                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


2-6-2004

In Re:Digital Island
Precedential or Non-Precedential: Precedential

Docket No. 03-1055




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Recommended Citation
"In Re:Digital Island " (2004). 2004 Decisions. Paper 962.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/962


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                         PRECEDENTIAL          One Rodney Square
                                               P.O. Box 1035, Suite 500
UNITED STATES COURT OF APPEALS                 Wilmington, DE 19899
     FOR THE THIRD CIRCUIT
           __________                          Counsel for Appellants

             Case No: 03-1055                  Jerrold J. Ganzfried [Argued]
                                               Mark D. Wegener
        IN RE: DIGITAL ISLAND                  Howrey, Simon, Arnold & White
         SECURITIES LITIGATION                 1299 Pennsylvania Avenue, N.W.
                                               Washington, DC 20004

      WILLIAM BLAIR MASSEY, Lead               Philip A. Rovner
                   Plaintiff                   Potter, Anderson & Corroon
     as representative of a class consisting   1313 North Market Street
     of all holders of the common stock of     6th Floor, P.O. Box 951
               Digital Island, Inc.,           Wilmington, DE 19801

                       Appellant               Counsel for Appellees
                __________

          On Appeal From The                                   _________
   United States District Court For The
           District of Delaware                                OPINION
     (Civil Action No. 02-cv-00057)                          ____________
    The Honorable Gregory M. Sleet,
              District Judge                   SMITH, Circuit Judge
               __________
                                                      This securities class action lawsuit
        Argued November 4, 2003                arises out of the acquisition of Digital
              __________                       Island, Inc. by Cable & Wireless, PLC
                                               (“C&W”). Pursuant to a May 14, 2001
   Before: MCKEE, SMITH, and WEIS,
                                               Merger Agreement between Digital Island
             Circuit Judges
                                               and C&W , Dali Acquisition Corp.
     (Opinion Filed February 6, 2004)          (“Dali”), a wholly-owned subsidiary of
                                               C&W, made a cash tender offer to
Jeffrey G. Smith                               shareholders of Digital Island under which
Robert Abrams [Argued]                         it acquired 80 percent of the shares of
Wolf, Haldenstein, Adler, Freeman & Herz       Digital Island. Dali was thereafter merged
270 Madison Avenue                             into Digital Island, which survived as a
New York, NY 10016                             wholly-owned subsidiary of C&W.

Pamela S. Tikellis                                  Plaintiffs filed a Consolidated
Chimicles & Tikellis
                                               Amended Class Action Complaint (the
“Complaint”) on May 15, 2002. Plaintiffs       received “extra consideration” for their
in this case represent a class comprised of    shares in violation of Section 14(d)(7) of
all persons, other than the named              the ‘34 Act, 15 U.S.C. § 78n(d)(7), and
defendants and certain related parties, who    Securities and Exchange Commission
owned Digital Island common stock              (“SEC”) Rule 14d-10, the so-called “Best
during the relevant period and who             Price Rule,” 17 C.F.R. § 240.14d-10(a).
received the tender offer. 1 Defendants are    Plaintiffs allege both individual violations
Digital Island, members of Digital Island’s    by Defendants of these provisions, as well
Board of Directors during the relevant         as “control person liability” under Section
time period, including Digital Island’s        20(a) of the ‘34 Act. 15 U.S.C. § 78t(a).
CEO, Ruann Ernst (the “Directors”),2
C&W, C&W ’s CEO, Graham Wallace,3                      The District Court dismissed
and Dali.       Plaintiffs allege that, in     Plaintif f s’ c o n s o l id a t e d a m e n d ed
connection with the tender offer,              complaint, with prejudice, for failure to
Defendants made misleading statements          state a claim pursuant to Fed. R. Civ. P.
and failed to disclose material information    12(b)(6) and the Private Securities
in violation of Section 14(e) of the           Litigation Reform Act of 1995 (the
Securities and Exchange Act of 1934 (the       “PSLRA”), 15 U.S.C. § 78u-4. In re
“‘34 Act”), as amended by the W illiams        Digital Island Sec. Litig., 223 F. Supp. 2d
Act of 1968.        15 U.S.C. § 78n(e).        546 (D. Del. 2002). By a subsequent
Plaintiffs further allege that the Directors   order, the District Court denied Plaintiffs’
                                               motion, pursuant to Fed. R. Civ. P. 59(e),
                                               which sought to alter the court’s judgment
     1
     Individual complaints were filed by       and to permit Plaintiffs to file an amended
shareholders of Digital Island in late         complaint under Fed. R. Civ. P. 15(a).
January and early February of 2002. On         Because we conclude that Plaintiffs’
April 16, 2002, the District Court granted     proposed Second Consolidated Amended
Plaintiffs’ Joint Motion for Consolidation,    Class Action Complaint (the “proposed
Appointment of Lead Plaintiff and              amended Complaint”) does not articulate
Appointment of Lead Counsel.                   a viable theory of fraud, we will affirm
                                               both orders of the District Court.
 2
    The other Directors are: Charlie Bass,
Christos Cotsakos, Mary Cirillo-Goldberg,                             I.
G. Bradford Jones, Robert Marbut, Shahan
Soghikian, Don Reed, Mike McTighe,                   The following facts are drawn from
Robert Drolet, Avery Duff, and Marc            the proposed amended Complaint and
Lefar.                                         from Digital Island’s Securities and
  3
                                               Exchange Commission (“SEC”) Form
     Defendant Wallace also served as a
                                               14D-9, which is referenced in the proposed
member of Digital Island’s board
                                               amended Complaint and included in the
beginning on July 16, 2001.
Joint Appendix. See Oran v. Stafford, 226       $3.40 per share.4 Digital Island made a
F.3d 275, 289 (3d Cir. 2000) (taking            counter-proposal of $4.10 per share, which
judicial notice of documents required by        was rejected by C&W . On May 13, 2001,
law to be filed with the SEC). Digital          the Digital Island board met and voted
Island provides a global e-business             unanimously to approve the execution of
delivery network and suite of services for      the Merger Agreement with a per share
enterprises that use the internet to deploy     tender offer price of $3.40 and to
business applications and conduct e-            recommend to the shareholders that they
commerce. Digital Island began searching        accept the tender offer.
for a potential acquirer in August of 2000,
at which time representatives of Digital                   On May 14, 2001, Digital Island
Island contacted representatives of C&W         and C&W executed the Merger
to gauge C& W’s interest in a strategic         Agreement, which contemplated a first
partnership with Digital Island. In March       step tender offer followed by a second step
of 2001, C&W indicated that it was              merger.        Under the tender offer,
interested in a potential business              shareholders who tendered their shares
combination with Digital Island. In April       were to receive $3.40 per share. Under the
of 2001, C&W delivered an initial draft of      merger, all remaining shares of Digital
the Merger Agreement and made an initial        I sland would be c a nc e le d , a nd
offer to purchase Digital Island for $2.25      shareholders would receive $3.40 per
a share. After considering the offer and        share. The tender offer period expired on
meeting with its financial advisors, Digital    June 18, 2001, and on June 19, 2001,
Island advised C&W that it was prepared         D i g i t a l Isla n d a n n o u n c e d t h at
to begin negotiations, provided that the        appro xima tely 80 percent of it s
offer price was increased to at least $3.25.    outstanding stock had been tendered.

