In re EQT Corp. Sec. Litig.

504 F.Supp.3d 474

IN RE EQT CORPORATION SECURITIES LITIGATION

2:19-cv-00754-RJC

United States District Court, W.D. Pennsylvania.

Signed December 2, 2020

OPINION

Robert J. Colville, United States District Judge

Before the Court is the Motion to Dismiss the First Amended Class Action Complaint (ECF No. 95) filed by Defendants EQT Corporation ("EQT"), Steven T. Schlotterbeck ("Schlotterbeck"), Robert J. McNally ("McNally"), David L. Porges ("Porges"), David E. Schlosser, Jr. ("Schlosser") (collectively, the "Officer Defendants"), and Jimmi Sue Smith ("Smith"), James E. Rohr ("Rohr"), Vicky A. Bailey ("Baily"), Philip G. Behrman ("Behrman"), Kenneth M. Burke ("Burke"), A. Bray Cary, Jr. ("Cary"), Margaret K. Dorman ("Dorman"), Stephen A. Thorington ("Thorington"), Lee T. Todd, Jr. ("Todd"), Christine J. Toretti ("Toretti"), Daniel J. Rice IV ("Rice"), and Robert F. Vagt ("Vagt") (collectively, the "Signer Defendants").¹ Defendants assert that each of the nine Counts set forth in the First Amended Complaint (the "Complaint") (ECF No. 85) filed by Lead Plaintiffs the Government of Guam Retirement Fund ("Guam"), the Northeast Carpenters Annuity Fund, and the Northeast Carpenters Pension Fund (collectively, "Northeast Carpenters")² and Plaintiff Cambridge Retirement System ("Cambridge") (collectively, "Plaintiffs") should be dismissed with prejudice. This Court has jurisdiction in this matter pursuant to 28 U.S.C. §§ 1331 and 1337. Defendants’ Motion has been fully briefed, and is ripe for disposition.

I. Factual Background & Procedural History

In this putative class action, Plaintiffs’ Complaint sets forth the following allegations relevant to Defendants’ Motion to Dismiss:

EQT is a natural-gas-production company whose primary operations are in the Appalachian Basin and throughout Pennsylvania, West Virginia, and Ohio. Compl. ¶ 2, ECF No. 85. EQT claims to be the largest producer of natural gas in the United States based on average daily sales volume. Id. In Western Pennsylvania, EQT drills and completes natural-gas wells through the process of hydraulic fracturing in the Marcellus Shale deposit. Id. at ¶ 39. The Officer Defendants occupied positions within EQT which provided them with "the power and authority to control the contents of EQT's reports to the SEC and investors, press releases, and presentations to securities analysts, money and portfolio managers, and institutional investors."³ Id. at ¶ 38. Each of the Signer Defendants either: (1) was the Chief Accounting Officer or a director of EQT, signed the Registration Statement (defined below) and permitted his or her name to be used in solicitations contained in the Registration Statement; or (2) was the CEO of Rice Energy Inc. ("Rice") or a director of Rice who "was named in the Registration Statement, with his written consent, as a person who would become a director of EQT upon the closing of the Acquisition," and who "permitted his name to be used in solicitations contained in the Registration Statement." Id. at ¶¶ 480-491.

Guam is a defined benefit pension plan that purchased shares of EQT common stock during the relevant Class Period (defined below). Compl. ¶ 29, ECF No. 85. Northeast Carpenters are pension and benefit funds that purchased shares of EQT common stock during the Class Period and held shares of EQT stock on September 25, 2017, the record date for EQT shareholders to vote on the Acquisition (defined below). Id. at ¶ 30. Cambridge is a contributory retirement system which:

[P]urchased shares of EQT stock during the Class Period; held shares of EQT stock on September 25, 2017, the record date for EQT shareholders to vote on the Acquisition; held shares of Rice stock on September 21, 2017, the record date for Rice shareholders to vote on the Acquisition; held Rice stock on November 13, 2017, the closing date of the Acquisition[;] and acquired EQT stock in exchange for its Rice stock in the Acquisition[.]

Id. at ¶ 31.

On June 19, 2017, EQT announced that it had entered into an agreement to acquire rival gas producer Rice for $6.7 billion⁴ (the "Acquisition"). Id. at ¶ 3. Schlotterbeck, EQT's then-President and CEO, cited substantial synergies, defined by Plaintiffs as "the benefit derived from the combined value and performance of two companies exceeding the sum of the separate individual parts," id. at ¶ 3 n.1, that the Acquisition would purportedly generate as justification for the proposed merger, id. at ¶ 3. More specifically, EQT issued a press release on June 19, 2017 asserting that, "by combining EQT's and Rice's contiguous acreage, EQT could drill natural-gas wells with longer laterals,"⁵ which EQT claimed would "generate cost savings and synergies amounting to at least $2.5 billion from the economies of scale that would result from drilling longer wells from the same well pads."⁶ Compl. ¶ 57, ECF No. 85. Defendants asserted that these synergies and costs savings would be attained by drilling 1,200 wells at an average lateral length of 12,000 feet, and further by reducing its total number of well pads from 199 to 99. Id. at ¶ 66. EQT also held an investor conference call and presentation on June 19, 2017, and Schlotterbeck sent an email to all EQT employees, further touting the same purported benefits of EQT's potential acquisition of Rice. Id. at ¶¶ 60-65.

