In Re: Rockefeller Center Properties, Inc. Securities Litigation Frank Debora Wilson White Stanley Lloyd Kaufman, Jr. Joseph Gross, at No. 98-5394 v. Charal Investment Company, Inc, a New Jersey Corporation C.W. Sommer & Co., a Texas Partnership, on Behalf of Themselves and All Others Similarly Situated Alan Freed Jerry Crance Helen Scozzanich Sheldon P. Langendorf Rita Walfield Robert Flashman and Renee B. Fisher Foundation, Renee B. Fisher Foundation, Inc., at No. 98-5395
Docket: 98-5394
Court: Court of Appeals for the Third Circuit; July 19, 1999; Federal Appellate Court
The case involves an appeal related to the acquisition of Rockefeller Center Properties, Inc. by investors led by Whitehall Street Real Estate Limited Partnership V. Former shareholders of Rockefeller Center Properties allege that the proxy statement and associated documents for the acquisition were misleading, specifically for not disclosing (1) ongoing negotiations for the sale of approximately 20% of Rockefeller Center to General Electric post-acquisition, and (2) that the Whitehall Group would acquire transferable development rights linked to the property. The District Court granted summary judgment for the defendants, determining that the omissions were not material. The appellate court vacates the summary judgment concerning the sale negotiations, indicating that this claim warrants further consideration, but upholds the summary judgment on the issue of transferable development rights. Rockefeller Center Properties, Inc. was established in 1985 through a $750 million initial public offering and a subsequent $550 million from debentures, which financed a $1.3 billion loan to partnerships owning most of Rockefeller Center, secured by mortgages on their interests.
In the fall of 1994, Rockefeller Center Properties, Inc. faced cash shortages for upcoming debenture payments and entered into financing agreements with Whitehall Street Real Estate Limited Partnership V, which provided a $150 million loan in exchange for partial mortgage assignments and stock warrants, and Goldman Sachs, which purchased $75 million in debentures for a board seat. Goldman Sachs appointed Daniel M. Niedich as a director. By May 11, 1995, the Partnerships filed for Chapter 11 bankruptcy, ceasing mortgage payments and prompting Rockefeller Center Properties, Inc. to explore recapitalization and acquisition proposals from three interested groups: one led by investor Samuel Zell, another by Gotham Partners, and a third including Whitehall and Goldman Sachs.
On August 11, 1995, Rockefeller Center Properties, Inc. signed a combination agreement with the Zell Group, which committed $250 million in cash and $700 million in new financing, allowing for termination if a superior proposal arose. In fall 1995, the Partnerships proposed a Chapter 11 reorganization plan to transfer full ownership of Rockefeller Center to Rockefeller Center Properties, Inc. The board rejected offers from the Whitehall Group ($100 million) and Gotham Group ($105 million) but later approved Whitehall's all-cash merger bid of $8.00 per share over Zell's lower-value bid.
Simultaneously, a rights offering agreement was established that would allow Rockefeller Center Properties, Inc. to conduct a $200 million public rights offering if shareholders rejected the Whitehall bid. On February 14, 1996, a proxy statement was filed with the SEC, indicating concerns about the company's solvency without the merger and mentioning an appraisal valuing Rockefeller Center at $1.25 billion, excluding transferable development rights due to mortgage encumbrances.
The proxy statement outlined the Whitehall Group's plans contingent on merger approval, including acquiring Rockefeller Center and securing at least $430 million in debt financing to address existing debts of Rockefeller Center Properties, Inc. It referenced potential credit lease financing transactions with General Electric, detailing a September 1995 agreement that modified NBC's lease to facilitate such financing, and noted related SEC filings. The statement briefly alluded to possible lease modifications suggested by financial advisors but did not specify intentions to negotiate lease financing with NBC or GE. Accompanying the proxy statement were letters from Rockefeller Center Properties, Inc.'s president and board chair: one discussing a rights offering contingent on merger outcomes, and the other confirming the board's unanimous merger approval. Shareholders approved the merger on March 25, 1996, followed by the Bankruptcy Court's approval of the reorganization plan transferring Rockefeller Center to the Whitehall Group. Subsequently, on April 23, 1996, Rockefeller Center Properties, Inc. agreed to sell the property to General Electric for $440 million. Plaintiffs filed a lawsuit on November 15, 1996, alleging violations of the Securities Exchange Act due to misstatements and omissions, claiming two main points: failure to disclose intentions to sell part of Rockefeller Center to General Electric and the existence of air rights that would be acquired by the Whitehall Group. Defendants moved to dismiss the case on April 30, 1997, providing an affidavit which included past appraisals and relevant newspaper articles, while plaintiffs countered on July 9, 1997, with various SEC filings and bankruptcy documents.