        Negotiations between Digital Island            Plaintiffs’ Section 14(e) claim is
and C&W continued through April and             based on two significant business deals
into May, but C&W would not agree to            that were announced immediately after the
raise its offer to $3.25 per share. On May      expiration of the tender offer. On June 20,
10, 2001, Digital Island announced an           2001, Digital Island announced a major
agreement to provide certain business           business agreement with Bloomberg LP,
services to Microsoft Corporation. The          and on July 2, 2001, Digital Island
price of Digital Island’s stock rose that day   announced anoth er major business
from $2.00 per share to $3.69 per share.        agreement with Major League Baseball
On May 11, 2001, representatives of C&W
indicated that C&W’s board of directors          4
                                                    According to information submitted in
had preliminarily approved an offer of
                                                the Joint Appendix, Digital Island’s stock
                                                dropped to $3.13 at the close of trading on
                                                May 11.
(“MLB”). According to Plaintiffs, both          MLB deals because the success of the
the Bloomberg and MLB deals had                 tender offer and resulting merger created a
substantial value to Digital Island, and, if    windfall for Defendants that was not
disclosed, would have substantially             enjoyed by Digital Island’s other
influenced the shareholders’ decision to        shareholders.      Specifically, Plaintiffs
tender their shares.5                           allege that, pursuant to the merger, the
                                                Directors received substantial cash
        Plaintiffs allege that Defendants       payments for outstanding options to
knew of the Bloomberg and MLB deals             purchase Digital Island common stock, as
prior to expiration of the tender offer, but    well as for their shares of restricted
deliberately or recklessly failed to disclose   common stock. Additionally, Plaintiffs
the deals until after the expiration of the     allege that CEO Ernst had executed a
tender offer.       Plaintiffs argue that       lucrative contract for employment to serve
Defendants had an affirmative duty to           as President and CEO of the surviving
disclose the Bloomberg and MLB deals,           entity. 6
or, alternatively, that Defendants’ failure
to mention those deals in the tender offer         Such extra consideration was given
and the Schedule 14D-9 rendered those              to Digital Island officers and
docu men ts mate rially m islea ding.              directors in order to induce them to
Plaintiffs allege that Defendants were             support the Offer to Purchase at the
motivated to suppress the Bloomberg and            $3.40 price per share and to
                                                   withhold the announcement of the
  5
                                                   Bloomberg and Major League
     Plaintiffs’ prediction is based on the
                                                   Baseball deals until after the
increase in value of Digital Island stock
                                                   expiration of the Offer to Purchase
that occurred after announcement of the
                                                   in order to preclude the need for
Microsoft deal. The actual disclosure of
                                                   C&W to increase the consideration
the Bloomberg and MLB deals does not
                                                   in the Offer to Purchase.
appear to have affected the price of Digital
Island stock. Plaintiffs explain that the
                                                   6
success of the tender offer on June 19                The proposed amended Complaint
effectively froze Digital Island’s share        alleges that “five of the officers of Digital
price at $3.40 per share because, under the     Island, including Ms. Ernst, received
merger agreement, all outstanding shares        lucrative employment contracts in
of Digital Island were to be automatically      connection with the merger which entitled
cashed out at that price. Nevertheless,         them to generous salary and option
Plaintiffs allege very few facts from which     packages.” Defendants point out that,
any meaningful comparison can be drawn          according to the Schedule 14D-9
between the Microsoft deal on the one           referenced in the Complaint, only one
hand, and the Bloomberg and MLB deals           named Defendant, CEO Ernst, received
on the other.                                   such a contract. Plaintiffs did not respond.
App. at 338. According to Plaintiffs,                 The District Court dismissed the
disclosure of the Bloomberg and MLB           Complaint on September 10, 2002, for
deals threatened to derail the merger with    failure to state a claim. The District Court
C&W:                                          held that Plaintiffs’ Section 14(e) claim
                                              failed to meet the heightened pleading
   If the announcement induced more           requirements of the PSLRA in two
   than 50 percent of Digital Island          respects: (1) the Complaint did not
   stockholders not to tender their           identify with specificity the statements that
   shares, the Merger would not be            were allegedly misleading, and (2) the
   consummated and the Digital Island         Complaint did not plead facts giving rise
   officers would lose their lucrative        to a strong inference of scienter. 15
   employment agreements, as well as          U.S.C. § 78u-4(b). The District Court
   the extra consideration for their          further held that Plaintiffs failed to state a
   shares. Thus, any announcement             claim for violation of the Best Price Rule
   concerning the Bloomberg or                because that provision applies only to
   Major League Baseball Deals                payments made during a tender offer, and
   carried with it the threat of              the extra consideration alleged by
   undermining the M erger                    Plaintiffs was received pursuant to
   Agreement.                                 agreements executed prior to the tender
                                              offer. Finally, the District Court dismissed
App. at 352.                                  Plaintiffs’ “control person liability” claim
                                              because (1) the predicate violations on
        In addition to their Section 14(e)    which that claim was based (i.e., the
claim, Plaintiffs allege that, by virtue of   Section 14(e) and Best Price Rule claims)
these cash payments and the Ernst             were dismissed, and (2) because Plaintiffs
employment agreement, the Directors           failed to allege facts sufficient to establish
received “extra consideration” for their      control and/or culpable participation.
shares in violation of Section 14(d)(7) of
the ‘34 Act and the SEC’s Best Price Rule.               Plaintiffs filed a Motion to Alter
Plaintiffs allege individual violations by    Judgment and For Leave to File An
Defendants of Sections 14(e) and the Best     Amended Complaint under Fed. R. Civ. P.
Price Rule, as well as “control person        59(e) and 15(a). The District Court denied
liability” under Section 20(a) of the ‘34     Plaintiffs’ motion on November 25, 2002.
Act.7                                         The District Court concluded that
                                              P l a in t i f fs h a d d e l i b e r a t e l y a n d
    7
                                              unreasonably delayed seeking leave to
       The Complaint also alleges that
                                              amend until after judgment had been
Defendants issued a false and misleading
                                              entered on the motion to dismiss.
proxy statement in violation of Section
14(a) of the ‘34 Act. Plaintiffs do not
appeal dismissal of this claim.
       Plaintiffs timely appealed both          Claim. Although the stay of proceedings
orders on December 23, 2002.8 The               against Digital Island and Dali does not
District Court had subject matter               affect our reasoning, it does mean that our
jurisdiction under 28 U.S.C. § 1331 and 15      decision today does not reach either entity.
U.S.C. § 78aa. This Court has jurisdiction
over the District Court’s order dismissing                           II.
Plaintiffs’ Complaint under 28 U.S.C. §
1291 because the Complaint was                        Section 14(e) of the ‘34 Act
dismissed with prejudice. Manze v. State        provides, in pertinent part:
Farm Ins. Co., 817 F.2d 1062, 1064 (3d
Cir. 1987).        This Court also has               It shall be unlawful for any person
jurisdiction under section 1291 over the             to make any untrue statement of a
District Court’s denial of Plaintiffs’ post-         material fact or omit to state any
judgment motion for leave to amend. See              material fact necessary in order to
Foman v. Davis, 371 U.S. 178 (1962); N.              make the statements made, in the
River Ins. Co. v. CIGNA Reinsurance Co.,             light of the circumstances under
52 F.3d 1194, 1203 (3d Cir. 1995). We                which they are made, not
review de novo a District Court’s                    misleading, or to engage in any
dismissal of a complaint for failure to state        fraudulent, dec eptiv e, or
a claim under Fed. R. Civ. P. 12(b)(6).              manipulative acts or practices, in
Ramsgate Court Townhome Ass’n v. West                connection with any tender offer . .
Chester Borough, 313 F.3d 157, 158 (3d               ..
Cir. 2002).
                                                15 U.S.C. § 78n(e). The District Court
       On December 8, 2003, after oral          held that Section 14(e) requires proof of
argument in this case, the successor entity     scienter, i.e., “a mental state embracing
to the merger of Digital Island and Dali        intent to deceive, manipulate, or defraud.”
filed for Chapter 11 Bankruptcy in the          Ernst & Ernst v. Hochfelder, 425 U.S. 185,
District of Delaware. Under 11 U.S.C. §         193 n.12 (1976). Both parties appear to
362(a), this filing operates to stay all        agree.9
proceedings against Digital Island and
Dali. Digital Island is a defendant in                 Section 14(e) is “modeled on the
Plaintiffs’ Section 14(e) claim, and Dali is    antifraud provisions of § 10(b) of the [‘34]
a defendant in Plaintiffs’ Best Price Rule      Act and Rule 10b-5,” Schreiber v.

