Ashford Hospitality Prime Inc v. Sessa Capital (Master) LP et al

Brief/Memorandum in Support

N.D. Tex.August 2, 2016

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION ASHFORD HOSPITALITY PRIME, INC., Plaintiff, v. SESSA CAPITAL (MASTER), L.P., SESSA CAPITAL GP, LLC, SESSA CAPITAL IM, L.P., SESSA CAPITAL IM GP, LLC, JOHN E. PETRY, PHILIP B. LIVINGSTON, LAWRENCE A. CUNNINGHAM, DANIEL B. SILVERS and CHRIS D. WHEELER, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) SESSA CAPITAL (MASTER), L.P., Counterclaim-Plaintiff; v. ASHFORD HOSPITALITY PRIME, INC., Counterclaim-Defendant. ) ) ) ) ) ) ) ) ) ) NO. 3:16-cv-00527-N SESSA CAPITAL (MASTER), L.P. Third-Party Plaintiff, v. ASHFORD INC., ASHFORD HOSPITALITY ADVISORS LLC, MONTY J. BENNETT, DOUGLAS A. KESSLER, STEFANI D. CARTER, CURTIS B. MCWILLIAMS, W. MICHAEL MURPHY, MATTHEW D. RINALDI, and ANDREW STRONG, Third-Party Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) DEFENDANTS’ MEMORANDUM IN SUPPORT OF THEIR MOTION TO DISMISS PLAINTIFF’S AMENDED COMPLAINT PURSUANT TO FRCP 12(B)(1) AND FRCP 12(B)(6) Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 1 of 32 PageID 5176 ii TABLE OF CONTENTS INTRODUCTION ........................................................................................................................................... 1 LEGAL STANDARD ...................................................................................................................................... 2 ARGUMENT ..................................................................................................................................................... 3 I. Money Damages Are Unavailable to Ashford Prime Under Section 13(d) ................................. 3 II. Prima Facie Tort Is Not a Cognizable Claim Under Texas Law .................................................. 3 III. Ashford Prime Has No Standing to Bring a Section 14(a) Claim ................................................. 4 IV. Ashford Prime’s Allegations in Support of its Section 14(a) Claim Do Not Meet the Requirements of the PSLRA or Rule 12(b)(6) ................................................................................. 5 A. Ashford Prime’s Allegations Regarding Sessa’s Alleged Omission to Disclose Plans Are Insufficient............................................................................................................. 6 1. Section 14(a) Does Not Require Disclosure of Plans .......................................... 6 2. Ashford Prime’s Allegations Regarding Alleged Omissions of Plans Do Not Satisfy PSLRA Pleading Standards or Rule 12(b)(6)............................. 7 a. The Documents Ashford Prime Cites Do Not Support a Reasonable Belief That Defendants Had Undisclosed Plans ............... 8 b. Ashford Prime’s Allegations Are Implausible ....................................... 12 c. Any Failure by Sessa to Disclose its Alleged Plans Is Immaterial ................................................................................................... 13 B. Ashford Prime’s Allegations Regarding Alleged Omissions of Risks Do Not Meet PSLRA Pleading Standards ....................................................................................... 15 C. Ashford Prime’s Allegations Regarding Alleged Misleading Statements About the Termination Fee Do Not Meet PSLRA Pleadings Standards and Rule 12(b)(6) Standards ................................................................................................................. 17 D. Ashford Prime’s Allegations Regarding Sessa’s Alleged Misstatements About the Penny Preferred Stock Do Not Meet PSLRA Pleading Standards ........................ 18 E. Ashford Prime’s Allegations Regarding Sessa’s Alleged Misstatements Regarding the Conduct of Ashford Prime’s Management and Board Do Not Meet Rule 12(b)(6) Standards ............................................................................................. 19 F. Ashford Prime’s Allegations Regarding Sessa’s Alleged Omission of Livingston’s Purchase of Ashford Prime Stock Do Not Meet Rule 12(b)(6) Pleading Standards ................................................................................................................ 22 Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 2 of 32 PageID 5177 iii V. Ashford Prime’s Allegations in Support of its Section 13(d) Claim Do Not Meet the Requirements of the PSLRA or Rule 12(b)(6) ............................................................................... 23 CONCLUSION ............................................................................................................................................... 25 Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 3 of 32 PageID 5178 iv TABLE OF AUTHORITIES Cases 7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211 (5th Cir.1994) ............................................................................................................................ 4 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................................. 2, 7 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .......................................................................................................................... 2, 18, 24 Blanchard 1986, Ltd. v. Park Plantation, LLC, 553 F.3d 405 (5th Cir. 2008) ........................................................................................................................ 3 Burt v. Maasberg, Civil Action No. ELH-12-0464, 2013 WL 1314160 (D. Md. Mar. 31, 2013) .............................. 23, 25 Cal. Pub. Emps.’ Ret. Sys. v. The CHUBB Corp., 394 F.3d 126 (3d Cir. 2004) .......................................................................................................................... 2 Diamond Offshore, Co. v. Survival Sys., Inc., 902 F. Supp. 2d 912 (SD Tex. 2012) ........................................................................................................... 3 GAF Corp. v. Heyman, 724 F.2d 727 (2d Cir. 1983) ........................................................................................................................ 22 Hollywood Casino Corp. v. Simmons, No. 3:02-CV-0325-M, 2002 U.S. WL 1610598 (N.D. Tex. July 18, 2002) .......................................... 25 Hulliung v. Bolen, 548 F. Supp. 2d 336 (N.D. Tex. 2008) ....................................................................................................... 2 In Re Marsh & McLennan Cos., Inc. Sec. Litig., 536 F. Supp. 2d 313 (S.D.N.Y. 2007) ............................................................................................... passim Kaiser Aluminum & Chem. Sales v. Avondale Shipyards, Inc., 677 F.2d 1045 (5th Cir. 1982) ............................................................................................................... 2, 18 Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195 (2d Cir. 1978) ............................................................................................................... 15, 16 Merrit v. Libby, McNeil & Libby, 510 F. Supp. 366 (S.D.N.Y. 1981) ............................................................................................................... 7 Mo. Portland Cement Co. v. Cargill, Inc., 498 F.2d 851 (2d Cir. 1974) .......................................................................................................................... 7 Motient Corp. v. Dondero, 529 F.3d 532 (5th Cir. 2008) ........................................................................................................................ 3 Ramming v. United States, 281 F.3d 158 (5th Cir. 2001) ........................................................................................................................ 3 Resnik v. Swartz, 303 F.3d 147 (2d Cir. 2002) .......................................................................................................................... 5 Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 4 of 32 PageID 5179 v Susquehanna Corp. v. Pan Am. Sulphur Co., 423 F.2d 1075 (5th Cir. 1970) ...................................................................................................................... 7 Tatum v. Nationsbank of Tex., N.A., 1995 Tex. App. LEXIS 3635, (Tex. App. 1995) ....................................................................................... 3 Tenet Healthcare Corp. v. Cmty. Health Sys., Inc., 839 F. Supp. 2d 869 (N.D. Tex. 2012) ....................................................................................................... 