On October 7, 1997, the court heard arguments on a motion to dismiss. Following the arguments, plaintiffs provided a letter from the law firm Winthrop, Stimson, Putnam & Roberts to the New York City Planning Commission concerning Rockefeller Center's air rights, along with two newspaper articles about interest in Rockefeller Center. The District Court ruled on December 7, 1997, converting the motion to dismiss into a motion for summary judgment under Rule 12(b) because it had considered affidavits and evidence from both parties. The court granted summary judgment to defendants on the claim regarding General Electric's sale negotiations, noting that plaintiffs failed to prove defendants were aware of specific transaction details at the time of the Proxy Statement or shareholder vote. The court concluded that the General Electric transaction was not materially distinct from disclosed lease financing, as both provided immediate cash flow and the general interest of General Electric in Rockefeller Center was widely known. Additionally, the court suggested that no reasonable shareholder would find the potential sale significant for voting on the merger.
Conversely, the court denied summary judgment on plaintiffs' claim regarding transferable development rights (air rights), citing a lack of disclosure in the proxy statement about Rockefeller Center Properties, Inc. acquiring these rights. The court found it could not determine the materiality of the omission due to insufficient evidence of the air rights' value. On December 23, 1997, plaintiffs sought reargument or certification for interlocutory appeal, arguing the court improperly converted the motion and submitted a Rule 56(f) affidavit for further discovery. On March 4, 1998, defendants moved for summary judgment on the air rights claim, supported by affidavits from real estate appraiser Robert Von Ancken, who stated the air rights had negligible value due to their speculative nature, estimating them at $8.5 million, and Norman Marcus, former general counsel for the NYC Planning Commission. In contrast, plaintiffs presented three declarations from experts who argued the air rights were materially misleadingly omitted, with one appraiser valuing them at "at least $30 million."
On July 10, the District Court upheld its decision to convert a motion to dismiss into a motion for summary judgment and dismissed plaintiffs' argument regarding lack of notice for this conversion as required by Rule 12(b) and the case Rose v. Bartle, without providing an explanation. The court granted summary judgment to defendants on the air rights claim, noting the most significant valuation of the air rights was a $42 million estimate from a newspaper article, which was minor compared to the $1.2 billion value of Rockefeller Center. The court concluded that no reasonable juror could find the omission of air rights disclosure to be material. The appeal raised two issues: the appropriateness of the conversion regarding plaintiffs' General Electric negotiations claim and the correctness of the District Court's materiality conclusion regarding the failure to disclose the Whitehall Group's acquisition of transferable development rights. Both issues are subject to plenary review. The conversion process, as defined by Fed. R. Civ. P. 12(b), occurs when materials outside the pleadings are considered without exclusion, requiring reasonable notice to all parties. The review of conversion decisions involves assessing whether conversion was necessary, if notice was provided, and if lack of notice constituted harmless error. Courts may consider certain materials without conversion, such as documents integral to the complaint or undisputedly authentic documents attached to the motion to dismiss, provided the plaintiff had actual notice and relied on those documents in their complaint.
When a District Court converts a motion to dismiss into a motion for summary judgment, it must provide the parties with a "reasonable opportunity" to present relevant material and must give "unambiguous" notice of this conversion. In *Rose v. Bartle*, it was emphasized that while notice does not need to be express, it is preferable for District Courts to provide explicit notice, potentially through court orders or during hearings. In this case, plaintiffs claimed they were unaware of the conversion until summary judgment was granted, leading to the conclusion that the District Court failed to provide sufficient notice. The record lacked any indication that the motion to dismiss was to be converted, and the court had stated it was deciding a motion to dismiss during a hearing.
Defendants argued that the plaintiffs had constructive notice due to their submission of materials beyond the pleadings; however, case law shows differing requirements for notice among circuits. The failure to provide proper notice warrants reversal unless deemed a harmless error. Such an error is harmless only if the plaintiff's complaint would not survive a motion to dismiss. In this instance, the analysis involves the complex standards of the Private Securities Litigation Reform Act, and the court found it more appropriate for the District Court to address the issues first due to the complexity and volume of materials involved.