  8                                              9
    A timely Rule 59(e) motion suspends            Plaintiffs cite Clearfield Bank & Trust
the time in which to appeal, which then         Co. v. Omega Fin. Corp., 65 F. Supp. 2d
begins to run, pursuant to Fed. R. App. P.      325, 340, 342-43 (W.D. Pa. 1999), in
4(a)(4), upon the entry of an order granting    support of the proposition that Section
or denying the motion.                          14(e) requires proof of scienter.
Burlington Northern, Inc., 472 U.S. 1, 10      justified under a traditional Rule 12(b)(6)
(1985), which require proof of scienter,       analysis.”); see also Greebel v. FTP
Ernst & Ernst, 425 U.S. at 193. Because        Software, Inc., 194 F.3d 185, 196 (1st Cir.
of the similarity in the language and scope    1999) (“A mere reasonable inference is
of Section 14(e) and Rule 10b-5, we have       insufficient to survive a motion to
in the past construed the two consistently.    dismiss.”). For purposes of the PSLRA,
E.g., Flynn v. Bass Bros. Enters., Inc., 744   Plaintiffs may plead scienter by alleging
F.2d 978, 984-85 (3d Cir. 1984) (adopting      facts that (1) establish a motive and an
the same test of materiality for both          opportunity to commit fraud, or (2)
Section 14(e) and Rule 10b-5). We              constitute circumstantial evidence of either
therefore join those circuits that hold that   reckless or conscious behavior. In re
scienter is an element of a Section 14(e)      Advanta Corp. Sec. Litig., 180 F.3d 525,
claim. See, e.g., Conn. Nat’l Bank v. Fluor    534-35 (3d Cir. 1999). Either way,
Corp., 808 F.2d 957, 961 (2d Cir. 1987);       plaintiffs must plead f acts “w ith
Smallwood v. Pearl Brewing Co., 489 F.2d       particularity,” and these facts must give
579, 605 (5th Cir. 1974) (“Congress            rise to a “strong inference” of a knowing
adopted in Section 14(e) the substantive       or reckless misstatement. Id. at 535.
language of the second paragraph of Rule
10b-5 and in so doing accepted the                                  A.
precedential baggage those words have
carried over the years.”).                            Plaintiffs’ theory of the case is that
                                               the Directors and CEO Wallace suppressed
        The P S LR A establishes a             the Bloomberg and MLB deals to ensure
heightened pleading requirement for            the success of the tender offer and the
certain securities fraud cases. The PSLRA      subsequent merger. 10 When the tender
requires plaintiffs to “state with
particularity facts giving rise to a strong     10
                                                    We agree with the District Court that,
inference that the defendant acted with the
                                               absent a duty to correct or update
required state of mind.” 15 U.S.C. § 78u-
                                               misleading statements, Plaintiffs failed to
4(b)(2). In requiring a “strong inference”
                                               identify an affirmative duty to disclose the
of scienter, the PSLRA alters the normal
                                               Bloomberg and MLB deals. Oran, 226
operation of inferences under Fed. R. Civ.
                                               F.3d at 285-86 (“Such a duty to disclose
P. 12(b)(6). In re Rockefeller Ctr. Props.,
                                               may arise when there is insider trading, a
Inc. Sec. Litig., 311 F.3d 198, 224 (3d Cir.
                                               statute requiring disclosure, or an
2002) (“[U]nless plaintiffs in securities
                                               inaccurate, incomplete or misleading prior
fraud actions allege facts . . . with the
                                               disclosure.”); In re Burlington Coat
requisite particularity . . . they may not
                                               Factory Sec. Litig., 114 F.3d 1410, 1432
benefit from inferences flowing from
                                               (3d Cir. 1997) (“Except for specific
vague or unspecific allegations—
                                               periodic reporting requirements . . . there
inferences that may arguably have been
                                               is no general duty on the part of a company
offer succeeded, the merger cashed out        various options to purchase shares of
                                              common stock as well as shares of
                                              restricted common stock held by the
to provide the public with all material
                                              Directors. According to Plaintiffs, the
information.”). Because we conclude that
                                              prospect of cashing out these holdings
Plaintiffs have failed to adequately plead
                                              induced the Directors to suppress
scienter, we do not decide whether the
                                              information that would have raised the
proposed amended Complaint adequately
                                              value of Digital Island’s shares. Such an
specifies the statements alleged to be
                                              increase, Plaintiffs allege, would have
misleading and the reason why those
                                              jeopardized the Merger Agreement
statements are misleading, or whether the
                                              because shareholders would not have
proposed amended Complaint properly
                                              tendered at $3.40 and C&W would not
attributes those statements to any of the
                                              have increased the consideration offered.
Defendants in this case. See Rockefeller,
                                              CEO Ernst’s lucrative employment
311 F.3d at 217-18 (discussing the
                                              contract with the surviving entity provided
pleading requirements of the PSLRA and
                                              her with a further inducement.
Fed. R. Civ. P. 9(b)).
                                                     Setting aside the Ernst employment
       The District Court further dismissed
                                              agreement, the Directors stood to gain
the Section 14(e) claim as to C&W , Dali,
                                              from any increase in Digital Island’s share
and Wallace, because those defendants
                                              price in the same manner as any other
were not affiliated with Digital Island and
                                              Digital Island shareholder, that is, by
therefore owed no duty to Digital Island’s
                                              tendering their shares into the offer or by
shareholders to disclose the Bloomberg
                                              having their shares cashed out in the
and IBM deals.        Plaintiffs make no
                                              merger. Moreover, our reading of the
argument in their briefs that dismissal was
                                              proposed amended Complaint compels the
erroneous as to C&W and Dali and have
                                              same conclusion reached by the District
therefore abandoned these issues. Kost v.
                                              Court: “As a result of the tender offer and
Kozakiewicz, 1 F.3d 176, 182 (3d Cir.
                                              merger, each [Director] was paid the face
1993).     Plaintiffs do maintain that
                                              value of the options, i.e., the difference, if
Defendant Wallace violated Section 14(e)
                                              any between the option price and $3.40.”
by failing to disclose the two deals.
                                              Digital Island, 223 F. Supp. 2d at 550.
Plaintiffs make no argum ent that
                                              Nevertheless, Plaintiffs argue that the
Defendant Wallace owed a duty to correct
                                              success of the tender offer created a
or update statements that he did not make
                                              windfall for the Directors because it
and over which he had no control.
                                              allowed them to unload their holdings all
Accordingly, we will affirm the District
Court’s dismissal of the Section 14(e)
claim as to Wallace on the grounds that he
was under no duty to disclose the
Bloomberg and MLB deals.
at once, at a guaranteed price of $3.40 a              Granting that some value might
share.11                                       attach to the avoidance of future risk, or
                                               that only so many shares can be unloaded
   11
                                               on the open market without depressing the
       The allegations in the proposed
                                               share price, Plaintiffs’ theory is
amended complaint emphasize the fact that
                                               nevertheless a weak inference teetering on
the merger cashed out both vested and
                                               an unfounded assumption. Kalnit v.
unvested options and restricted stock:
                                               Eichler, 264 F.3d 131, 139-40 (2d Cir.
