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Lusk v. Akardi

United States District Court, D. Minnesota

August 6, 2017

MATTHEW LUSK and ST. CLAIR EMPLOYEES' RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiffs,
v.
BAHRAM AKRADI, GILES H. BATEMAN, JACK W. EUGSTER, GUY C. JACKSON, JOHN K. LLOYD, MARTHA A. MORFITT, JOHN B. RICHARDS, and JOSEPH S. VASSALLUZZO, Defendants.

          DAVID T. WISSBROECKER, ROBBINS GELLER RUDMAN & DOWD LLP, KAI H. RICHTER, NICHOLS KASTER, PLLP, JEFFREY C. BLOCK AND JACOB A. WALKER, BLOCK & LEVITON LLP FOR PLAINTIFFS MATTHEW LUSK AND ST. CLAIR EMPLOYEES' RETIREMENT SYSTEM.

          THOMAS P. SWIGERT, DORSEY & WHITNEY LLP, FOR DEFENDANT BAHRAM AKRADI.

          MATTHEW B. KILBY, FAEGRE BAKER DANIELS LLP, FOR DEFENDANTS GILES H. BATEMAN, JACK W. EUGSTER, GUY C. JACKSON, JOHN K. LLOYD, MARTHA A. MORFITT, JOHN B. RICHARDS, AND JOSEPH S. VASSALLUZZO.

          MEMORANDUM OPINION AND ORDER GRANTING DEFENDANTS' MOTIONS FOR JUDGMENT ON THE PLEADINGS

          JOHN R. TUNHEIM CHIEF JUDGE UNITED STATES DISTRICT COURT

         Plaintiffs Matthew Lusk and St. Clair Employees' Retirement System (collectively “Plaintiffs”) are former shareholders of Life Time Fitness, Inc. (“Life Time”). Plaintiffs bring this action individually and as a class action on behalf of all other similarly situated former Life Time shareholders regarding the 2015 merger of Life Time with a group of private equity firms. Plaintiffs' sole remaining claim in this case is for breach of fiduciary duty against the former directors of Life Time's board.

         Because Plaintiffs did not plead a non-exculpated breach of fiduciary duty claim against the former Life Time board, and because Life Time's shareholders ratified the transaction pursuant to Minn. Stat. § 302A.255, the Court will grant the defendants' motions for judgment on the pleadings.

         BACKGROUND [1]

         I. MERGER

         Life Time is a Minnesota corporation that operates a chain of health fitness centers. (Am. Compl. ¶¶ 2, 12, Aug. 31, 2015, Docket No. 87.) Defendant Bahram Akradi founded Life Time in 1992, and he acted as its “Chairman of the Board, President and CEO.” (Id. ¶ 13.) Defendants Giles H. Bateman, Jack W. Eugster, Guy C. Jackson, John K. Lloyd, Martha A. Morfitt, John B. Richards, and Joseph S. Vassalluzzo were members of Life Time's board of directors (hereinafter the “Board, ” and together with Akradi, the “Defendants”). (Id. ¶¶ 14-20.) Plaintiffs held Life Time stock prior to the merger at issue. (Id. ¶¶ 10-11.)

         In response to pressure from a Life Time shareholder, on July 21, 2014, Life Time hired Wells Fargo Securities, LLC (“Wells Fargo”), (Am. Compl. ¶¶ 32, 35; Decl. of Matthew B. Kilby, Ex. D (“Proxy”) at 7, Oct. 5, 2015, Docket No. 119), to consider “various financing and strategic alternatives available to Life Time to maximize long-term shareholder value, including but not limited to the evaluation of a [real estate investment trust (“REIT”)] conversion transaction, ” (Proxy at 35-36). The concept of unlocking Life Time's real estate value through a REIT transaction also prompted an unsolicited acquisition proposal from Party A on July 30, 2014, for over $60.00 a share at a time when Life Time had a $40.57 per share closing price. (Am. Compl. ¶ 35; Proxy at 36.) In response, the Board also engaged Guggenheim Securities, LLC (“Guggenheim”) to review and assess various financial alternatives to maximize shareholder value. (Am. Compl. ¶ 36; Proxy at 6, 36.)

         On September 23, 2014, Party A increased its unsolicited acquisition proposal to $70.00 per share. (Am. Compl. ¶ 40; Proxy at 36.) At a September 25, 2014 meeting, “the Board decided to allow Akradi and Life Time's financial advisors to begin contacting potential bidders . . . . Akradi was heavily involved in these communications and personally contacted certain bidders with whom he had a pre-existing relationship.” (Am. Compl. ¶ 40.) As Akradi and the Board continued to consider strategic alternatives, on January 16, 2015, Party A reaffirmed its offer of $70.00 per share, and a group of private equity firms (the “Buyout Group”)[2] offered $65.00 to $69.00 per share. (Id. ¶ 41; Proxy at 37-38.)

