Atlas Master Fund, LTD. v. Terraform Global Inc. (Cir. Ct. Mont. Co.)

Filed:  January 3, 2019

Opinion by:  Judge Rubin

Holding:  To determine whether a claim under the Securities Act of 1933 adequately alleged omissions from a registration statement, a court will review whether there is a substantial likelihood that the disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Facts:  A Delaware corporation (the “Company”) with its principal office in Bethesda, Maryland, was formerly controlled by its sponsor/parent (“Parent”) in a YieldCo structure.  A YieldCo is a tax-efficient financing structure that exists largely to benefit the sponsor, by allowing “the sponsor to tap the public equity markets without giving up control of the underlying assets.”  The Company completed an IPO on July 31, 2015 at $15.00 per share of common stock.  The Company’s stockholders were paid $5.10 per share when it was acquired by a third party in December 2017.  Plaintiffs are investment funds that bought shares in the IPO and brought suit alleging the loss in value in the span of two years, resulted in large measure, from material representations and omissions in the Company’s registration statement. 

The registration statement provided that any material transaction between the Company and Parent would require the approval by the Company’s conflicts committee, which was composed entirely of independent directors (the “Conflicts Committee”).  On November 20, 2015, the Company’s board allegedly terminated the two members of the Conflicts Committee following the Committee’s failure to approve a transaction requested by Parent.  Later the same day, three new members were added to the Company’s board and approved the transaction. 

The registration statement also provided an assurance that Parent, which borrowed money to purchase and develop the assets it sold to the Company, had adequate capital and access to the capital markets to make acquisitions and to develop projects.  Plaintiffs alleged the registration statement failed to disclose that, at the time of the IPO, Parent needed a $169 million loan to satisfy an undisclosed margin call related to an earlier acquisition by Parent.  While the loan closed after the IPO in August 2015, plaintiffs alleged the terms were known before the offering.  The interest rate exceeded the disclosed average annual interest rate by 500%. 

The defendants, which included the Company and persons who served as officers and directors of both the Company and Parent, filed a motion to dismiss arguing that the plaintiffs failed to plead viable claims for relief under the Securities Act of 1933.

Analysis:  With respect to alleged omissions from a registration statement, a court will review whether there is a “substantial likelihood that the disclosure of the omitted [information] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  Under circumstances where a registration statement contains both seemingly accurate and inaccurate information, “the Supreme Court has cautioned that ‘not every mixture with the true will neutralize the deceptive.  If it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability should follow.”

The Court found factual questions existed whether the registration statement was misleading with regard to each of the following aspects: (a) the Conflicts Committee, which was represented to be an effective control against self-dealing by Parent; (b) Parent’s then-existing financial condition and ability to raise capital to acquire and fund drop-down projects; and (c) Parent’s ability to disengage from the YieldCo model and decline to drop-down projects to the Company if Parent could get a better deal elsewhere. 

Conflicts Committee.  The Court stated that while the registration statement disclosed Parent’s ability to appoint all of the Company’s directors, including members of the Conflicts Committee, “a fair reading of the registration statement makes it seem that there would be a meaningful check in place to block overreaching by Parent regarding drop-downs.  No rational investor would equate the power to appoint [the Company’s] directors with the power to sack an independent Conflicts Committee, at will, and replace it with loyalists, the first time [the Company’s] Conflicts Committee rejected” a proposal. 

Parent’s Financial Condition.  The plaintiffs alleged that, although the loan closed in August 2015 after the IPO, the terms were known before the offering.  Plaintiffs conceded that the registration statement warned generally about the Company’s dependence upon Parent, and need for liquidity.  The Court stated that a registration statement may be misleading if “it fails entirely to disclose a material risk that is already known by the company” and concluded that it is a reasonable inference that certain defendants “knew of these impending, and imminent material financial events on July 31, 2015.”  The Court noted that the registration statement did not disclose the Parent’s need to secure the $169 million loan, which “likely would have alerted potential investors of material risks, otherwise unknown to the public.”  The Court disagreed with defendants’ contention that the Company had no duty to disclose any information about Parent’s financial condition, even if it knew about it, due to the YieldCo structure and the Company being completely controlled by Parent.

Ability to Disengage.  The Court recognized this part of plaintiffs claim as being more tenuous.  While the registration statement did not say that Parent could, at will, simply abandon the Company, “the offering documents did say that neither party was required to buy or sell any project, or to do so on any particular terms.”  Giving plaintiffs the benefit of all favorable inferences, the Court was disinclined to dismiss this part of the claim. 

The Court denied the motion to dismiss.  The Court also discussed the doctrine of class action tolling.  

The opinion is available in PDF.