                                               2001) (“Sufficient motive allegations
   First, the Digital Island officers and
                                               ‘entail concrete benefits that could be
   directors were to receive substantial
                                               realized by one or more of the false
   cash payments in connection with
                                               statements and wrongful nondisclosures
   the Merger for their in-the-money
                                               alleged.’” (quoting Shields v. Citytrust
   options to purchase Digital Island
                                               Bancorp., Inc., 25 F.3d 1124, 1130 (2d
   common stock. This applied to
                                               Cir. 1994)). The inference is that the
   both vested and unvested options.
                                               Directors feared that C&W would abandon
   In addition, the officers of Digital
                                               its efforts to acquire Digital Island if the
   Island were to receive cash in
                                               share price increased. Plaintiffs argue that
   connection with the Merger in
                                               this fear can be inferred from C&W’s
   return for certain re stricted
                                               rejection of Digital Island’s $4.10 counter-
   common stock which they had been
                                               proposal, and from the fact that the merger
   granted in April 2001, several
                                               agreement was hastily executed within
   weeks prior to the Merger
                                               days of the disclosure of the Microsoft
   announcement, in return for their
                                               deal. Whether or not this inference is
   out-of-the money options.
                                               reasonable under Rule 12(b)(6), the
                                               PSLRA requires a strong—as opposed to
App. at 351. Plaintiffs do not allege that
                                               merely reasonable—inference to survive a
the Directors received any sort of
                                               motion to dismiss. See Rockefeller, 311
accelerated payment for their holdings,
                                               F.3d at 224. The inference urged by
i.e., that any payment was made prior to
                                               Plaintiffs is not strong, because the far
their vesting. Nor are there any allegations
regarding the circumstances or purpose of
the April 2001 option exchange program.        and restricted stock, whether vested or
Instead, our reading of the proposed           unvested, was necessarily tied to the
amended Complaint leads us to the same         market value of Digital Island’s common
conclusion as the District Court: the          stock. While other eventualities might
Directors received the face value of their     have decreased Digital Island’s share price
options and restricted stock pursuant to a     before these holdings vested, such open-
merger in which all outstanding securities     ended speculation is entirely insufficient to
of Digital Island were cancelled. More         support a strong inference of motive under
fundamentally, the value of these options      the PSLRA. Rockefeller, 311 F.3d at 222.
more compelling inference is that the                   Regardless of the strength of this
Directors bargained aggressively with           inference, it rests on an assumption,
C&W, motivated solely by a desire to            devo id of any fac tual alle gation
exploit the surge in Digital Island’s stock     whatsoever, that the Directors would be
price that followed the announcement of         worse off if C&W withdrew its offer. Yet
the Microsoft deal. If the Directors were       Plaintiffs’ theory of the case necessarily
confident of the Bloomberg and MLB              requires that disclosure of the MLB and
deals before the merger agreement was           Bloomberg Deals would have increased
finalized, they would certainly have            the market value of Digital Island stock
disclosed those deals to support their          absent the merger.        Accordingly, to
counter-offer. 12 If instead, the Bloomberg     establish a strong inference of motive,
and MLB deals were finalized after              Plaintiffs were obliged to allege some facts
execution of the merger agreement,              tending to show how the Directors could
C&W’s rejection of the counter-offer            have hoped to make out better by
could have no bearing on how C&W                unloading their options and restricted stock
would react to the deals. Rather, C&W’s         than by realizing the impact of the
decision to increase the tender offer price     Bloomberg and MLB deals on their shares,
following the Microsoft deal would              either in the market or in a merger with
indicate that C&W might respond                 another suitor. See Advanta, 180 F.3d at
favorably to the Bloomberg and MLB              540-41 (no strong inference of scienter
deals.                                          where detailed allegations revealed that
                                                allegedly improper profits were small in
                                                comparison to defendants’ stock holdings);
                                                Burlington Coat Factory, 114 F.3d at 1423
   12
                                                (noting that plaintiffs had failed to plead
       Plaintiffs equivocate on when the
                                                facts showing that allegedly improper
Bloomberg and MLB deals became
                                                profits were substantial in comparison to
sufficiently certain to merit disclosure.
                                                defendants’ overall stock holdings and
Plaintiffs generally allege that the deals
                                                compensation). 13     Considering all the
were close to completion sometime during
                                                allegations in Plaintiffs’ proposed
the tender offer period.          Plaintiffs,
                                                amended Complaint, we agree with the
however, imply that the deals were
                                                District Court that “plaintiffs’ theory
sufficiently final sometime prior to
execution of the merger agreement, insofar
                                                  13
as Plaintiffs allege that the disclosure of            The proposed amended Complaint
the Microsoft deal was misleading because       further assumes, without the support of
it implied that no other deals were about to    factual allegations, that other potential
be consummated. Plaintiffs also allege          acquirers would not have emerged on
that C&W generally became aware of the          terms comparable to those offered by
deals by virtue of the due diligence            C&W, or at least that the Directors feared
process.                                        that no other suitor would emerge.
makes little economic sense because the                 The rationale underlying these
directors’ own stock options would have             holdings is straightforward. Similar
been devalued if they tried to sell the             situations arise in every merger;
company for less than full price.” Digital          thus, allowing a plaintiff to prove a
Island, 223 F. Supp. 2d at 555. The                 motive to defraud by simply
proposed amended Complaint therefore                alleging a corporate defendant’s
does not allege facts giving rise to a strong       desire to retain his position with its
inference that the Directors acted with             attendant salary . . . would force the
scienter in not disclosing the Bloomberg            directors of virtually every
and MLB deals in their statements                   company to defend securities fraud
regarding the tender offer.                         actions, every time that company
                                                    effected a merger or acquisition.
       The Ernst employment agreement
does little to strengthen the inference of      Accord Kalnit, 264 F.3d at 139-40 (“[A]n
motive that can be drawn from Plaintiffs’       allegation that defendants were motivated
allegations. As with the Directors’ stock       by a desire to maintain or increase
holdings, Plaintiffs allege no facts from       executive compensation is insufficient
which it can be inferred that the               because such a desire can be imputed to all
employment agreement actually created a         corporate officers.”). Because Plaintiffs’
windfall to Ernst beyond what she would         a l l eg a t i o n s r e g a r d in g t h e E r n st
otherwise realize by an increase in the         employment agreement do nothing to
value of her shares. More fundamentally,        distinguish her motivations from those
the fact that CEO Ernst had executed an         surrounding countless other mergers and
employment agreement with the acquirer          acquisitions, the proposed amended
cannot, in and of itself, establish a strong    Complaint fails to create a strong inference
inference of motive. As the Fourth Circuit      of scienter as required by the PSLRA.
explained in Phillips v. LCI Int’l, Inc., 190
F.3d 609, 622-23 (4th Cir. 1999):                                       B.

