the Clerk to enter final judgment for dismissal against all other defendants and transfer the case against CHC to the suspense docket for administrative closure. The court referred to the final prospectus and registration collectively as the Registration Statement, noting that the statements in both documents were substantively identical. The court accepted the facts from the Amended Complaint as true for the motion's purpose, as established in Ashcroft v. Iqbal.
CHC has filed for Chapter 11 bankruptcy, resulting in an automatic stay of the case against CHC as per Section 362a, while the case continues against the non-debtor individual and underwriter defendants. Relevant case law, including Teachers Ins. Annuity Ass’n of Am. v. Butler and McCarthy v. Dun. Bradstreet Corp., establishes the legal context for proceeding against non-debtors. The excerpt references the importance of inquiry notice in securities claims, noting that the discovery of facts triggering inquiry does not automatically initiate the statute of limitations, as clarified in Merck v. Reynolds. The Registration Statement indicates that BP was a significant customer for CHC, with its top ten customers contributing around 60% to CHC's revenues. Plaintiffs argue that the revenue decline likely pertained to CHC’s contracts with BP, countered by the Court's view of a reasonable investor's perspective. Additional evidence includes regulatory filings and public disclosures from ERA, specifically an August 13, 2013 conference call where ERA's CEO discussed Petrobras' payment policies, which were said to affect all operators in Brazil. The mention of a 2013 article regarding Petrobras halting payments on specific contracts suggests courts may use such articles to establish notice, but this particular article is deemed too obscure to have the same impact as previous precedent.
Petrobras’ policy concerning its EC225 contracts was not a secret within the industry, as evidenced by various legal precedents. Plaintiffs acknowledge that Petrobras resumed payments on the contested contracts after a suspension period in December 2013. They argue that Petrobras's nonpayment raises questions about the legality of CHC's standing charges. However, the assertion that CHC’s omission of details regarding Petrobras amounts to a material omission is incorrect, as competitors may provide varying levels of specificity. The financial impact of the $21.3 million drop in revenue, being 1.6% for the nine-month period and 1.2% for fiscal year 2014, falls below the SEC’s 5% materiality threshold. Disclosure is not obligatory merely because information is relevant to investors. Claims under Section 15 are dismissed as they are derivative of other claims. Additionally, all claims against defendant Moore are dismissed since he did not sign the Registration Statement.