4 Torchmark Corp. v. Bixby, 708 F. Supp. 1070 (W.D. Mo. 1988) ......................................................................................................... 24 Truman v. United States, 26 F.3d 592 (5th Cir. 1994) .......................................................................................................................... 3 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) ...................................................................................................................... 5, 6, 13, 22 Van Ormer v. Aspen Tech., Inc., 145 F. Supp. 2d 101 (D. Mass. 2000) ........................................................................................................ 18 Virginia Bankshares, Inc., v. Sandberg, 501 U.S. 1083 (1991) ........................................................................................................................ 4, 19, 20 Vladimir v. Bioenvision, Inc., 606 F. Supp. 2d 473 (S.D.N.Y. 2009) ............................................................................................... passim Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) ........................................................................................................................ 3 Statutes 15 U.S.C. § 78u-4(b)(1) .................................................................................................................................... 16 15 U.S.C. § 78u-4(b)(1)(B) ................................................................................................................... 2, 17, 25 17 C.F.R. § 240.13d-101 .................................................................................................................................... 7 17 C.F.R. § 240.14a-101, Item 5(b)(1)(xii) ...................................................................................................... 6 17 C.F.R. § 240.14a-9(a) ............................................................................................................................. 5, 15 17 CFR 240.14a-9(c) ........................................................................................................................................ 19 Other Authorities Thomas Lee Hazen, The Law of Securities Regulation § 10.3[2] (5th ed. 2005 ................................................................................................................................... 4 Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 5 of 32 PageID 5180 1 Defendants Sessa Capital (Master), L.P., Sessa Capital, GP, LLC, Sessa Capital IM, L.P., and Sessa Capital IM GP, LLC (collectively “Sessa”), along with defendants John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers, and Chris D. Wheeler (the “Sessa Candidates”) hereby submit the following Memorandum in Support of their Motion to Dismiss the amended complaint filed by plaintiff Ashford Hospitality Prime, Inc. (“Ashford Prime”). INTRODUCTION This action arises out of a proxy contest in which Sessa nominated the Sessa Candidates, four of whom are entirely independent of and have no affiliation with Sessa, to run against the incumbent directors of Ashford Hospitality Prime, Inc. (“Ashford Prime”). Ashford Prime amended its complaint to add a claim for prima facie tort and to seek money damages. The gist of Ashford Prime’s amended complaint is, in Ashford Prime’s words, that “Sessa must be made to pay” for pursuing the proxy contest. Ashford Prime is not entitled to any money damages as a matter of law. Ashford Prime’s amended complaint has three causes of action: alleged violations of Section 13(d) of the Securities Exchange Act of 1934 (the “Act”) and rules promulgated thereunder; alleged violations of Section 14(a) of the Act and rules promulgated thereunder; and prima facie tort. Money damages are not available under Section 13(d) of the Act. Ashford Prime has no standing to pursue claims under Section 14(a) of the Act. And Texas does not recognize a cause of action for “prima facie tort.” Therefore, the Court should dismiss with prejudice pursuant to Rule 12(b)(6) any portion of Ashford Prime’s amended complaint seeking money damages based on alleged violations of Section 13(d) of the Act and the rules promulgated thereunder and Ashford Prime’s cause of action for prima facie tort. The Court should dismiss with prejudice pursuant to Rule 12(b)(1) Ashford Prime’s cause of action for alleged violations of Section 14(a) of the Act and the rules promulgated thereunder. Ashford Prime’s causes of action for alleged violations of Sections 13(d) and 14(a) of Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 6 of 32 PageID 5181 2 the Act should also be dismissed pursuant to Rule 12(b)(6) for the additional reasons that the amended complaint does not meet the applicable heightened pleading standards of the Private Securities Litigation Reform Act (the “PSLRA”) or the standards of Rule 12(b)(6). LEGAL STANDARD To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). Conclusory allegations and unwarranted deductions of fact are not accepted as true. Kaiser Aluminum & Chem. Sales v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982). Courts are not bound to accept as true a legal conclusion couched as a factual allegation. Twombly, 550 U.S. at 555 (citation omitted). The heightened pleading standards of the PSLRA apply to all causes of action pursuant to the Act. See Hulliung v. Bolen, 548 F. Supp. 2d 336, 341 n.4 (N.D. Tex. 2008) (citing Cal. Pub. Emps.’ Ret. Sys. v. The CHUBB Corp., 394 F.3d 126, 144-45 (3d Cir. 2004)). The PSLRA requires, among other things, that plaintiffs “specify each statement alleged to have been misleading, the reason or reasons why the statement was misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). The PSLRA does not require that plaintiffs plead with particularity every fact upon which their beliefs concerning false or misleading statements are based, but “plaintiffs must plead with particularity sufficient facts to support those beliefs.” Vladimir v. Bioenvision, Inc., 606 F. Supp. 2d 473, 484 (S.D.N.Y. 2009) (citation omitted). Thus, the Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 7 of 32 PageID 5182 3 focus is on whether “the facts alleged are sufficient to support a reasonable belief as to the misleading nature of the statement or omission.” Id. (citation omitted). A Rule 12(b)(1) motion to dismiss allows a party to challenge the exercise of the Court's subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1). A motion to dismiss for lack of standing is brought under Rule 12(b)(1). Blanchard 1986, Ltd. v. Park Plantation, LLC, 553 F.3d 405, 409 (5th Cir. 2008). Courts accept all well-pleaded allegations in the complaint as true, and construe those allegations in the light most favorable to Plaintiff. Truman v. United States, 26 F.3d 592, 594 (5th Cir. 1994). Moreover, courts may consider affidavits and other evidence outside the pleadings in resolving a motion to dismiss under Rule 12(b)(1). Williamson v. Tucker, 645 F.2d 404, 412-13 (5th Cir. 1981). The party asserting jurisdiction bears the burden of proof for a 12(b)(1) motion to dismiss. Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001). A Rule 12(b)(1) motion to dismiss a cause of action must be considered before a Rule 12(b)(6) motion to dismiss. (Id.) ARGUMENT I. Money Damages Are Unavailable to Ashford Prime Under Section 13(d) There is no private right of action for money damages under Section 13(d) of the Act. See Motient Corp. v. Dondero, 529 F.3d 532, 536 (5th Cir. 2008) (upholding dismissal of issuer’s claim to the extent it sought “actual and compensatory damages”). Therefore, to the extent that Ashford Prime seeks money damages for alleged violations of Section 13(d) and the rules promulgated thereunder, those claims should be dismissed with prejudice pursuant to Rule 12(b)(6). II. Prima Facie Tort Is Not a Cognizable Claim Under Texas Law There is no cause of action for prima facie tort under Texas law. See Diamond Offshore, Co. v. Survival Sys., Inc., 902 F. Supp. 2d 912, 928-930 (SD Tex. 2012) (no cause of action for prima facie or intentional tort under Texas law because Texas law requires the pleading of a specific tort); see also Tatum v. Nationsbank of Tex., N.A., 1995 Tex. App. LEXIS 3635, *16 (Tex. App. 1995) (affirming Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 8 of 32 PageID 5183 4 dismissal of prima facie tort claim because no Texas court to consider the issue has ever recognized such a claim and because such courts have universally held that a cause of action for prima facie tort must be addressed by the legislature, not the courts). Because there is no cause of action for prima facie tort in Texas, Ashford Prime’s claim for prima facie tort should be dismissed with prejudice pursuant to Rule 12(b)(6). III. Ashford Prime Has No Standing to Bring a Section 14(a) Claim Under established Fifth Circuit law, only stockholders “with voting rights” have standing to pursue claims pursuant to Section 14(a) of the Act. 7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211, 229-30 (5th Cir.1994) (citing Virginia Bankshares, Inc., v. Sandberg, 501 U.S. 1083, 1106-08 (1991)); Thomas Lee Hazen, The Law of Securities Regulation § 10.3[2] (5th ed. 2005 (“[S]ince the proxy regulations are designed to protect shareholder voting rights, standing should be limited to shareholders who had a right to vote.”). Indeed, the Fifth Circuit has specifically denounced “open[ing] a Pandora’s box by extending” the right to sue under section 14(a) “to any person potentially injured by a proxy statement” such as “disappointed potential merger partners, disgruntled employees, etc.” 7547 Corp., 38 F.3d at 230. Furthermore, a district court in the Northern District of Texas applied Virginia Bankshares and 7547 Corp. and held that “it cannot infer ‘any congressional urgency to depend on implied private actions [by target corporations] to deter violations of §14(a)’” (the “target corporation” was the subject of the shareholder proxy fight) See Tenet Healthcare Corp. v. Cmty. Health Sys., Inc., 839 F. Supp. 2d 869, 871-72 (N.D. Tex. 2012) (dismissing issuer’s claim for damages pursuant to Section 14(a) for lack of standing). Ashford Prime does not allege it is a stockholder of Ashford Prime with voting rights. Like the “target corporation” in Tenet, it is the issuer with no voting rights in its own stock. Therefore, Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 9 of 32 PageID 5184 5 Ashford Prime lacks standing to bring a claim pursuant to Section 14(a) and the rules promulgated thereunder. This cause of action should be dismissed with prejudice pursuant to Rule 12(b)(1). IV. Ashford Prime’s Allegations in Support of its Section 14(a) Claim Do Not Meet the Requirements of the PSLRA or Rule 12(b)(6) Ashford Prime does not have standing to bring claims pursuant to Section 14(a). Even if it did, its claim should still be dismissed because its allegations do not satisfy the pleading standards of the PSLRA or Rule 12(b)(6). Rule 14a-9 states that “[n]o solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.” 17 C.F.R. § 240.14a-9(a). Omission of information from a proxy statement violates Section 14(a) and Rule 14a-9 if either the SEC regulations specifically require disclosure of the omitted information in the proxy statement, or the omission makes other statements in the proxy statement materially false or misleading. In Re Marsh & McLennan Cos., Inc. Sec. Litig., 536 F. Supp. 2d 313, 321 (S.D.N.Y. 2007) (citing Resnik v. Swartz, 303 F.3d 147, 151 (2d Cir. 2002)). Furthermore, a plaintiff who charges that a statement or omission is materially false must show: a substantial likelihood that, under the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact [or correction of the misstated fact] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 10 of 32 PageID 5185 6 A. Ashford Prime’s Allegations Regarding Sessa’s Alleged Omission to Disclose Plans Are Insufficient 1. Section 14(a) Does Not Require Disclosure of Plans Ashford Prime alleges that “the Proxy Materials conspicuously omit Defendants’ plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) Ashford Prime does not allege that Defendants’ supposed omissions rendered any specifically identified statement in the proxy statement materially false or misleading. Instead, Ashford Prime argues that Defendants’ supposed “failure to disclose such plans and proposals violates Section 14(a) of the Act and the rules and regulations promulgated thereunder, including Rule 14a-9.” (Id.) Because Section 14(a) does not require the disclosure of plans, this portion of Ashford Prime’s claim should be dismissed with prejudice pursuant to Rule 12(b)(6). Without any requirement under Section 14(a) that specifically requires disclosure of “plans,” Ashford Prime tries to pass off Item 5(b)(1)(xii) of Rule 14a-101 as requiring disclosure of plans. (Am. Compl. ¶ 75) However, Item 5(b)(1)(xii) does not call for disclosures of “plans” and indeed contains no references to “plans.” Instead, Item 5(b)(1)(xii) requires disclosure only of “any arrangement or understanding” that proxy contest participants and their associates have with any person with respect to any future transactions to which the registrant or any of its affiliates will or may be a party. 17 C.F.R. § 240.14a-101, Item 5(b)(1)(xii). Ashford Prime does not even allege that Defendants had arrangements or understandings with third parties with respect to future transactions, and even if such an allegation was made, no evidence supports it. Nor can an alleged failure to disclose “plans” be the basis for a violation of Rule 14a-9 unless that omission rendered some specific statement in the proxy statements materially misleading or false. In Re Marsh & McLennan Cos., 536 F. Supp.2d at 321. Ashford Prime has not pointed to any statement in Defendant’s proxy statement that is materially misleading or false as a result of the alleged failure to disclose plans. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 11 of 32 PageID 5186 7 The term “plans” has a distinct meaning in the federal securities laws. Item 4 of Schedule 13D specifically requires disclosure of “plans.” 17 C.F.R. § 240.13d-101.1 The SEC uses the terms “understanding” and “arrangement” under the federal securities laws to mean something different, and more specific, than plans. For example, Item 6 of Schedule 13D specifically requires disclosure of “understandings” and “arrangements” with respect to securities of the issuer. Id. 2. Ashford Prime’s Allegations Regarding Alleged Omissions of Plans Do Not Satisfy PSLRA Pleading Standards or Rule 12(b)(6) Even if “plans” were required to be disclosed by Item 5(b)(1)(xii), Ashford Prime’s allegations do not meet PSLRA and Rule 12(b)(6) pleading standards. Ashford Prime alleges that Defendants had a specific plan that they failed to disclose: a “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) But the documents Ashford Prime references to support its allegations are insufficient to support a reasonable belief that any such definitive plan existed. Thus, Ashford Prime does not satisfy the heightened pleading requirements of the PSLRA. See Vladimir, 606 F. Supp. 2d at 484. Nor do Ashford Prime’s allegations have facial plausibility because the factual content pleaded does not allow the Court to draw the reasonable inference that Defendants had such a definitive plan or that the failure to disclose any such plan on Schedule 14A was material. Thus, they also fail to satisfy general Rule 12(b)(6) requirements. Ashcroft, 556 U.S. at 678 (citation omitted). 1 Where SEC regulations require the disclosure of “plans” - on Schedule 13D - there is no requirement to make “predictions of future behavior,” Mo. Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 872 (2d Cir. 1974), or to disclose tentative or “inchoate” plans. Merrit v. Libby, McNeil & Libby, 510 F. Supp. 366, 372 (S.D.N.Y. 1981). Indeed, the Fifth Circuit has cautioned that disclosure of tentative plans can be misleading. Susquehanna Corp. v. Pan Am. Sulphur Co., 423 F.2d 1075, 1084-85 (5th Cir. 1970) (“It would have been misleading to the stockholders and to the public investor for [a] Schedule 13D . . . to indicate that there was a plan or proposal” for a merger where the “idea for such a merger never got off the ground”). It would make no sense and result in internally inconsistent rules if it was assumed that any different standard would apply to any hypothetical requirement to disclose “plans” under Item 5(b)(1(xii) of Schedule 14A. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 12 of 32 PageID 5187 8 a. The Documents Ashford Prime Cites Do Not Support a Reasonable Belief That Defendants Had Undisclosed Plans None of the documents Ashford Prime refers to supports a reasonable belief that any Defendants had a definitive “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets,” (Am. Compl. ¶ 79) and therefore Ashford Prime fails to satisfy the heightened PSLRA pleading requirements. Considering these documents in chronological order, the first is “Sessa internal notes of a call with an Ashford Prime shareholder on June 17, 2015.” (Am. Compl. ¶ 82) Ashford Prime concedes that at most the discussion touched on the “possibility that the termination fee clause could be unwound.” (Id.) Discussing the “possibility” that the termination fee “could be unwound” is not an actual plan. The actual notes reflect that this was even less than a discussion, merely a simple question from Mr. Petry to a third party: “Do you think there is any possibility that the termination fee clause could be unwound?” (App. 18). The third party responds “Possible it would be viewed as a breach of duty of loyalty. Also, keep in mind that change of control encompasses many things, even change in board.” (Id.) That is the extent of the “discussion” that Ashford Prime claims evidences an actual plan that “Sessa intended to implement.” And this “discussion” does not reflect any “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) The second document Ashford Prime refers to is “[i]nternal Sessa correspondence from August 2015.” (Am. Compl. ¶ 82) Ashford Prime argues that this document shows that “Petry and other Sessa employees” (i) discussed plans to “formulate a potential pitch to ISS regarding Ashford Prime” that included “committing to a specific menu of changes such as ‘internalizing, amending bylaws, stopping acquisitions’”, (ii) “sketched a litigation strategy with regard to the termination fee,” (iii) discussed the “need” for “a well-reasoned and detailed business plan,” and (iv) discussed the “need” for a “game plan” that would involve “selling the company.” (Id.) At most, this document Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 13 of 32 PageID 5188 9 reflects the possibility of developing “plans,” not the existence of actual definitive and specific plans. (App. 20-22) Nothing in the document reflects a “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) The third document that Ashford Prime refers to is “Petry’s handwritten notes from a November 11[, 2015] meeting with Defendant Livingston.” (Am. Compl. ¶ 83) Ashford Prime says that these notes reflect the discussion of a “Legal Plan,” a “CEO plan,” and an “Investment Banker Plan,” for a “property by property” sale and a “bank plan for the entire company.” (Id.) This document reflects Mr. Livingston’s thoughts that about the need for plans on certain topics. (App. 24-25) It does not show that any such plans were adopted and does not show a definitive “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) Ashford Prime says that a fourth document, a December 8, 2015 internal Sessa email (Am. Compl. ¶ 82), shows Sessa was “pursu[ing]” a “path” towards “[a]chieving a renegotiation of the termination fee.” (Id.) But this email contains the suggestion of a Sessa analyst that Sessa pursue “3 board seats with the single issue being the termination fee.” (App. 27-29) Had Sessa only nominated three candidates, the termination fee would not have been an issue because Sessa’s candidates would not have constituted a majority of the board. So rather than suggesting Sessa had a path toward renegotiating the termination fee, the email shows Sessa was considering avoiding the termination fee altogether. Further, the email is not indicative of what Sessa actually decided to do, which is to pursue five board seats and making the incumbent directors’ record of corporate governance the issue. (See ECF No. 121-3, Am. Compl. Ex. 3 at 4-5) The email does not reflect any actual “plan” and even if it did, by the time the proxy contest began in January, Sessa was pursuing a different path. In addition, the email contains no mention of any “litigation strategy” concerning the termination fee, and indeed contradicts the notion that the correspondence from August 2015 Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 14 of 32 PageID 5189 10 discussed above shows there was a definitive “plan” with respect to litigating the termination fee. It establishes that as of December 8, 2015, Sessa still had no definitive “plan” with respect to Ashford Prime, which undercuts Ashford Prime’s reliance on the first three documents discussed above to establish the existence of a “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) The fifth document that Ashford Prime refers to is “[i]nternal Sessa notes from a December 18, 2015 call” with the Sessa Candidates. (Am. Compl. ¶ 83) Ashford Prime says this document reflects a discussion that the “[t]ermination fee will have to be dealt with, will have to have legal strategy around that.” (Id.) These are the same “Sessa notes” that Ashford Prime says show that Sessa and the Sessa Candidates discussed a “game plan after election,” including a “real and fair sale process” and “attacking the termination fee.” (Id.) Again, these notes do not reflect any actual definitive and specific plan regarding the termination fee, simply an acknowledgment that the termination fee is a problem. (App. 31-32) Moreover, Livingston stated he “would be interested in what would be gameplan after election.” (App. 32) Petry observed that that “in today’s environment” maximizing value would include “a real and fair sale process.” (Id.) But Petry’s further response shows that there were no definitive plans because he “[didn’t] know what [the environment] looks like in 6 months” when the election would take place. (Id.) This document also shows that the previous documents cited do not evidence the existence of any definitive plan, much less a “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets.” (Am. Compl. ¶ 79) Otherwise, Livingston would not have expressed his interest in knowing the “gameplan after election.” (App. 32) The sixth document that Ashford Prime refers to is “handwritten notes from Sessa.” (Am. Compl. ¶ 83). Ashford Prime says this document references Sessa’s “business plan,” a “transition plan (e.g. first 100 days),” and a “litigation plan.” The notes were written on a draft copy of a Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 15 of 32 PageID 5190 11 presentation that Sessa made to Ashford Prime stockholders. (App. 34) That presentation was also publicly filed with the SEC on March 23, 2016. (App. 634-677) Far from plausibly showing that Sessa had a “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets,” these notes reflected criticism of Sessa’s lack of plans in their stockholder presentation: “Our plan needs to be more convincing [and] have much more detail[.]” (App. 34) The notes then listed suggestions for Sessa to formulate a “business plan,” a “transition plan (e.g. first 100 days), and a “litigation plan.” (Id.) None of these documents leads to a reasonable conclusion that Defendants had any definitive plan, much less a definitive “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets,” which is the supposed plan that Ashford Prime alleges Sessa failed to disclose. (Am. Compl. ¶ 79) See e.g., Vladimir, 606 F. Supp. 2d at 492-94 (finding deficient under PSLRA heightened pleading standards plaintiff’s allegations of the existence of a definitive undisclosed plan to effect a merger, including allegations that (i) defendants met and discussed that “it may be an appropriate time to discuss an acquisition,” (ii) certain defendants were in constant contact, (iii) certain defendants “insisted” that other defendants sell their shares to effect the merger, and (iv) based on an anonymous source, defendants had such an definitive secret plan). Plaintiffs offer only speculation and surmise - not facts - as to the existence of such a plan, predicated on non- controversial internal documents showing that certain Sessa employees and Livingston at various times discussed the possibility of developing plans concerning Ashford Prime, but which ultimately resulted in no definitive and specific plans, only a decision by Sessa to run its proxy contest on the issue of Ashford Prime’s corporate governance failures. Most importantly, there is no evidence suggesting that Sessa or the Sessa Candidates ever even considered a “hasty sale of the Company Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 16 of 32 PageID 5191 12 and its assets.”2 