   [A]ssertions that a corporate officer               A reckless statement is one
   or director committed fraud in               “involving not merely simple, or even
   order to retain an executive                 inexcusable negligence, but an extreme
   position, or retain such a position          departure from the standards of ordinary
   with the merged company, simply              care, and which presents a danger of
   do not, in themselves, adequately            misleading buyers or sellers that is either
   plead motive. . . .                          known to defendant or is so obvious that
                                                the actor must have been aware of it.”
                                                Advanta, 180 F.3d at 535. Allowing
                                                Plaintiffs to plead recklessness is intended
                                                to “discourage[] deliberate ignorance and
prevent[] defendants from escaping                  Where any person varies the terms
liability solely because of the difficulty of       of a tender offer . . . before the
proving conscious intent to commit fraud.”          expiration thereof by increasing the
Id.      Scienter therefore requires “a             consideration offered to holders of
misrepresentation so recklessly made that           such securities, such person shall
the culpability attaching to such reckless          pay the increased consideration to
conduct closely approaches that which               each security holder whose
attaches to conscious dec eptio n.’”                securities are taken up and paid for
McLean v. Alexander, 599 F.2d 1190,                 pursuant to the tender offer . . . .
1197 (3d Cir. 1979) (quoting Coleco
Indus., Inc. v. Berman, 567 F.2d 569, 574        15 U.S.C. § 78n(d)(7). 14 SEC Rule
(3d Cir. 1977) (per curiam)). Recklessness       14d-10(a)(2), the “Best Price Rule,”
is not intended to encompass “claims             implements Section 14(d)(7) and provides:
essen tially grounded on corporate               “No bidder shall make a tender offer
mismanagement.” Advanta, 180 F.3d at             unless . . . [t]he consideration paid to any
540.                                             security holder pursuant to the tender offer
                                                 is the highest consideration paid to any
       We agree with the District Court          other security holder during such tender
that Plaintiffs’ allegations fail to create a    offer.”     17 C.F.R. § 240.14d-10(a).
strong inference of recklessness. Because        Plaintiffs allege that the Directors received
Plaintiffs’ allegations show that                “extra consideration” for their shares when
Defendants’ interests were at all times tied     their options and restricted stock were
to the value of their shares, we have no         cashed out in the merger pursuant to the
basis to infer the sort of conscious
disregard and deliberate ignorance
required to plead scienter. At most,
Plaintiffs’ allegations show that the              14
                                                       Plaintiffs do not appeal dismissal of
Directors failed to exploit the potential that
                                                 this claim as to Digital Island or any of the
the Bloomberg and MLB deals had to
                                                 individual defendants other than Wallace.
increase the value of Digital Island shares,
                                                 As the District Court recognized, the Best
whether through the tender offer price paid
                                                 Price Rule, by its terms, only applies to
by C&W or on the open market. Such
                                                 bidders. Digital Island, 223 F. Supp. 2d at
alleged mismanagement does not fall
                                                 556.     On appeal, Plaintiffs offer no
within the anti-fraud prohibitions of
                                                 explanation why Defendant Wallace
Section 14(e).
                                                 should be considered a bidder. We
                                                 therefore will affirm the District Court’s
                     IV.
                                                 dismissal of the Best Price Rule claim with
                                                 respect to Defendant Wallace on the
      Section 14(d)(7) of the ‘34 Act
                                                 ground that Defendant W allace is not a
provides, in pertinent part:
                                                 bidder within the meaning of the rule.
Merger Agreement.15        In addition,         C.F.R. § 240.14d-10(a). The District
Plaintiffs allege that the employment           Court and Defendants rely heavily on
agreement between C&W and CEO Ernst             Lerro v. Quaker Oats Co., 84 F.3d 239,
further constituted a premium for her           245 (7th Cir. 1996), in which the Seventh
shares. There is no dispute that both the       Circuit held that “transactions before or
Merger Agreement and the Ernst                  after a tender offer are outside the scope of
Employment agreement were executed              Rule 14d-10.” The plaintiff in Lerro
prior to the tender offer.                      alleged that a controlling shareholder had
                                                received extra compensation for his shares
       The District Court adopted, and          in the form of an exclusive distribution
Defendants urge this Court to adopt, a          agreement executed by the tender offeror
“bright-line rule” that payments arising out    and the controlling shareholder prior to the
of an agreement executed prior to a tender      tender offer. Id. at 240. The agreement
offer do not state a claim under the Best       was to commence upon consummation of
Price Rule, which expressly applies only to     the offer. Id. The court held that the value
payments made “during a tender offer.” 17       of the distribution agreement did not
                                                constitute extra compensation in violation
   15
                                                of the Best Price Rule because the
      The proposed amended Complaint
                                                agreement was signed before the offer
alleges that this consideration exceeds that
                                                began. Id. at 244. The court reasoned:
received by other Digital Island
shareholders, although Plaintiffs make no
                                                   Before the offer is not “during” the
allegation that Digital Island’s outstanding
                                                   offer. . . . The difference between
options and restricted stock were held
                                                   “during” and “before” (or “after”)
exclusively by the Directors.
                                                   is not just linguistic. It is essential
                                                   to permit everyone to participate in
       Curiously, Plaintiffs argue in their
                                                   the markets near the time of a
brief that we should read the proposed
                                                   tender offer. Bidders are forbidden
amended Complaint to allege that the extra
                                                   to buy or sell on the open market or
payment was made when the Directors
                                                   via negotiated transactions during
tendered their shares. If that is the case,
                                                   an offer, but they are free to
we do not understand how the Directors
                                                   transact until an offer begins, or
could h a v e r e c e iv e d the ex tra
                                                   immediately after it ends.
consideration alleged by Plaintiffs, which
is premised on the allegation that those
                                                Id. at 243; see also Katt v. Titan
options were partially unvested at the time
                                                Acquisitions, Inc., 244 F. Supp. 2d 841,
of the merger. If the Directors did indeed
                                                850 (M.D. Tenn. 2003) (stating that Rule
exercise their options, to the extent vested,
                                                14d-10 “is, on its face, ‘aimed at conduct
they were simply paid the tender price for
                                                during the pendency of the tender offer’”
each share tendered like every other
                                                (quoting Walker v. Shield Acquisition
shareholder.
Corp., 145 F. Supp. 2d 1360, 1375 (N.D.            after it accepted all of the tendered