Consequently, the decision to grant summary judgment on the plaintiffs' claim regarding General Electric sale negotiations is vacated and remanded for further proceedings, allowing the parties to reframe their arguments in light of recent legal standards established in *In re Advanta Corporation Securities Litigation*. The plaintiffs' assertion of a material omission related to air rights is also noted, with the standard for materiality requiring that an omitted fact could significantly influence a reasonable shareholder's decision-making.
An omission is deemed immaterial legally if it has a negligible effect on a reasonable investor's assessment of a company's future earnings, as established in In re Burlington Coat Factory Sec. Litig. The court evaluates the materiality of omitted information based on whether it is speculative, unreliable, or contingent, particularly focusing on "soft" information, such as estimates and appraisals. The plaintiffs argued that the District Court incorrectly assessed the materiality of air rights by comparing their value to Rockefeller Center's. They claimed that knowledge of these air rights, appraised at "at least $30 million," would have influenced a reasonable shareholder's decision regarding a merger, especially since the defendants proposed to pay $308 million to shareholders. This $30 million would represent approximately ten percent of the merger price offered by the Whitehall Group.
Defendants provided three arguments to uphold the District Court's summary judgment regarding the air rights. First, they pointed out that Rockefeller Plaza West, the primary site for the air rights, was developed without them, suggesting the air rights had no value. Second, they stated that disclosure was made regarding the acquisition of the air rights through SEC filings about Rockefeller Center Properties, Inc. Lastly, they contended that the air rights were immaterial since their potential sale was speculative, and the $30 million valuation was negligible compared to Rockefeller Center's $1.2 billion value, which would not significantly affect shareholder decision-making.
The court concluded that it need not determine the materiality of the $30 million in relation to Rockefeller Center's value or the $308 million received, as plaintiffs failed to provide evidence that the air rights would be sold or that there was interest from potential buyers. The speculative nature of the air rights and the lack of evidence regarding their sale diminished their materiality. Furthermore, any disclosure would have included the limited likelihood of the air rights being sold. Consequently, the court affirmed the District Court's summary judgment on the air rights claims but vacated and remanded the judgment regarding the General Electric sale negotiations claim for further proceedings.
Defendants in the case include members of the Whitehall Group, affiliates, and former officers and directors of Rockefeller Center Properties, Inc. The partnerships involved are owned by The Rockefeller Group, Inc. (RGI), which is controlled by Mitsubishi Estate Co. of Japan and Rockefeller family trusts. The Whitehall Group's bid of $8.00 per share represents a 50% premium over the stock price prior to the bidding process.
In rights offerings, existing shareholders are given the right to purchase new shares at a discount. In New York City, property owners can acquire air rights, allowing development beyond zoning limitations, particularly when the property is a landmark like Rockefeller Center, with transfer restrictions to adjacent lots. Credit lease financing is mentioned as a method of asset securitization where future lease payments are sold for present value.
The excerpt also discusses the conversion of a motion to dismiss a claim related to General Electric negotiations. It indicates that the District Court erred by not providing adequate notice for the conversion and suggests that the appeal should determine if the error was harmless by assessing whether the plaintiffs' claims could be dismissed under Rule 12(b)(6). The parties submitted various documents to support or oppose the motion, including affidavits, bankruptcy court filings, letters from the New York City Planning Commission, and articles from the New York Times.
Defendant Goldman Sachs, in relation to the shareholders' Amended Complaint, submitted various documents, including affidavits from Robert Payson authenticating a Proxy Statement and SEC filings relied upon by the shareholders, excerpts from a Chapter 11 reorganization plan, and related news articles. Following the submission of these documents, the District Court converted the defendant's motion to dismiss under Rule 12(b)(6) into a motion for summary judgment under Rule 56. Typically, a court cannot consider extraneous matters when ruling on a motion to dismiss, as established in *In re Burlington Coat Factory Sec. Litig*. However, exceptions exist for documents integral to or explicitly cited in the complaint, which allows a court to review the entirety of relevant public statements and documents. Courts can also consider public records, but this is limited to specific types, such as criminal case dispositions and government agency decisions. Documents accessible under the Freedom of Information Act (FOIA) do not qualify as public records for dismissal purposes due to potential barriers in accessing such information. Consequently, two letters from the New York City Planning Commission obtained via FOIA were deemed inadmissible for consideration on the motion to dismiss.