Indeed, despite taking fulsome discovery from the Defendants on the topic, the evidence cited in Ashford Prime’s Amended Complaint does not come close to reflecting the type of preparations or agreements that would be expected if Defendants had a plan for a “hasty sale.” Plaintiffs do not allege that Sessa or any of the Defendants had any agreements or even discussions with investment bankers or lawyers regarding conducting a sale of the Company or any of its assets. Nor did they uncover any discussions, let alone agreements, with any potential purchasers of the Company or its assets. The Amended Complaint is devoid of any allegations that the Defendants were “shopping” the Company or its assets. b. Ashford Prime’s Allegations Are Implausible The allegation that Sessa had a definitive “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets,” is implausible. Sessa owns 8.2% of the stock of Ashford Prime. (ECF No. 86-1, App. 45) Since “hasty” fire sales do not maximize the sale price, Ashford Prime’s allegations amount to accusations that Sessa planned to act in a way that would severely negatively impact the value of Sessa’s investment in Ashford Prime. Furthermore, if Sessa had any other definitive plans on that or any other topic, Sessa had nothing to gain by keeping them a secret. Ashford Prime’s allegations are even more implausible when considered in the context that the parties already engaged in extensive discovery. Sessa produced thousands of pages of documents in discovery and Ashford Prime deposed Sessa Candidates Petry, Livingston, and 2 Sessa is unaware of any evidence supporting Ashford Prime’s conclusory allegation that Petry had conversations “with certain Directors and the Company’s financial advisor” in which he “advised he would seek a hasty sale of the Company.” (Am. Compl. ¶ 83) This allegation is unsupported by any facts and should not be credited. See Vladimir, 606 F. Supp. 2d. at 491-92 (refusing to credit the allegation made to support the existence of an agreement, that based on an “anonymous source” defendants held a secret meeting at which they reached an agreement because the court was “unable to determine whether [the] source was in a position to know what he is alleged to have [known], or, in fact, whether or not [the] anonymous source even exists”). Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 17 of 32 PageID 5192 13 Wheeler and Sessa employee Andrew Moin for three hours each. But Ashford Prime cites only a handful of documents in its amended complaint and does not cite a single line of deposition testimony. If Ashford Prime had facts to support its allegations, Ashford Prime would have referred to them in the allegations. c. Any Failure by Sessa to Disclose its Alleged Plans Is Immaterial Finally, even if Sessa had a definitive “plan to abandon the Strategic Review in favor of a hasty sale of the Company and its assets,” Ashford Prime has not alleged that the failure to disclose such plan was material. A plaintiff who charges that an omission is materially false must show: a substantial likelihood that, under the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact [or correction of the misstated fact] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available. TSC Indus., Inc., 426 U.S. at 449. Ashford Prime cannot come close to making that showing because on no fewer than 20 occasions between September 2, 2015 and May 20, 2016, Sessa publicly announced via Schedule 13D and 14(a) filings its beliefs and views regarding the Strategic Review, the Termination Fee, and the sale of the Company or its assets. (See App. 82-93, Summary of Sessa’s SEC Filings) For example, Sessa publicly announced its views on the strategic review in a January 8, 2016, Schedule 13D: “given the corporate governance and other issues . . . we now believe that a sale of the Company is the preferred outcome of the strategic alternatives process.” (ECF No. 121-8, Am. Compl. Ex. 8 at 10) One week later, Sessa announced that “[o]ur slate, if elected, would immediately pursue all options for renegotiating the termination fee[.]” (ECF No. 121-9, Am. Compl. Ex. 9 at 11) And in its preliminary proxy statement, Sessa told stockholders that “[i]n our view, the amended fee makes a fair strategic process virtually impossible because it triggers a termination fee of almost $150 million[.]” (ECF No. 121-1, Am. Compl. Ex. 1 at 7) Sessa further discussed its Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 18 of 32 PageID 5193 14 views in a March 23, 2016 press release and investor presentation that it publicly filed as a Schedule 13D. (App. 629-677) The investor presentation summarized Sessa’s “goals” for Ashford Prime, which included, among other things: (1) “examin[ing] with a fresh set of eyes, free of personal conflicts” all “related party contracts, including the advisory agreement” (App. 668); (2) “Explor[ing] all options to invalidate or renegotiate the termination fee” (id.); (3) “Consider any strategic action that enhances the value per share to shareholders, including asset sales” (App. 669); (4) by the time of the election, Ashford Prime’s “strategic review process will be 9 months old. We will review the work of [the] Board and the performance of [the Company’s] investment banker. If appropriate, we will retain new bankers” (App. 672, emphasis added); and (5) AHP falsely claims that we are “‘only interested in a quick sale’ . . . Once we have access to Board level, non-public information, we will engage the best course of actions for shareholders at that time” (id.). Sessa’s “goals,” beliefs and views did not constitute a definitive plan to sell the Company if the Sessa Candidates were elected, but in any event Sessa’s views on the subject were fully disclosed to the Company and to stockholders. Moreover, Ashford Prime repeatedly told investors in its own proxy materials that Sessa had undisclosed plans to make a hasty sale of the company. (See App. 94-108, Summary of Ashford Prime’s SEC Filings) For example, On January 15, 2016, Ashford Prime issued a press release stating that “[[b]ased on our previous meetings, Sessa is solely interested in an immediate sale of the Company[.]” (App. 291, emphasis added) The Company repeated that allegation again in a February 4, 2016 form 8-K (“[W]e believe based on our limited interactions that Sessa is only interested in seeking an immediate sale of the Company”) (App. 324, emphasis added), and again in a February 18, 2016, proxy statement (“The Company believes Sessa is attempting to irresponsibly seize control of the Ashford Prime Board in order to force a quick sale of the Company”) (App. 421, emphasis added), and Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 19 of 32 PageID 5194 15 again in a February 25, 2016, Form 8-K (Sessa wanted “to effectuate a short-sighted and irresponsible strategy aimed at forcing a quick sale of the Company”) (App. 429, emphasis added), and again in a March 11, 2016, proxy statement (AHP “believes Sessa has, from the very beginning, intended to pursue an expensive, short-sighted and irresponsible strategy aimed at forcing a quick sale of the Company”) (App. 569, emphasis added). In total, Ashford Prime told its stockholders that it suspected that Sessa harbored plans to force a quick sale on no fewer than 15 occasions. (See App. 94-108, Summary of Ashford Prime’s SEC Filings) In light of Sessa’s extensive disclosures on Schedule 13D and in its proxy materials, and Ashford Prime’s own frequent statements in its proxy materials, it is simply not plausible that Defendants’ supposed omission was material or resulted in any damages to Ashford Prime. See Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200 (2d Cir. 1978) (reversing 14a-9 violation because the alleged omission from proxy statement was “thoroughly aired” where proxy contestant and the target company had advised shareholders of the supposed admission) B. Ashford Prime’s Allegations Regarding Alleged Omissions of Risks Do Not Meet PSLRA Pleading Standards Ashford Prime next alleges that Defendants’ proxy materials omitted “any discussion of the significant economic risks posed to the Company and its stockholders by the election of the Purported Nominees and the realization of Defendants’ secret scheme to hastily sell the Company and its assets” and that this supposed “failure to disclose” violates Rule 14a-9. (Am. Compl. ¶¶ 85, 86) As an initial point, Rule 14a-9 does not