Ga. 2001))).                                       shares before paying the favored
                                                   shareholders.
        Plaintiffs urge this Court to adopt a
more flexible rule that focuses on whether      Id. at 655. Epstein held that the proper
the allegedly improper payment is an            focus should be “whether the . . .
integral part of the tender offer. For their    transaction was an integral part of [the]
part, Plaintiffs rely on Epstein v. MCA,        tender offer.” Id.17
Inc., 50 F.3d 644 (9th Cir. 1995), in which
the Ninth Circuit rejected the argument                We agree with the Seventh Circuit
that Rule 14d-10 turns on the timing of the     and the District Court that the market
payment.      Epstein did not involve an        requires a bright-line rule “to demark
agreement executed prior to the tender
offer period.16 Instead, the issue in Epstein      17
                                                       We regard Epstein as persuasive,
was whether a payment made after the
                                                despite the fact that it was reversed on
tender offer expired could violate the Best
                                                other grounds by the Supreme Court.
Price Rule. The Ninth Circuit held that
                                                Matsushita Elec. Indus. Co., Ltd. v.
such a payment could establish a violation,
                                                Epstein, 516 U.S. 367 (1996). Epstein is
reasoning that to hold otherwise
                                                apparently regarded as precedential within
                                                the Ninth Circuit, e.g., Harris v. Intel
   would drain Rule 14d-10 of all its
                                                Corp., No. 00-CV-1528, 2002 WL
   force [since] even the most
                                                1759817, at *5 (N.D. Cal. July 8, 2002),
   blatantly discriminatory tender
                                                and has been adopted by district courts in
   offer—in which large shareholders
                                                other circuits, e.g., Katt v. Titan
   were paid twice as much as small
                                                Acquisitions, Inc., 133 F. Supp. 2d 632,
   shareholders— would fall outside
                                                644 (M.D. Tenn. 2000). Epstein was also
   Rule 14d-10’s prohibition, so long
                                                cited with approval by the Second Circuit
   as the bidder waited a few seconds
                                                in Gerber v. Computer Assocs. Int’l, Inc.,
                                                303 F.3d 126 (2d Cir. 2002). Gerber
    16
       The agreements in Epstein were           involved a non-compete agreement
executed the same day on which the tender       between a bidder and a shareholder
offer was announced, thus occurring             executed during a tender offer. Gerber
during the tender offer under Rule 14d-         held that it was immaterial that payment
2(a), which provides that, for purposes of      was not made under the non-compete
Section 14(d), a tender offer commences         agreement until after the expiration of the
“at 12:01 a.m. on the date when the bidder      tender offer. Quoting Epstein, the court
has first published, sent, or given the         held that the Best Price Rule “cannot be so
means to tender to security holders.” 17        easily circumvented” by simply delaying
C.F.R. § 240.14d-2(a); see Epstein, 50          payment until after the expiration date. Id.
F.3d at 653, 655 & n.18, 657.                   at 135 (quoting Epstein, 50 F.3d at 655).
clearly the periods during which the           will enter into a wide variety of
special Williams Act rules apply.” Lerro,      agreements, including agreements with
84 F.3d at 243. W e also agree with            shareholders, that are conditioned on the
Epstein that tender offerors cannot be         success of the tender offer. The Ernst
permitted to evade the requirements of the     employment agreement is a perfect
Williams Act simply by delaying the actual     example: An offeror who intends to
payment, or by agreeing on the extra           operate a company as a going concern
payment beforehand. Indeed, Lerro itself       after the acquisition may reasonably
acknowledges that some payments made           attempt to secure the services of
outside of the tender offer period may be      incumbent management. Only where the
so transparently fraudulent as to require      tender offeror deliberately inflates that
them to be treated as made “during the         compensation to provide a premium for the
tender offer”:                                 officer’s shares is there a violation of the
                                               Best Price Rule. In such instances, the
   Doubtless there are limits to the use       tender offeror has attempted to defraud the
   of a follow-up merger as a means to         shareholders of the target company of the
   d e liver extra com pensation.              equal consideration to which they are
   Suppose [the acquirer] had                  entitled under the Williams Act and the
   promised [a shareholder] $14 for            Best Price Rule.
   each share he tendered during the
   offer, plus another $6 for each of                 Accordingly, in order to base
   these shares one month later. Just          recovery under the Best Price Rule on a
   as tax law requires “boot” to be            transaction execute d prior to the
   treated as a gain received from the         commencement of a tender offer, Plaintiffs
   sale of stock, securities law treats        must comply with Fed. R. Civ. P. 9(b),
   “boot” as a payment during the              which requires that “[i]n all averments of
   tender offer.                               fraud or mistake, the circumstances
                                               constituting fraud or mistake shall be
Lerro, 84 F.3d at 245. Nevertheless, the       stated with particularity.” See Shapiro v.
exception to the general rule is a narrow      UJB Fin. Corp., 964 F.2d 272, 287-89 (3d
one, and Plaintiffs’ allegations do not fall   Cir. 1992) (holding that Rule 9(b) applies
within it.                                     to claims under Sections 11 and 12(2) of
                                               the Securities and Exchange Act of 1933,
        Where, as here, a plaintiff argues     15 U.S.C. §§ 77k, 77l, when those claims
that the Best Price Rule has been violated     are grounded in fraud). Rule 9(b)’s
by a transaction executed prior to the         particularity requirement, which “has been
tender offer, the plaintiff necessarily        rigorously applied in securities fraud
alleges that the tender offeror has            cases,” Burlington, 114 F.3d at 1417,
fraudulently devised a scheme to               requires plaintiffs to “accompany their
circumvent the Rule. An offeror can and        legal theory with factual allegations that
make their theoretically viable claim                 mergers as distinct from tender
plausible,” id. at 1418. Furthermore,                 offers.       Statutory mergers are
under the PSLRA, Plaintiffs must allege               authorized and regulated by state
facts giving rise to a strong inference that          corporation codes, and federal
C&W acted with fraudulent intent; that is,            regulation of such mergers is found
that C&W intended to provide a premium                in federal regulations concerning
to the Directors for their shares through the         the solicitation of proxies. Finally,
Merger Agreement and the Ernst                        the Williams Act contains, in
employment agreement. 15 U.S.C. § 78u-                addition to the “best price”
4(b)(2); see also Burlington, 114 F.3d at             provision, time limits, disclosure
1418 (requiring, prior to passage of the              requirements, pro rata acceptance
PSLRA, allegations supporting a “‘strong              r u l e s , a n d p r o v i s io n s f o r
inference’ that the defendant possessed the           withdrawal of tendered shares that
requisite intent” to satisfy Rule 9(b)).              make no sense whatsoever in the
                                                      merger context. 18
        With respect to the Merger
Agreement, Plaintiffs allege that the           Accord Lerro, 84 F.3d at 244 (“Kramer
Directors received “extra compensation”         rejects, rightly we think, any argument that
to the extent that they were able to cash       a follow-up merger should be integrated
out all of their options and restricted stock   with a tender offer. They are different
at once. As a threshold matter, we              transactions, under different bodies of law
question whether the Best Price Rule            . . . .”); Epstein, 50 F.3d at 659 n.21