         On March 3, 2015, the Board established a Special Committee “consisting entirely of independent and disinterested directors, ” (Proxy at 6), which “discussed various strategies and tactics for seeking to obtain the highest per-share cash bids for Life Time” and also considered a “REIT [c]onversion [e]xploration.” (Proxy at 40; see also Am. Compl. ¶ 43.) The Special Committee “discussed their beliefs that potential bidders were more likely to submit the highest bids possible if they were permitted to discuss potential arrangements with senior members of Life Time's management team and that such discussions could be helpful in connection with arranging financing for a transaction.” (Proxy at 40.) The Special Committee allegedly “permitted Akradi to negotiate the terms of a rollover investment and his continued employment at the surviving company with potential buyers.” (Am. Compl. ¶ 43.)

         On March 11, 2015, the Buyout Group offered $70.50 per share and a rollover of Akradi's equity in Life Time. (Am. Compl. ¶ 46; Proxy at 42.) Party A again indicated that it offered $70.00 per share. (Am. Compl. ¶ 45; Proxy at 41- 42.) Plaintiffs suggest that Akradi recognized a sale to the Buyout Group was his only chance to invest in the surviving company, and thus “quickly tipped the sales process in the Buyout Group's favor.” (Am. Compl. ¶ 47.) On March 13, 2015, the Special Committee met with the financial advisors Wells Fargo and Guggenheim to discuss the two proposals as well as a REIT conversion. (Proxy at 42-43.) Guggenheim's analysis suggested that a REIT conversion would have resulted in a present value range of $64.50 to $84.50 per share, (id. at 43), and Wells Fargo's analysis suggested a range of $59.69 to $92.23 per share, (id. at 43-44). The Special Committee considered these analyses as well as the “uncertainties and risks associated” with a REIT conversion. (Id. at 44.)

         Negotiation over the transaction agreements continued over the next few days. (Id. at 44-45; Am. Compl. ¶ 49.) On March 15, 2015, Party A delivered a revised proposal with an offer of $72.00 per share, but did not provide a rollover investment or continued employment for Akradi. (Am. Compl. ¶ 49; Proxy at 45.) The Buyout Group also submitted a bid of $72.10 per share and requested Akradi roll over $125 million in equity. (Am. Compl. ¶ 50; Proxy at 46.)

         On March 15, 2015, the Special Committee and the Board both unanimously approved the merger with the Buyout Group. (Proxy at 48.) Life Time filed the Proxy with the Securities and Exchange Commission (“SEC”) on April 30, 2015, and it was disseminated to Life Time shareholders in advance of the shareholder vote on the merger on June 4, 2015. (Am. Compl. ¶ 63; Proxy at 2.) The 233-page Proxy discussed the background of the merger, the Board's analyses and recommendations, the financial advisors' fairness opinions, key terms of the merger agreement, disclosed Akradi's rollover interest, and the Board's entitlement to stock options at the consummation of the merger. (See Proxy at 7-8, 27, 35-75.) In recommending Life Time's shareholders vote in favor of the merger, the Board and the Special Committee noted that Guggenheim and Wells Fargo opined the price of $72.10 was fair to shareholders. (Proxy at 48-49.) Not including the Defendants' shares, the Life Time shareholders approved the merger with 81.65% voting in favor on June 4, 2015.[3] Pursuant to the merger, Akradi rolled over $125 million worth of his Life Time shares in exchange for shares in the surviving entity, (Am. Compl. ¶ 50), and remained the CEO, (id. ¶¶ 57-58).

         II. PROCEDURAL BACKGROUND

         On August 31, 2015, Plaintiffs filed an amended complaint alleging that Life Time and the Defendants issued a false or misleading proxy statement prior to the merger in violation of § 14(a) of the Securities Exchange Act and SEC Rule 14a-9, (id. ¶¶ 94-100), the Defendants and the Buyout Group acted as controlling persons of Life Time in violation of § 20(a) of the Securities Exchange Act, (id. ¶¶ 101-107), the Defendants breached fiduciary duties owed to Life Time's shareholders, (id. ¶¶ 108-112), and the Buyout Group aided and abetted the Defendants' breach of fiduciary duties, (id. ¶¶ 113-115). All defendants moved to dismiss on October 5, 2015.

         Subsequently, on September 30, 2016, the Court dismissed all claims except for the breach of fiduciary duty claim against Akradi and the Board. Lusk v. Life Time Fitness, Inc., 213 F.Supp.3d 1119, 1137-38 (D. Minn. 2016). The Court did not dismiss the claim primarily because the Defendants raised additional arguments in their reply memorandum, to which Plaintiffs were not given a chance to respond. Id. at 1133 n.7. On October 28, 2016, the Defendants moved for judgment on the pleadings to dismiss the claim. (Def. ...


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