specifically require disclosure of such risk and Ashford Prime fails to identify any other rule promulgated under Section 14(a) that specifically requires disclosure of such risk. See 17 C.F.R. § 240.14a-9. Even if Section 14(a) required disclosures of the risks Ashford Prime describes, Sessa’s concerns about the magnitude of the termination fee and its impact on the election of directors and the sale of Ashford Prime was proposing in the strategic alternatives process were more than Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 20 of 32 PageID 5195 16 adequately disclosed to the board and to stockholders. On December 10, 2015. Sessa sent a letter to the board that rang alarm bells regarding the existential threat that the termination fee posed to Ashford Prime: “We are further troubled by management’s disclosure … that the fee for terminating the current advisory agreement with Ashford Inc. could be as large as $4-5 per share. How can a Board of Directors hand over 1/3 of a company’s current market capitalization to an affiliate of the Chairman in any scenario?” The next day, Sessa publicly filed the same letter as a Schedule 13D. (ECF No. 121-7, Am. Compl. Ex. 7 at 12, emphasis added) On February 4, Sessa issued a press release, explaining to stockholders that “Ashford Prime’s Board of Directors, by amending the advisory agreement with Ashford Inc. . . . can choose whether to approve their replacements or trigger a massive fee[.]” (ECF No. 121-4, Am. Compl. Ex. 4 at 5, emphasis added) In addition - on no fewer than 12 occasions - Ashford Prime itself warned stockholders that the election of Sessa’s candidates or a subsequent sale of the Company “could trigger a termination fee in the hundreds of millions of dollars.” (See e.g., App. 94-108, Summary of Ashford Prime’s SEC Filings, citing March 29, 2016, and April 4, 2016, Form 8-K Proxy Materials) In fact, on February 25, 2016 - nearly four months before the election - Ashford Prime specifically told stockholders that Sessa’s proxy statements were deficient because they failed to address “the potential triggering of covenants in the Company’s credit and advisory agreements, which would require the Company to pay hundreds of millions of dollars to its contractual counterparties.” (App. 429, emphasis added) To claim that the risks of the termination fee and the proxy penalty were not disclosed to stockholders is absurd. See Kennecott Copper, 584 F.2d at 1200. Having failed to identify any rule that specifically requires the disclosure of such risk in the proxy materials, Ashford Prime must identify a specific statement in the proxy materials that it believes the supposed omission renders false or misleading and how it does so. 15 U.S.C. § 78u- 4(b)(1); In Re Marsh & McLennan Cos., 536 F. Supp. 2d at 321. Ashford Prime’s complaint is devoid Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 21 of 32 PageID 5196 17 of any such allegations. Nor can Ashford Prime claim that any alleged nondisclosure was material, given the voluminous statements by both sides on the termination fee and the proxy penalty. Therefore, Ashford Prime’s allegations do not meet the heightened PSLRA pleading standards. C. Ashford Prime’s Allegations Regarding Alleged Misleading Statements About the Termination Fee Do Not Meet PSLRA Pleadings Standards and Rule 12(b)(6) Standards Ashford Prime identifies two statements that supposedly are false representations regarding the termination fee. (Am. Compl. ¶ 91) However, the PSLRA requires that Ashford Prime also explain why it believes these statements are false. 15 U.S.C. § 78u-4(b)(1). Here, Ashford Prime says that the two statements “falsely state that the amendments to the Advisory Agreement have increased the magnitude of the Termination Fee.” (Am. Compl. ¶ 90) The only explanation that Ashford Prime gives for its assertion is a conclusory statement that the “magnitude of the Termination Fee did not change as calculated on any given date as the magnitude of such fee remains the same as would have been payable under the Advisory Agreement throughout 2015” including prior to the Third Amended Advisory Agreement (“TAAA”). (Am. Compl. ¶ 92) But Ashford Prime fails to explain how this can be so in light of the fact that the TAAA specifically changed the calculation of the termination fee from being based on Advisors’ “net earnings” and “market capitalization” to being based on Advisors’ Advisors’ “Adjusted EBITDA” and “total enterprise value”. Moreover, how can Sessa’s statements regarding the Termination Fee be considered false when Sessa publicly proclaimed that Ashford Prime had shrouded in secrecy the calculation of the fee? Indeed, more than 9 months before the election, Sessa filed a Schedule 13D that stated “the current advisory agreement with Ashford, Inc. … creates a fee that is impossible to calculate[.]” (ECF No. 121-6, Am. Compl. Ex. 6 at 9, emphasis added) Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 22 of 32 PageID 5197 18 Thus, Ashford Prime’s allegation is insufficient to explain why the two statements are supposedly false and does not meet heightened PSLRA pleading standards. See, e.g., Van Ormer v. Aspen Tech., Inc., 145 F. Supp. 2d 101, 104-05 (D. Mass. 2000) (Applying PSLRA standards in context of cause of action for violation of Section 10(b)(5) of the Act to find that plaintiffs’ did not adequately support their allegations that defendants’ statements about sales, revenue, and earnings projections were false because plaintiffs did not provide factual support for their conclusory allegations). Moreover, Ashford Prime’s allegation that the two statements are false are conclusory and does not meet general Rule 12(b)(6) pleadings standards. Kaiser Aluminum & Chem. Sales, 677 F.2d at 1050 (conclusory allegations and unwarranted deductions of fact are not accepted as true); Twombly, 550 U.S. at 555 (courts are not bound to accept as true a legal conclusion couched as a factual allegation). D. Ashford Prime’s Allegations Regarding Sessa’s Alleged Misstatements About the Penny Preferred Stock Do Not Meet PSLRA Pleading Standards Ashford Prime alleges that “Defendants have made false and misleading statements that Ashford Prime sold voting stock to holders of OP Units solely in exchange for consideration of $0.01 per share, or $43,750 in violation of Rule 14a-9.” (Am. Compl. ¶ 94) Ashford Prime’s allegation relates to its withdrawn plan to permit holders of OP Units “to purchase shares of Series C Preferred Stock . . . [at] the applicable subscription price of $0.01 per share” in a transaction in which holders of OP Units would have had “the opportunity to purchase up to approximately 4.375 million shares of Series C Preferred Stock.” (App. 1466) Ashford Prime has failed to meet the PSLRA pleading standards because its complaint fails to specifically identify any such statements made by Defendants and failed to explain how the alleged statements are false, misleading, or material. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 23 of 32 PageID 5198 19 E. Ashford Prime’s Allegations Regarding Sessa’s Alleged Misstatements Regarding the Conduct of Ashford Prime’s Management and Board Do Not Meet Rule 12(b)(6) Standards The Notes to Rule 14a-9 indicate that “depending upon particular facts and circumstances,” misleading statements can include “[m]aterial which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges concerning improper, illegal or immoral conduct or associations, without factual foundation.” 17 CFR 240.14a-9(c) The Supreme Court has held that statements of belief or opinion run afoul of the Act only if the statement is both a “misstatement of the psychological fact of the speaker’s belief in what he says” and “mislead about the stated subject matter.” See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991). Ashford Prime identifies five statements from Defendants’ proxy materials that it says are false and misleading. (Am. Compl. ¶¶ 102, 103) The only reason that Ashford Prime gives for why these statements are supposedly false and misleading is that they supposedly “accuse, without any factual support, Ashford Prime’s management and directors of improperly managing the company and violating their fiduciary duties, and therefore improperly impugn the character, integrity or personal reputation of members of Ashford Prime’s management and Board.” (Am. Compl. ¶ 105) The first statement Ashford Prime claims is false is a statement in Defendants’ Schedule 14A filed on February 2, 2016 that expresses Mr. Petry’s opinion that “[t]he need for new, highly- qualified directors, who will uphold their fiduciary duty and act in the interest of all shareholders, not just Mr. Bennett, has never been greater.” (Am. Compl. ¶ 103) Since Ashford Prime has not alleged that this is a misstatement of what Mr. Petry actually believes, it has failed to state a claim. See Virginia Bankshares, 501 U.S. at 1095. Furthermore, the opinion was based upon Ashford Prime’s announcement that it was enabling corporate insiders, including Mr. Bennett, to purchase preferred voting shares representing nearly 13.3% of Ashford Prime’s voting stock for a penny per share. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 24 of 32 PageID 5199 20 (ECF No. 121-05, Am. Compl. Ex. 5 at 4). It is thus supported by factual foundations and under the circumstances is not false or misleading. The second through fifth allegedly false statements are in Defendants’ preliminary proxy statement filed on February 12, 2016. (Am. Compl. ¶ 103) The second statement is the Defendants’ opinion that “we have little confidence that AHP’s Board, as currently composed, has the objectivity and commitment to take the steps necessary to enhance stockholder value.” (Id.) The third statement is Defendants’ opinion that “[w]e believe that the conflicts of interest and decisions by AHP’s directors discussed above show that the current Board is not sufficiently devoted to the best interest of the stockholders.” (Id.) Since Ashford Prime has not alleged that these are misstatements of what Defendants actually believe, it has failed to state a claim. See Virginia Bankshares, 501 U.S. at 1095. Furthermore, these statements of opinion are based upon facts set forth in the preliminary proxy statement, including the following: (1) the poor performance of Ashford Prime’s stock relative to the Dow Jones U.S. Hotel & Lodging REIT Index and the S&P 500; (2) Ashford Prime’s failure to provide any details of its strategic initiatives for, at that time, over five months; (3) the interlocking boards of Ashford Prime and Ashford Inc.; (4) the incumbent directors’ approval of amendments increasing the size of the termination fee and the circumstances in which it applies; (5) the purchase by Ashford Prime of approximately 8.8% of the stock of its affiliate Ashford Inc. for a 59% premium of the closing price; (6) Ashford Prime’s investment of over $50 million into a hedge fund controlled by Ashford Inc. and Bennett; and (7) Ashford Prime’s announcement, shortly after Sessa nominated the Sessa Candidates, that it would issue 4.375 million shares of preferred stock for a penny per share to predominantly corporate insiders. (ECF No. 121-1, Am. Compl. Ex. 1 at 3-5). Thus, they are supported by factual foundations and under the circumstances are not false or misleading. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 25 of 32 PageID 5200 21 The fourth statement simply expresses that the Sessa Candidates “recognize that as members of the Board they will owe fiduciary duties to ALL of the Company’s stockholders.” (Am. Compl. ¶ 103) It says nothing about the incumbent directors and furthermore is a true statement of the Sessa Candidates’ views and is not false or misleading. The final statement is a brief description of the lawsuit that Sessa filed against Ashford Prime and the incumbent directors. (Am. Compl. ¶ 103) It is a short, but accurate, summary of the causes of action Sessa asserted against Ashford Prime and the incumbent directors. It is therefore neither false nor misleading. It is also substantially similar to a description of the lawsuit that Ashford Prime provided in its proxy materials. (ECF No. 86-1, App. 015-016.) Ashford Prime alleges that three additional statements made by third parties also impugn “the character, integrity or personal reputation of Ashford Prime’s management and Board.” (Am. Compl. ¶ 104). Ashford Prime found the statements on an online forum called “Value Investors Club” that Ashford Prime asserts is “operated by defendant Petry.” (Id.) But Ashford Prime admits that these statements were not included in the proxy materials filed with the SEC. (Am. Compl. ¶ 116) (“[a]ccording to guidance from the SEC staff, all such information constitutes solicitation materials under Rule 14a-12 and should have been included by Defendants in their proxy materials and filed with the SEC.”) As an initial matter, Defendants are unaware of any “guidance from the SEC staff,” much less any provision of Section 14(a) of the Act or any rule promulgated thereunder indicating that any of the three statements should have been included by Defendants in proxy materials. The SEC staff made no such statements to Defendants. Thus, there is no actionable omission by Defendants. In Re Marsh & McLennan Cos., 536 F. Supp. 2d at 321. Ashford Prime’s allegations also make no sense. Ashford Prime essentially argues that statements that it alleges are false should be included in Defendants’ proxy materials. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 26 of 32 PageID 5201 22 F. Ashford Prime’s Allegations Regarding Sessa’s Alleged Omission of Livingston’s Purchase of Ashford Prime Stock Do Not Meet Rule 12(b)(6) Pleading Standards Ashford Prime alleges that Defendants failed to disclose Livingston’s purchase of Ashford Prime stock and that this supposed failure violated Rules 14a-3 and 14a-12. (Am. Compl. ¶ 107) Sessa concedes that Mr. Livingston’s purchase is required to be disclosed for Livingston in his capacity as a nominee.3 Livingston purchased 4,000 shares of Ashford Prime common stock on January 19. (App. 482) Defendants disclosed the purchase on February 4, 2016. (ECF No. 121-4, Am. Compl. Ex. 4 at 6) Ashford Prime claims this was an “improper delay.” (Am. Compl. ¶ 111) Yet, Ashford Prime held its annual meeting on June 10, 2016. (ECF No. 122-1, App. 027, June 13, 2016, Ashford Prime 8-K) Given that Livingston’s purchase was disclosed to stockholders a full 127 days before the annual stockholder meeting, as a matter of law the 16 days in late January and early February during which stockholders did not know about Livingston’s purchase could not have had any “actual significance in the deliberations of a reasonable shareholder.” Thus, the alleged omission cannot as a matter of law have been material. See TSC Indus., Inc., 426 U.S. at 449 (for an omission to be materially false, there must be “a substantial likelihood that, under the circumstances, the omitted fact would have assumed actual significant in the deliberations of a reasonable shareholder”); GAF Corp. v. Heyman, 724 F.2d 727, 741 (2d Cir. 1983) (holding that alleged omission was immaterial 3 As explained in Section V, Ashford Prime’s repeated allegations that Livingston and the other Sessa Candidates are members of a “group” are inadequate under the PSLRA and are insufficient to claim that any of those individuals are liable for the statements made by Sessa in its proxy statements. For the same reasons, they are insufficient to support Ashford Prime’s allegations that information regarding Livingston’s purchase of stock in Ashford Prime was improperly omitted because he was supposedly a member of a “group” soliciting proxies. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 27 of 32 PageID 5202 23 where defendant had “disseminated” that information “more than six weeks before the annual meeting in . . . [a] press release”). V. Ashford Prime’s Allegations in Support of its Section 13(d) Claim Do Not Meet the Requirements of the PSLRA or Rule 12(b)(6) Ashford Prime alleges that Defendants have violated Section 13(d) of the Act and the rules promulgated thereunder by (1) failing to disclose their alleged “plans or proposals regarding the sale of Ashford Prime and its assets” and (2) “failing to disclose - and continuing to deny - the formation of a group including Sessa and Livingston.” (Am. Compl. ¶ 117) Ashford Prime’s cause of action based on Defendants’ supposed failure to disclose plans or proposals should be dismissed for the same reasons already discussed - its allegations do not meet the heightened PSLRA pleading requirements or the general Rule 12(b)(6) pleading requirements. Ashford Prime’s supposed failure to disclose the alleged formation of a group should be dismissed for the same reasons. Ashford Prime primarily bases its allegation that Livingston and Sessa are a group on Livingston’s purchase of 4,000 shares of Ashford Prime stock after he became a Sessa Candidate. (Am. Compl. ¶ 41) Yet Ashford Prime concedes that by the time Livingston purchased his shares, Sessa had already acquired 2,330,726 shares in transactions going back to March 2015. (Am. Compl. ¶¶ 37-39) These allegations are insufficient to create a reasonable belief that Sessa, which already owned 8.2% of Ashford Prime stock, had any reason to or in fact did enter into any sort of joint agreement with Livingston to purchase shares, especially when Livingston’s purchase amounted to only 4,000 shares. This sort of conclusory pleading by hindsight is exactly the sort of allegation that the PSLRA is designed to block. See, e.g., Burt v. Maasberg, Civil Action No. ELH-12-0464, 2013 WL 1314160, *15 (D. Md. Mar. 31, 2013) (Court unable to conclude complaint contained sufficient facts to support a “reasonable belief” that the defendants, or some subset of them, formed a group to gain control of company where plaintiffs offered ex post facto speculation that because several defendants increased their holdings of target company stock during a particular time period they did Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 28 of 32 PageID 5203 24 so according to an agreement that involved all of the defendants). For the same reason, these allegations are simply implausible and are insufficient under general Rule 12(b)(6) pleading standards. Ashford Prime then resorts to alleging over and over that Sessa and Livingston have formed a “group” without ever providing any more factual allegations, culminating in the conclusion that “it is beyond dispute that Livingston’s coordinated stock purchases with Sessa and joint agreement to take control of the Ashford Prime Board makes them part of a “group.” (Am. Compl. ¶¶ 3, 11, 44, 117, 122) Far more detailed allegations than this have been held not to establish the existence of a group sufficient to meet PSLRA pleading standards. See, e.g., Vladimir, 606 F. Supp. 2d at 491-92 (dismissing claim of misrepresentation under PSLRA pleading standards even though plaintiffs alleged secret meetings among defendants discussing acquisition and that, based on an anonymous source, defendants had agreed to accept an acquisition offer); Torchmark Corp. v. Bixby, 708 F. Supp. 1070, 1083-84 (W.D. Mo. 1988) (dismissing Section 13(d) claim under pre-PSLRA standards even though plaintiffs alleged that four family members operated as a “group” in rejecting plaintiffs’ tender offer because each of the four family members individually signed a statement that they had no intention of selling their shares). These are also conclusory allegations that are not entitled to be accepted as true. Twombly, 550 U.S. at 555 Ashford Prime also alleges “[o]n information and belief” that “Defendants Sessa and Petry also secretly coordinated their attack on Ashford Prime with a number of Sessa’s limited partners who acquired Ashford Prime shares.” (Am. Compl. ¶ 43) The only specific additional allegation that Ashford Prime offers is that after filing Sessa’s Schedule 13D in September 2015, Petry discussed Ashford Prime with representatives of the Notre Dame Foundation, a Sessa limited partner, and that Notre Dame “acted on these communications” to acquire 75,000 shares of Ashford Prime and doubled its position after Sessa commenced its campaign. (Am. Compl. ¶ 123) Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 29 of 32 PageID 5204 25 Ashford Prime never specifically alleges that Notre Dame and Sessa have formed a “group” that Sessa should have disclosed pursuant Section 13(d). However, even if they had, these allegations are the same sort of hindsight ex post facto pleading that is insufficient to establish the existence of a “group” under PSLRA standards. See, e.g., Burt, 2013 WL 1314160, *13. And Plaintiffs do not allege the existence of any an actual agreement with Notre Dame, which is independently fatal to Plaintiffs’ Section 13(d) claim. See Hollywood Casino Corp. v. Simmons, No. 3:02- CV-0325-M, 2002 U.S. WL 1610598, *2 (N.D. Tex. July 18, 2002) (to plead the existence of a group, a complaint must allege both (1) the existence of an agreement among the group’s members, and (2) that the agreement aims to further a common objective). Finally, to the extent that Ashford Prime has alleged “on information and belief” that other unnamed limited partners of Sessa are part of some “group” that should have been disclosed, such allegations are insufficient under the PSLRA. The PSLRA specifically requires that if an allegation regarding an omission is made on information and belief, the complaint shall state with particularity “all facts” on which that belief is formed. 15 U.S.C. § 78u-4(b)(1)(B). Ashford Prime has provided no facts on which its purported belief is formed. CONCLUSION For the foregoing reasons, Sessa respectfully submits that this Court should dismiss Ashford Prime’s Amended Complaint with prejudice. Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 30 of 32 PageID 5205 26 Dated: August 2, 2016 SKIERMONT DERBY LLP s/ Paul J. Skiermont Paul J. Skiermont Texas State Bar No. 24033073 Email: pskiermont@skiermontderby.com Eliot J. Walker Texas State Bar No. 24058165 Email: ewalker@skiermontderby.com Shellie Stephens Texas State Bar No. 24079398 Email: sstephens@skiermontderby.com 2200 Ross Ave., Suite 4800W Dallas, Texas 75201 Telephone No.: (214) 978-6600 Facsimile No.: (214) 978-6601 Of Counsel: BARTLIT BECK HERMAN PALENCHAR & SCOTT LLP Glen E. Summers (Pro Hac Vice) Email: glen.summers@bartlit-beck.com Joseph Doman (Pro Hac Vice) Email: joe.doman@bartlit-beck.com 1899 Wynkoop Street, 8th Floor Denver, Colorado 80202 Telephone No. (303) 592-3100 Facsimile No.: (303) 592-3140 John D. Byars (Pro Hac Vice) Email: john.byars@bartlit-beck.com Courthouse Place 54 W. Hubbard St., Suite 300 Chicago, Illinois 60654 Telephone No. (312) 494-4400 Facsimile No.: (312) 494-4440 Attorneys for Sessa Capital (Master), L.P., Sessa Capital GP, LLC, Sessa Capital IM, L.P., Sessa Capital IM GP, LLC, John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers, Chris D. Wheeler Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 31 of 32 PageID 5206 27 CERTIFICATE OF SERVICE On August 2, 2016, I electronically submitted the foregoing document with the clerk of court for the U.S. District Court, Northern District of Texas, using the electronic case filing system of the court. I hereby certify that I have served all counsel and/or pro se parties of record electronically or by another manner authorized by Federal Rule of Civil Procedure 5(b)(2). s/ Paul J. Skiermont Paul J. Skiermont Case 3:16-cv-00527-N-BN Document 129 Filed 08/02/16 Page 32 of 32 PageID 5207 i UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION ASHFORD HOSPITALITY PRIME, INC., Plaintiff, v. SESSA CAPITAL (MASTER), L.P., SESSA CAPITAL GP, LLC, SESSA CAPITAL IM, L.P., SESSA CAPITAL IM GP, LLC, JOHN E. PETRY, PHILIP B. LIVINGSTON, LAWRENCE A. CUNNINGHAM, DANIEL B. SILVERS and CHRIS D. WHEELER, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) SESSA CAPITAL (MASTER), L.P., Counterclaim-Plaintiff; v. ASHFORD HOSPITALITY PRIME, INC., Counterclaim-Defendant. ) ) ) ) ) ) ) ) ) ) NO. 3:16-cv-00527-N SESSA CAPITAL (MASTER), L.P. Third-Party Plaintiff, v. ASHFORD INC., ASHFORD HOSPITALITY ADVISORS LLC, MONTY J. BENNETT, DOUGLAS A. KESSLER, STEFANI D. CARTER, CURTIS B. MCWILLIAMS, W. MICHAEL MURPHY, MATTHEW D. RINALDI, and ANDREW STRONG, Third-Party Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ AMENDED COMPLAINT PURSUANT TO FRCP 12(b)(1) AND FRCP 12(b)(6) Case 3:16-cv-00527-N-BN Document 129-1 Filed 08/02/16 Page 1 of 2 PageID 5208 1 Before the Court is the motion of Defendants, Sessa Capital (Master), L.P., Sessa Capital GP, LLC, Sessa Capital IM, John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers, and Chris D. Wheeler, to dismiss Plaintiffs’ claims pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). After considering the Motion, the Court is of the opinion that the Motion should be GRANTED. IT IS THEREFORE ORDERED that Defendants Motion to Dismiss Plaintiffs’ Amended Complaint is GRANTED and Plaintiffs’ Amended Complaint is dismissed WITH PREJUDICE. IT IS SO ORDERED this ___ day of August, 2016. David C. Godbey United States District Judge Northern District of Texas Case 3:16-cv-00527-N-BN Document 129-1 Filed 08/02/16 Page 2 of 2 PageID 5209