should ever apply to payments made              (distinguishing Kramer on the grounds that
pursuant to a second-step merger. We find       Kramer, unlike Epstein, involved a
persuasive the Second Circuit’s reasoning       second-step statutory merger). 19
in Kramer v. Time Warner Inc., 937 F.2d
767, 779 (2d Cir. 1991):
                                                 18
                                                        In Kram er, the plaintiff claimed
   [W]e perceive no basis in the                that certain officers received payments for
   language, structure or legislative           their stock options in connection with a
   history of the Act for viewing a             merger that exceeded the price paid to
   second-step statutory merger                 other shareholders pursuant to the merger.
   following a successful tender offer          Id. at 778-79 & n.5.
   for 51 percent of a target’s shares             19
                                                       Plaintiffs allege that the payments
   as a continuation of the tender
                                                receiv ed by the Directors w e re
   offer. Such a merger lacks the
                                                consideration for options and restricted
   most salient characteristics of a
                                                stock that were held prior to the Merger
   tender offer—an offer to purchase,
                                                Ag reem ent. This gr ound f ur th er
   tender and acceptance. Moreover,
                                                distinguishes Epstein, where the options
   state and federal law clearly treat
                                                themselves were alleged to be conditioned
        As discussed above, Plaintiffs fail   allegation provides no basis on which to
to cobble together a coherent theory as to    infer the payment of a share premium in
how these payments could have induced         violation of the Best Price Rule.
the Directors to suppress the Bloomberg
and MLB deals and support the tender                 The facts alleged by Plaintiffs are
offer. Conversely, we have difficulty         therefore a far cry from Epstein. In that
understanding how these payments could        case, the tender offeror executed an
give rise to an inference that they were      agreement with one of the shareholders,
intended by C&W as such an inducement.        Sheinberg, under which Sheinberg would
More fundamentally, the fact that the         receive a lump sum payment if the tender
merger cashed out certain unvested            offer succeeded. Epstein, 50 F.3d at 657.
holdings of the Directors, without more,      Immediately after the execution of the
cannot establish a strong inference of        agreement—i.e., that same day—the tender
fraudulent intent. Plaintiffs do not allege   offer was announced. Id. at 653, 657. The
that these holdings were anything but pre-    defendant in Epstein claimed that the
existing, legitimate obligations of Digital   payment was to induce Sheinberg to stay
Island. The only inference we can take        on as an officer and to cash out his stock
from these allegations, then, is that C&W     options under the merger. Id. at 657.
chose to honor Digital Island’s existing      Plaintiffs argued, however, that the options
obligations.      Plaintiffs provide no       themselves were conditioned on the
explanation for why this behavior should      success of the tender offer. Id. at 658.
raise suspicion, particularly where C&W       With respect to Sheinberg’s “amended
intended to operate Digital Island as a       employment agreement,” Plaintiffs pointed
going concern.                                out that the payment appeared to
                                              correspond precisely to the value of his
        Nor have Plaintiffs alleged any       options, i.e., there was no compensation
facts that would render the Ernst             for services. Id. at 658-59. Epstein thus
employment agreement suspect. Plaintiffs      involved precisely the kind of allegations
do not allege that Ernst’s employment         of fraud that a bright line rule would
agreement is a sham transaction designed      exclude from Best Price Rule protection.
to insulate an improper tender offer          Further proceedings were therefore
premium. They do not contend that the         necessary to determine the purpose of the
compensation package was excessive, or        Sheinberg agreement, i.e., whether the
that it was out of line with amounts that     lump sum payment “constitutes incentive
similarly situated executives were paid.      compensation that [the offeror] wanted to
Instead, Plaintiffs simply characterize the   give Sheinberg independently of the . . .
agreement as “lucrative.” This conclusory     deal, or a premium that [the offeror]
                                              wanted to give Sheinberg as an
                                              inducement to support the tender offer and
on the success of the tender offer. 50 F.3d
                                              tender his own shares.” Id. at 659.
at 658.
        To the extent that Epstein holds that           Instead, when applying the Best
the proper inquiry in such cases is whether     Price Rule to a transaction that is executed
the transaction “unconditionally obligated”     outside of the tender offer period and that
the offeror, we respectfully reject that        nominally does not involve the purchase of
holding. Id. at 656-57; see also id. at 656     securities, the “central issue” is whether a
(concluding that an agreement was “an           given payment constitutes “a premium that
integral part of the offer and subject to       [the offeror] wanted to give [the
Rule 14d-10’s requirements” because the         shareholder] as an inducement to support
agreement was “conditioned on the tender        the tender offer and tender his own
offer’s success”). Whether the offeror was      shares.” Epstein, 50 F.3d at 659; see, e.g.,
unconditionally obligated would be              Katt, 244 F. Supp. 2d at 857-58. This, of
important if we were dealing with an            course, requires an intent to defraud the
outright purchase of securities. See 17         remaining shareholders of their entitlement
C.F.R. § 240.14e-5(b)(7) (allowing              to equal consideration under the tender
purchases of securities during—but              offer. Accordingly, when reviewing a
“outside”—of a tender offer where               complaint alleging a violation of Rule 14d-
purchase is pursuant to an unconditional        10 based on a transaction executed prior to
and binding contract entered into before        the commencement of a tender offer, the
public announcement of the tender offer);       trial court should determine whether the
Epstein, 50 F.3d at 656 (“Thus a bidder         plaintiff has met the heightened pleading
who purchases shares from a particular          requirements of Rule 9(b) and the PSLRA.
shareholder before a tender offer begins
does not violate Rule 14d-10.”). But                   We conclude that Plaintiffs’
tender offerors routinely engage in             allegations do not meet these heightened
transactions not involving the purchase of      pleading standards.         The proposed
securities that are conditioned on the          amended Co mp laint allo ws no
success of the tender offer (e.g., if the       reasonable—let alone strong—inference
offer fails, the prospective “employer”         that the Merger Agreement or the Ernst
never comes into existence). Epstein’s          employment agreement conceal a
“unconditionally obligated” test should not     fraudulent share premium in violation of
subject all of these transactions to            the Best Price Rule. We acknowledge that
challenge under the Best Price Rule. See        we are applying for the first time the
also Lerro, 84 F.3d at 244-45 (warning          pleading requirements of Rule 9(b) and the
against a construction of the Best Price        PSLRA to a Best Price Rule claim.
Rule that “would imperil countless              Nevertheless, we believe that allowing
ordinary transactions [including] simple        Plaintiffs an opportunity to amend this
employment agreements under which the           claim would be futile. Plaintiffs’ theory of
surviving entity promises to employ             fraud with respect to their Best Price Rule
managers for stated terms or give               claim mirrors the theory underpinning their
severance pay”).                                Section 14(e) claim and we have rejected
as implausible Plaintiffs’ most recent         the District Court’s order         denying
iteration of this theory. We see no reason     Plaintiffs leave to amend.
to allow them a third opportunity under the
Best Price Rule.                                                  VII.

