Castlerigg Master Invs., Ltd. v. Abbvie, Inc.

2021 IL App (1st) 200527

191 N.E.3d 121

455 Ill.Dec. 162

CASTLERIGG MASTER INVESTMENTS, LTD., Plaintiff-Appellant,

v.ABBVIE, INC. and Richard Gonzalez, Defendants-Appellees.

No. 1-20-0527

Appellate Court of Illinois, First District, FIFTH DIVISION.

Filed March 31, 2021

Michael D. Smith, Law Office of Michael D. Smith, P.C., of Chicago, and David J. Goldsmith, of Labaton Sucharow LLP, of New York, New York, for appellant.

Tarek Ismail, Alan Littmann, Andrew Rima, and Betsy Farrington, of Goldman Ismail Tomaselli Brennan & Baum LLP, and James F. Hurst, Andrew A. Kassof, Gabor Balassa, and Whitney L. Becker, of Kirkland & Ellis LLP, both of Chicago, for appellees.

JUSTICE CUNNINGHAM delivered the judgment of the court, with opinion.

¶ 1 The plaintiff-appellant, Castlerigg Master Investments, Ltd. (Castlerigg), appeals from the circuit court of Cook County's dismissal of its complaint against the defendants-appellees, AbbVie, Inc. (AbbVie) and Richard Gonzalez, for failure to state a claim. For the following reasons, we affirm the judgment of the circuit court of Cook County.

¶ 2 BACKGROUND

¶ 3 Castlerigg is an investment fund based in the British Virgin Islands with its principal place of business in New York, New York. AbbVie is a Delaware-incorporated pharmaceutical company with its principal place of business in North Chicago, Illinois. Mr. Gonzalez is AbbVie's chief executive officer (CEO) and chairman of the board.

¶ 4 On June 20, 2014, AbbVie announced that it had approached another pharmaceutical company, Shire PLC (Shire), with an acquisition proposal.¹ Shire is organized under the laws of the island of Jersey, a self-governing dependency of the United Kingdom, and headquartered in Ireland. AbbVie disclosed that as part of its acquisition proposal with Shire, AbbVie would reincorporate as a foreign company outside of the United States and create a tax inversion, which would significantly reduce the amount it paid in taxes in the United States.

¶ 5 On July 18, 2014, AbbVie and Shire announced they had reached agreed terms and signed a merger agreement. The merger agreement provided that AbbVie would merge with Shire, with AbbVie as the surviving entity reincorporating in Jersey. The merger agreement projected a new, lower tax rate for the newly merged entity as a consequence of reincorporation under the laws of Jersey.

¶ 6 That same day, Mr. Gonzalez held an investor conference call to discuss the merger agreement. During the conference call, investment analysts asked Mr. Gonzalez about the emerging political debate in the United States surrounding tax inversions and the risk of United States government action to eliminate or restrict tax inversion benefits. Mr. Gonzalez answered that AbbVie had "studied this transaction very, very carefully" and believed it was "highly executable." He stated that the tax inversion was an additional benefit but "not the primary rationale" for the merger agreement.

¶ 7 On September 22, 2014, while the merger agreement was pending, the United States Treasury Department announced new federal tax regulations that would limit certain benefits of tax inversions and diminish the ability of inverted companies to pay a lower tax rate to the United States (the treasury notice).

¶ 8 On September 29, 2014, Mr. Gonzalez issued a letter to all Shire employees, which AbbVie publicized to investors and filed with the United States Securities and Exchange Commission (the Shire letter). The Shire letter stated that AbbVie was still moving forward with the merger agreement and that Mr. Gonzalez was "more energized than ever" and "confident" about it. AbbVie also published a letter to its own employees stating that it was aiming for a fourth-quarter close of the merger agreement (the AbbVie letter).

¶ 9 As of September 29, 2014, Castlerigg held 114,457 Shire American depository receipts (ADRs)² , worth more than $29.8 million based on the closing price of $260.67 that day.³ According to Castlerigg, the conference call, as well as the Shire and AbbVie letters, induced it to maintain its Shire ADRs based on the belief that the merger agreement would close later that year.

¶ 10 On October 14, 2014, AbbVie announced that it was reconsidering the merger agreement, due, in part, to the September 22, 2014, treasury notice. On October 15, 2014, AbbVie confirmed that it was terminating the merger agreement. AbbVie's announcement stated:

"Although the strategic rationale of combining our two companies remains strong, the agreed upon valuation is no longer supported as a result of the changes to the tax rules and we did not believe it was in the best interests of our stockholders to proceed."

Following AbbVie's announcement that it was not moving forward with the merger agreement, Shire's ADRs fell 30% in value in one day.