On July 3, 2017, investor JANA Partners LLC ("JANA") disclosed that it had acquired a nearly 6% equity stake in EQT, and further stated that it opposed the Acquisition and disputed EQT's proffered bases supporting the Acquisition. Compl. ¶ 8, ECF No. 85. More specifically, JANA asserted that the potential synergies cited by EQT were "grossly exaggerated," and that EQT's purported drilling plan was unattainable because EQT and Rice did not possess enough contiguous undrilled acreage to allow for the increase in lateral length cited by Defendants as a basis for the Acquisition. Id. at ¶ 121. On July 5, 2017, JANA sent a letter to EQT's Board which set forth materially similar opposition to the Acquisition, and also filed this letter with SEC. Id. at ¶ 122. On July 27, 2017, Defendants filed a combined registration statement on Form S-4, prospectus, and joint proxy statement/prospectus (together, the "Registration Statement") with the SEC in connection with the Acquisition. Id. at ¶ 67. The Registration Statement set forth several representations respecting the potential benefits of the Acquisition that were consistent with EQT's June 19, 2017 representations discussed above, and effectively denied JANA's objections to the Acquisition.⁷ Id. at ¶¶ 69-71; 216-223.

JANA continued to publicly oppose the Acquisition through the sending and filing of letters, as well as the filing of proxy materials in opposition to the Acquisition with the SEC,⁸ consistently citing the impossibility of EQT's claimed synergy drilling plan of 1,200 wells with 12,000 feet in average lateral length, and EQT consistently and repeatedly publicly denied any of the criticisms raised by JANA. Id. at ¶¶ 124-47; 237. Prior to the Acquisition, Rice and EQT formed an integration team that ultimately dissolved in July or August 2017 over disagreements regarding the attainability of EQT's projected synergies and future operations plans. Id. at ¶¶ 92-93. Also prior to the Acquisition, EQT experienced operational difficulties in drilling ultra-long laterals, including the allegedly undisclosed collapse of two 18,000 foot-plus lateral wells. Id. at ¶¶ 95-99, 279. On November 9, 2017, majorities of EQT and Rice shareholders ultimately voted in favor of the Acquisition, and the Acquisition closed on November 13, 2017. Id. at ¶ 152.

Plaintiffs assert that, following the Acquisition, EQT was unable to drill longer laterals in a cost-efficient manner and that it did not achieve the claimed synergies cited as a basis for the Acquisition. Compl. ¶ 153, ECF No. 85. Despite this, EQT and the Officer Defendants stated that the Acquisition was exceeding expectations, and expressed confidence that EQT was "on track" to achieve and exceed the synergies described as a basis for the Acquisition. Id. at ¶ 156. EQT continued to experience increased costs and difficulties in its lateral drilling operations, and refused to incorporate Rice's proffered best practices, instead opting to utilize its own purportedly outdated and ineffective methods. Id. at ¶¶ 157-63. Following the Acquisition and up until mid-to late 2018, EQT did not publicly reveal these increased costs and operational issues, and instead: (1) portrayed the Acquisition and EQT's ongoing operations and financial results as successful; (2) understated and hid increased operating and development costs from investors; and (3) capitalized rather than expensed the cost of treatment and disposal of all of its produced water.⁹ Id. at ¶¶ 164-94.

On October 25, 2018, EQT held an investor and analyst conference call, wherein EQT disclosed negative financial results for EQT's third quarter. Compl. ¶ 332, ECF No. 85. Specifically, EQT revealed that: (1) EQT "was increasing well-development capital expenditures for 2018 by $300 million, or 14%, based on costs that ‘represent primarily onetime events that were driven by pace of activity, ultra-long lateral learning curve[,] and some service cost increases[;]’ " (2) EQT had reported a quarterly net loss attributable to EQT of $40 million; (3) EQT's 2018 costs were higher than had been initially anticipated. Id. at ¶¶ 332-37. Following this news, EQT's shares fell from a close of $40.46 per share on October 24, 2018 to $35.34 on October 25, 2018, and eventually fell to as low as $31.00 per share over the next several days. Id. at ¶ 338.

On December 10, 2018, Toby and Derek Rice, two of the founders of Rice, and their executive team (collectively, the "Rice Team") sent a letter to the EQT Board and released a presentation which took issue with EQT's stock-price performance and set forth "the Rice Team's plan for improving EQT's operations and generating...