Judicial notice of public disclosure documents filed with the SEC is permissible, following the precedents set by the Second and Fifth Circuits. These documents, required by law, are deemed authentic, and their contents are relevant not for truth but to understand what was stated. A plaintiff alleging legal deficiencies in such documents cannot claim prejudice from their examination by the court. The ruling emphasizes that only legally required SEC filings are considered, excluding other disclosures like press releases.
The District Court may properly assess authenticated SEC filings submitted by both shareholders and defendants when ruling on a motion to dismiss. Specifically, the court can consider: (1) an affidavit authenticating proxy statement documents, including RCPI's annual reports for 1995 and 1996; (2) New York Times articles cited in the complaint; (3) a Form 13D/A filed by Goldman Sachs; (4) affidavits authenticating publicly filed documents relied upon by shareholders; and (5) news articles mentioned in the shareholders' complaint. The court's error in document conversion is deemed harmless as these documents support dismissal for failure to state a claim.
Materiality assessments are nuanced and often jury questions, but claims of omissions or misstatements can be ruled immaterial as a matter of law if they are clearly insignificant to a reasonable investor.
An omission or misrepresentation is considered material if it significantly alters the total mix of information available to a reasonable investor. Shareholders are not required to prove that disclosing omitted facts would have changed their vote on a merger. Information may be deemed trivial or of dubious significance, rendering it immaterial as a matter of law. Claims regarding failures to predict future events are challenging to assess for materiality, particularly when the information is speculative. However, forward-looking statements are not inherently non-actionable if the speaker genuinely believes them. The materiality of speculative information hinges on the probability and magnitude of the event relative to the company's overall activities. For claims under 10b-5, plaintiffs must provide specific facts that strongly infer scienter, although the standards for pleading were unclear at the time of filing. Despite this ambiguity, the plaintiffs' claims regarding GE negotiations do not survive a motion to dismiss even under a more lenient standard. On appeal, shareholders argue that the District Court wrongly granted summary judgment concerning the Board's failure to disclose negotiations for selling 20% of Rockefeller Center for $440 million, with the materiality of these negotiations being a jury question. This situation exemplifies "fraud by hindsight."
The District Court found no factual basis supporting the shareholders' claims that the Investor Group failed to disclose material negotiations regarding the sale of Rockefeller Center prior to the Buy-out Merger vote. Newspaper articles indicated broad negotiations to improve Rockefeller Center's financial condition but did not confirm any firm negotiations, rendering the sale speculative and legally immaterial. Additionally, the shareholders argued that Goldman Sachs and the defendants were obligated to disclose potential sale negotiations with GE/NBC, particularly in light of Goldman Sachs’ prior statement about no plans to sell Rockefeller Center's buildings in the near future. The Court ruled that such non-disclosure was immaterial under SEC regulations, which prohibit including speculative negotiations in proxy materials, and noted that Goldman Sachs’ statement predates the formation of the Investor Group, thus absolving the Group of any duty to update it. Lastly, the District Court observed that GE's interest in Rockefeller Center and related financing arrangements were adequately disclosed in the Proxy Statement. The shareholders argued there was a significant difference between a lease financing agreement and a sale, asserting that a sale would provide immediate cash without increasing debt, whereas lease financing was conditional and inadequate for operational needs. However, the Court found that the shareholders misinterpreted a Bankruptcy Court statement to imply that disclosing the potential sale would have led to sufficient cash for RCPI to manage Rockefeller Center without additional capital.
The Bankruptcy proceeding indicates that a statement was made regarding the need to update the Debtors' bankruptcy disclosure statement to creditors. The proxy materials show GE's interest in both RCPI and Rockefeller Center, and it is noted that GE was part of the Zell Group, which would likely be aware of any potential sale of part of Rockefeller Center to itself. However, the Zell Group did not submit a bid exceeding the $8.00-$8.75 per share bid from the Investor Group. The District Court found that "no reasonable shareholder" would deem the potential sale significant for voting decisions. Furthermore, shareholders did not claim that the refinancing agreements with Goldman Sachs were fraudulent or illegitimate. Thus, remanding the case for further argument on these issues is deemed unnecessary. The shareholders argue that the $1.25 billion appraisal should consider the potential value of air rights, asserting that this would raise the per share value beyond the offered amount. However, the argument fails to recognize that the $8.00 figure reflects a distressed sale value, not the true value of Rockefeller Center, and simply adding a hypothetical value for air rights does not yield an accurate assessment. The full text of the Bankruptcy proceeding may be referenced in the motion to dismiss due to the plaintiffs’ reliance on excerpts from it in their complaint.