¶ 11 On October 11, 2019, Castlerigg filed a complaint against AbbVie and Mr. Gonzalez in the circuit court of Cook County. The complaint alleged that, as a merger arbitrage investor, Castlerigg buys and holds stocks based on the probability of an acquisition closing, which requires "careful monitoring" and evaluation to determine if a proposed acquisition will close. Regarding the merger agreement at issue in this case, Castlerigg's complaint alleged that AbbVie's and Mr. Gonzalez's "assurances on September 29, 2014 induced [Castlerigg] to maintain its judgment that the [merger agreement] would close and hold Shire ADRs worth approximately $30 million." Castlerigg alleged that AbbVie made fraudulent misrepresentations in the Shire and AbbVie letters regarding the status of the merger agreement. Specifically, the complaint stated:

"As the CEO, Board Chairman and leader of AbbVie's effort to acquire Shire, [Mr.] Gonzalez had special knowledge of the probability that the merger would not close in light of the September 22, 2014 tax regulation changes. AbbVie abandoned the Shire transaction just two weeks after [Mr.] Gonzalez's statements. On information and belief, [Mr.] Gonzalez's statements lacked factual basis, and [Mr.] Gonzalez knew facts about AbbVie's internal reaction to the tax regulation changes that were incompatible with his statements. On information and belief, [Mr.] Gonzalez and AbbVie made the statements with reckless disregard for their truth or falsity, knowing that Shire investors such as [Castlerigg], having no reason to believe [AbbVie's and Mr. Gonzalez's] statements were untrue or misleading, scrutinized and relied on their statements."

¶ 12 Castlerigg's complaint further alleged that "it would neither have continued to hold its positions in Shire, nor would [it] have maintained its judgment the transaction would close, if [Castlerigg] knew that AbbVie was then evaluating whether to abandon the Shire acquisition as a result of the recently announced restrictions on tax inversions." Castlerigg's complaint concluded by stating that because it held onto its Shire ADRs based on AbbVie's and Mr. Gonzalez's misrepresentations, it was injured when the value of Shire ADRs dropped by 30% following AbbVie's announcement that it was terminating the merger agreement. The complaint sought compensatory damages, punitive damages, and interest all "in an amount to be determined at trial."

¶ 13 AbbVie and Mr. Gonzalez filed a combined motion to dismiss Castlerigg's complaint pursuant to section 2-619.1 of the Code of Civil Procedure (Code) ( 735 ILCS 5/2-619.1 ) (West 2018)). The motion to dismiss argued that the trial court should dismiss Castlerigg's complaint pursuant to section 2-615 of the Code (id. § 2-615) because the complaint did not adequately plead a fraud claim, and because the complaint was time barred by the statute of limitations, pursuant to section 2-619 of the Code (id. § 2-619). AbbVie and Mr. Gonzalez argued that Castlerigg had failed to plead a fraud claim because Illinois does not recognize "holder claims,"⁴ such as that alleged in Castlerigg's complaint. They argued that the Illinois Securities Law of 1953 (Securities Law) ( 815 ILCS 5/1 et seq. (West 2018)) protects investors from fraud regarding the sale or purchase of securities, but not regarding the holding of securities. Citing Dloogatch v. Brincat , 396 Ill. App. 3d 842, 847, 336 Ill.Dec. 571, 920 N.E.2d 1161 (2009), AbbVie and Mr. Gonzalez stated in their motion: "Castlerigg pursues its holder claims under a common law cause of action for fraud. But this attempt to end-run the Securities Law fails because Illinois courts have never recognized Castlerigg's purported claim." AbbVie and Mr. Gonzalez asked the trial court to dismiss Castlerigg's complaint for failure to state a claim.

¶ 14 Following a hearing on AbbVie and Mr. Gonzalez's motion to dismiss, the trial court stated:

"Okay. I believe Dlooglatch [sic ] does control here and for those reasons I think what you have pled is a holder claim, and the case is dismissed.

But in an effort to make sure that there's no ambiguity or if this is reviewed at some point in time by a higher court, I also note that there's no way you can take this outside of kind of the Securities Law as much as you're trying to do so and the three[-]year Statute of Limitations would also control.

So for both reasons, although I find that no cause of action for a holder claim can be pled in Illinois, I think Dlooglatch [sic ] is very clear on that, so it is dismissed. But were that should be look[ed] at that this is just common[-]law fraud, I think the securities element of this is such that the three[-]year Statute of Limitations would control and the case is dismissed."

¶ 15 The trial court therefore dismissed Castlerigg's complaint with prejudice. This appeal followed.

¶ 16 ANALYSIS

¶ 17 We note that we have jurisdiction to consider this matter, as Castlerigg filed a timely notice of appeal. See Ill. S. Ct. R. 301 (eff. Feb. 1, 1994); R. 303 (eff. July 1, 2017).

¶ 18 Castlerigg presents the following issue: whether the trial court erred in dismissing its complaint. Castlerigg argues the trial...