                    V.                                 Because Plaintiffs failed to allege
                                               facts giving rise to a strong inference that
        Section 20(a) provides, in pertinent   Defendants acted with scienter in regard to
part: “Every person who, directly or           their statements and/or silence concerning
indirectly, controls any person liable under   the Bloomberg and MLB deals, we will
any provision of this chapter or of any rule   affirm the District Court’s dismissal of
or regulation thereunder shall also be         their Section 14(e) claim. Likewise, we
liable jointly and severally with and to the   will affirm dismissal of Plaintiffs’ Best
same extent as such controlled person . . .    Price Rule claim because it depends on the
.” 15 U.S.C. § 78t(a). Liability under         same implausible theory of fraud as their
Section 20(a) is derivative and must be        Section 14(e) claim. Moreover, dismissal
predicated upon an independent violation       of these claims compels dismissal of
of the ‘34 Act. Advanta, 180 F.3d at 541.      Plaintiffs’ Section 20(a) claims, which are
Accordingly, because we will affirm the        derivative of the Section 14(e) and Best
District Court’s dismissal of Plaintiffs’      Price Rule claims. Finally, our analysis
fraud and Best Price Rule claims for           has taken into consideration the additional
failure to state a claim, the proposed         allegations in Plaintiffs’ proposed
amended Complaint necessarily fails to         amended Complaint. We therefore will
state a claim under Section 20(a).             affirm the District Court’s denial of leave
                                               to amend on the basis of futility.
                    VI.

        Finally, we address the District
Court’s denial of Plaintiffs’ motion under
Rules 59(e) and 15(a) to alter the judgment
and to obtain leave to file an amended
complaint. We have determined that
Plaintiffs’ proposed amended Complaint
fails to state a claim under Rule 12(b)(6)
and the PSLRA and that leave to amend
would therefore be futile. Foman v. Davis,
371 U.S. 178, 182 (1962); In re NAHC,
Inc. Sec. Litig., 306 F.3d 1314, 1332 (3d
Cir. 2002). Accordingly, we will affirm
